6 Factors to Consider When Timing Your Exit
MBA Hotel Brokers has been selling hotels for 20+ years. We have been through multiple industry cycles, local market boom and busts, and we have sold hotels in every ownership status and resolved countless situations which at first seemed like ‘deal breakers’. We have seen it all.
If you have been considering selling any of your hotels, here are some tips for timing your exit:
Market conditions are favorable
The hotel industry is cyclical and while there are good reasons to sell and good reasons to buy at all points of the cycle, when your aim is the highest price you should try to sell while the market is in its upward swing. 2018 hotel transactions remain vibrant and many experts see this as a good time to take advantage of the extended market cycle.
New Supply is Coming to Your Market
You will get the best value for your hotel before any new hotels are planned within competing distance of your hotel. If you already know a new hotel is coming, then its best to sell as early as possible before the hotel opens. A new hotel(s) in the market may affect the projected revenue and can also negatively affect the cap rate used by appraisers.
Hotel Revenue is Trending Up
The best time to sell a hotel is when performance is strong. Hotel values are largely driven by revenue. As you have increased revenue at the hotel, its value has also increased. Renovations, PIPs, re-branding and new marketing strategies can all improve hotel revenue per available room. There is less risk for hotel buyers and their lenders when a hotel has strong historical revenue, which will get you a great return on investment.
Hotel Revenue is Trending Down
Hotel revenue can start shrinking for many reasons from management to changes in the market. But, if you have not already turned the downward trend around, its best to sell now before revenue drops any further, to maintain the highest value for the property. Oftentimes a fresh management team can bring about changes to improve the revenue.
Cap rates are steady
Steady capitalization rates mean stable hotel values. Q4 of 2017 saw nationwide cap rates creep up slightly but overall cap rates are favorable. Q2 2018 national cap rates are at 7.5% for full service hotels and 9.0% for limited service hotels. However, this data is heavily skewed by the top metro cities. Hotels in secondary, tertiary, and rural markets will see higher cap rates.
Debt is available
The Federal Reserve has raised the Prime interest rate twice so far in 2018 and may raise the rate twice more before the year is out. However, interest rates are still historically low, and lenders are eager for more loans. The environment for some loan types, especially SBA 7A loans, is so competitive that lenders are squeezing the spread which keeps the rate low for borrowers. In most cases, hotel buyers will be able to leverage acquisitions with debt and readily available debt is essential when trying to sell your hotel.
That said, market conditions are fluid. If you are considering selling one or more of your hotels, start with a broker opinion of value from a respected and experienced hotel broker.
Any of MBA Hotel Brokers’ experienced hotel brokers can provide a complimentary hotel valuation. We consider a dozen+ factors about your hotel as well as current market conditions. We use a sophisticated database of hotel transactions and three valuation models (gross revenue multiple, capitalization rate, and price per key) to arrive at the optimum starting list price.
If now is a good time to hold your hotel investment, but you want to refinance, either to get equity out or to get lower interest rate or better loan terms, you can use a free hotel refinance calculator at https://hotelloanhub.com/calculator Or use Hotel Loan Hub to apply for a refinance loan and save time and money: https://hotelloanhub.com
Till’ next time,
– Charlie Fritsch, President, MBA Hotel Brokers & Jaime Goss, MBA Hotel Brokers