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 Hotel Growth Strategies
Value Creation and Preservation

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Colliers International Realty Advisors Ė Toronto, Canada
September 2004

A relatively low level of hotel transactions have occurred to date and few properties are available on the market. As a result, it is difficult for many hotel owners, investors or even shareholders to continue to grow their investments through external sources with accretion as a mandate. Strategies for most growth-oriented hotel companies, whether public or private, will need to emphasize income growth from internal methods.

1. Assess Enhancement Opportunities

Those with ownership interests in hotels must be prepared to develop and encourage their operators to create sustainable income improvement solutions from all of the real estate associated with the hotel. One beneficial tool that should be utilized in maximizing the overall value of a hotel is an exhaustive Value Creation and Preservation Strategy (VCPS). This tool identifies repositioning strategies, non-traditional revenue sources, commercial and/or retail leasing opportunities, excess land use alternatives, potential benefits of capital renovation and brand repositioning, highest-and-best-use analysis and improvements in property tax burden with the overall objective of maximizing the income output of the property.

2. Review Branding and Management

The analysis would identify alternative sources for branding and/or management and the value benefits expected from each option. Implementation of the recommendations will work to improve the assetís income producing capability from hotel operations and ultimately its value.  It is important to understand that some agreements tied to a hotel could be considered an encumbrance and have an adverse effect on income and value. It is always beneficial to complete a thorough due diligence on all scenarios. This component of the analysis would also benefit the passive investor or owner by having a firm knowledgeable in-management practices monitoring performance.

3. Physical Evaluation

Another factor that also plays a significant role in the long-term value prospects of a hotel is its physical condition. A deteriorating property will result in lost market share and revenue as guests seek alternative accommodation. Loss of brand affiliation is also a potential detrimental effect of a deteriorating asset. The VCPS would outline the benefits of a continuous property reinvestment plan or complete renovation. It will force hotel operators to be proactive and gauge the physical condition of the competition and fully substantiate recommendations for capital improvements. The feasibility component of a VCPS would identify the potential upside to a capital renovation providing rationale for project financing.

Managing a capital renovation requires significant planning in order to minimize business disruption, reduce the potential for lost income during the renovation and deliver on time and on budget. The VCPS identifies key areas requiring planning and again rationalizes the expenditure by outlining its positive effect on income. The proper development of the renovation plan will address specific areas of expertise including architecture, engineering, legal, and construction and project management. A poorly implemented renovation can result in significant cost overruns, income erosion and destroy the desired investment returns.

4. Anticipate the Impact of New Supply

The economic life of a hotel can be adversely affected by the addition of new supply. In several cases, there have been new hotels built in markets that do not support development based on the local market operating statistics. However, some hotel developers have realized that the physical condition of the overall hotel stock within a certain market is inferior.  These developers believe that a new property will steal market share from each existing hotel and on its own become successful leaving the poorest performers to suffer and possibly close or be converted to an alternative use. It is believed that this trend will continue as hotel franchisors push for brand presence in more markets. By working to develop the VCPS, a hotel owner can anticipate the effects that new supply will have on the value of their asset and devise a proactive strategy that minimizes the effect or reduces the possibility of new supply.

Hotel owners need to keep in mind that the emergence of alternative forms of competition will affect the value of their hotel investments. There has been a significant rise of indirect competition in the form of furnished apartments or condominiums in major markets across Canada. This competitor has taken market share from hotels in the fairly profitable extended stay segment. The real estate in which these businesses operate is typically residential affording these entities a significant tax advantage over hotels. This is a growing industry in many markets and is establishing structure but is not easily tracked. Owners need to monitor this and other forms of non-traditional indirect competition.

5. Other Hotel Real Estate Components

Many hotels include other components that can have a significant impact on value but are often overlooked. An office or retail piece may be associated with a hotel property. These forms of real estate demand an understanding of local real estate trends in order to positively effect lease negotiations, vacancy rates and potential rental income. If an operator does not possess this expertise, it is difficult to constantly monitor activity in these areas. In addition, a highest-and-best use analysis may indicate that excess land or the overall site location would result in higher market value compared to its current use. The benefits of local market knowledge and real estate expertise can increase rental income and identify site potential to produce property value improvements.

6. Sharing the Risk - Leasing Out Components of the Operation

The opportunity to lease certain operating components within a hotel to a third party is an option that can improve a hotelís income. Some hotels have opted to lease out food and beverage operations, spas, golf courses and parking facilities to operators specializing in these disciplines.  The benefit here is that the hotel now generates a more stable cash flow through lease income and the new operator will bring expertise that can improve service and product consistency. Property value can be enhanced with this arrangement since lease income is often more stable than income from operations.

7. Realty Tax Reduction

A successful property tax appeal can have a positive effect on a hotelís income.  Often assessments on hospitality properties include a component of enterprise value. It is key in any assessment appeal to extract the business component from the real estate value.  The value of furniture, fixtures and equipment and management skill must be extracted to reveal only the real estate value. Assessment experts will perform research and analysis to achieve the lowest possible assessed value.

This is a specialized area that is best handled by a realty company that offers professional property tax advice.  A hotel operating business and its real estate components are closely interwoven.  We have witnessed the negative impact that negligence or the mishandling of a hotel asset has on income and value.  Regardless of whether you are preparing to refinance your asset, monetize equity, sell assets or boost cash flow it is beneficial to allow a real estate expert who understands the hotel industry develop a VCPS. This tool will address issues affecting a property with the goal of extracting maximum value while the hotel operator focuses on running a successful hotel.



The Hospitality and Tourism division of Colliers International Realty Advisors has advised its clients on all aspects of value creation and preservation for their hotels. Over the last ten years it has advised on projects with an aggregate value of over $10 billion. Our clients include financial institutions, hotel owners, investors and shareholders with assets ranging from small country inns and resorts to large national portfolios.

Colliers International is a multi-faceted real estate company that has seventeen offices across Canada.

We welcome the opportunity to discuss ways in which we can help to develop and deploy a strategy to benefit you or your operator in maximizing the income of your hotel and resultant value.


 
Contact:

Colliers International Realty Advisors
Curtis Gallagher
Vice President, Hospitality & Tourism
Direct Line: 416.643.3702
Curtis.Gallagher@colliers.com
Toronto, Canada

Also See: Canadian Hotel Investment Report 2002 - Colliers International Hotels / Feb 2002
Canadian Hotel Investment Report 2000 - Colliers International Hotel Realty / Feb 2000


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