Matching Skillset, Risk Tolerance and Capital to a Hotel Investment

Matching your Skillset, Risk Tolerance and Capital to a Hotel Investment

May 13, 2016

 

You're looking for a hotel acquisition.  You've identified some target criteria;

  • States or markets of interest
  • Limited, Select, or Full service
  • Possible brands
  • Price limit
  • Number of rooms, etc.

You may also have in mind target parameters such as cap rate, price per key or a room revenue multiplier that fit the product and market.

 

However, I'd say it's also important to match your skillset and capacity with the opportunity.  Not only financial capacity, but the time required from you and your team to acquire, execute your strategy, and operate the hotel.  A performing hotel with steady revenue and strong profits may only need a standard PIP, or none at all in rare cases, to stay at the top of its market segment and improve guest reviews and drive ADR. This type of investment offers predictable returns on investment and is lower risk for the owner, as well as the lender. However, for the well performing hotel, the buyer may pay a higher price per key and revenue multiplier, in keeping with the lower risk.  Is that the right investment for you? 

 

An example of this kind of asset is the Holiday Inn Express Limerick, Pennsylvania which I sold for $7,225,000. in 2012, when the industry was just recovering from the lean years. At the time of the sale, the hotel was only 2 years old and was achieving well over 100% RevPAR penetration of its competitive set, and revenues were still climbing although a new Hampton was being built nearby. The buyer was an experienced business person, but this was their first hotel acquisition in the U.S.  The hotel sold for $101,760 per key, which most buyers found to be a higher price per key than they could accept in a smaller suburban market, yet it was just 3.46 times room revenue, and sold at a high cap rate.  It was a good match of the opportunity to the experience level of the buyer, and he also retained the existing successful experienced G.M., which was a good decision.  The sale was a win-win for both buyer and seller.

 

More experienced hotel operators with the time and resources for a turn-around repositioning opportunity may look for a hotel that is under-performing in its market, and likely in need of a major renovation PIP and/ or re-branding. There’s greater risk but also greater potential profits, IF the buyer can execute the repositioning as planned.

 

The Comfort Inn Fort Mill, South Carolina was in receivership, then bankruptcy court when MBA Hotel Brokers sold it, and it needed major repairs and capital improvements. The buyer was a hotel industry veteran with past experience overhauling mismanaged and underperforming hotels. The sale price per key was $21,895, but the PIP was estimated to exceed $1,000,000.  While this experienced operator was successful in bringing the capital needed to do the big PIP, and had the skill set necessary to organize the renovations needed and get them done in a timely fashion, we have seen some other buyers who have not been successful at this for multiple reasons.  Other than uncontrollable changes in the local market, often in these cases the buyer assumes they can get the capital to do the big PIP later, or just puts it off, and eventually letting a hotel decline by not keeping up with PIP requirements, competition with new hotels, and market expectations, leads to a loss of business and failure to compete, with ever declining RevPAR.

 

Finding the right investment for you will be a match of your desires and your capacity, financial and otherwise, and the skill set of all of the buyer's players, partners, management company, professional advisors, etc., with the opportunity of the hotel. Most hotels have room to improve performance in some way, it’s just a matter of scale and risk. So it's not only “What's in your wallet?”, but what's in your skill set and the new ownership's level of commitment to the success of the acquisition that matters.  If you are buying a hotel with partners, matching partner expectations, capital, and skill sets, with the project and keeping everyone working together with the same goal in mind from the beginning to exit, is critical to the success of the hotel investment.  There are hotel investment opportunities in every phase of the industry and economic cycles.  Finding the opportunities that fit is the ongoing challenge everyone faces. 

 

Honestly assessing the limitations of your access to capital, skills, focus and determination, as well as market limitations, before you begin a hotel investment search is the most important recommendation I could make. 

 

Till next time;

 

Charlie Fritsch

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MBA Capital Funding Inc. is a commercial mortgage and financing services firm, specializing in arranging debt and debt structures.