Making The Ideal Hotel Investment / Stephen Rushmore / Canadian Lodging Outlook / Aug 2002

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Making The Ideal Hotel Investment

CANADIAN LODGING OUTLOOK
July 2002 Year to date

The Canadian Lodging Outlook is a joint monthly publication
of Smith Travel Research and HVS International,
Vancouver and Toronto, Canada

By Stephen Rushmore, MAI, CHA, CRE, president and founder of HVS International

I have been helping people buy and sell hotels for the past 30 years and also have acquired a few for my own account. Hotels are complicated, high-risk investments that require specialized operational expertise or you will run the risk of quickly losing a substantial amount of capital. Over the years, I have developed a set of criteria that I use for making hotel investments and would like to share this information with you.

**Criteria For Making Hotel Investments**
Never buy a hotel unless it has at least an eight-month season. In a seasonal market, it is best that the in season months are consecutive. Shorter seasons may work only if there is a sufficient average rate premium during the high season. Examples of markets that enjoy long seasons include London, Paris, Hawaii and Lake Tahoe, Nevada.
Select markets that enjoy visitation from several market segments. Avoid hotels that depend on just one market segment such as commercial, group and leisure for the bulk of their demand. This provides relief from a downturn in one travel sector. For example, Boston's hotel occupancy decline caused by the shrinkage of technology demand has been cushioned somewhat by an increase in leisure travel to the area.
Never be dependent on just one demand generator. What happens when an airport closes, a theme park goes out of business or a company is acquired and its headquarters are relocated? These are examples of hotel markets that suffered due to the demise of a primary generator of hotel demand.
Never short-cut your due diligence investigation. In the United States we call it, "Buyer Beware." You need to thoroughly understand the property's condition and exactly what you are buying. An engineering study is essential. I have seen what appeared to be habitable hotels rendered totally unusable because of underground environment pollution, interior mold infestation, structural damage from termites and rodents and properties that do not meet the current building codes. A new hotel in Wilmington, Delaware, was not permitted to open because the developer added extra guestroom floors and failed to comply with the local building codes.
Look for hotel markets with high barriers to entry. Overbuilding is a problem throughout the world. Markets such as Dallas, Atlanta, Salt Lake City and Phoenix, where it is relatively easy to acquire hotel zoned land and build a lodging facility, tend to become overbuilt during periods where financing is readily available. In cities such as London, Hong Kong and Beverly Hills, California, the barriers to entry are high.
Investigate your management company. If you plan on using a hotel management company be sure you fully understand its capabilities. That means obtaining financial statements for similar hotels it operates and determine whether revenues are maximized and expenses are in line. If it refuses to share operating performance, find another management company.
Match the brand with the product. Hilton is excellent at attracting meetings and conventions, while Days Inn operates better in the leisure market. When branding a hotel you need to understand which brands attract which type of travellers and select the brand that will generate the most business for your hotel. Be careful of brands that still are trying to develop a unique identity. With all the brand consolidation you need to investigate possible adverse impact issues where you may be directly competing against other brands within the same chain.
Remember you will need to sell your hotel someday. When you plan to buy a hotel you also need to plan for the eventual sale. To have the greatest flexibility to find the right buyer, try to structure your acquisition so you can easily terminate the management contract, the franchise agreement, assign or prepay the mortgage, buy out your partners and minimize your tax exposure.

Following these criteria for making a hotel investment may not always guarantee success, but they do illustrate some of the potential pitfalls that I have experienced over the years. Good luck and may your next hotel investment be successful.

Stephen Rushmore, MAI, CHA, CRE, is president and founder of HVS International, a global hotel consulting firm with offices in New York, San Francisco, Denver, Miami, Dallas, Vancouver, Toronto, New Delhi, Singapore, Sao Paulo and Buenos Aires.

Canadian Lodging Outlook
HVS International - Canada
July 2002 Year-to-Date

July 2002 Year-to-Date	Number of Rooms	Occupancy Rate % 2002	Occupancy Rate % 2001	Average Room Rate $ 2002	Average Room Rate $ 2001	RevPAR $ 2002	RevPAR $ 2001	Room Supply % Change	Room Demand % Change
Nova Scotia Area	1,486	59.0%	60.5%	$79.87	$80.51	$47.12	$48.71	0.3%	-2.2%
Halifax, NS	2,273	69.4%	71.5%	$112.86	$115.56	$78.32	$82.63	5.8%	2.6%
Montreal, QC	15,414	65.0%	66.3%	$139.29	$133.40	$90.54	$88.44	2.1%	0.0%
QuebecCity, QC	3,804	64.5%	65.6%	$130.54	$125.64	$84.20	$82.42	2.3%	0.6%
Quebec Area	3,437	55.5%	55.0%	$87.94	$84.02	$48.81	$46.21	0.5%	1.3%
Toronto Downtown	12,000	65.9%	69.7%	$161.47	$164.71	$106.41	$114.80	0.1%	-5.4%
Toronto North/East	6,207	60.5%	64.6%	$108.19	$109.26	$65.45	$70.58	-0.3%	-6.6%
Toronto Airport/West	9,798	65.1%	70.7%	$116.09	$116.24	$75.57	$82.18	3.7%	-4.5%
Ottawa, ON	7,983	63.2%	68.6%	$125.55	$127.61	$79.35	$87.54	2.4%	-5.6%
Ontario East	5,385	56.3%	58.3%	$96.76	$95.07	$54.48	$55.43	0.3%	-3.1%
Niagara Falls, ON	6,295	55.7%	55.3%	$121.94	$119.95	$67.92	$66.33	0.8%	1.5%
Ontario Southwest	6,668	59.0%	59.7%	$97.87	$97.34	$57.74	$58.11	0.5%	-0.8%
Ontario North	4,435	56.9%	58.2%	$90.94	$89.02	$51.74	$51.81	0.1%	-2.0%
Ontario Central	6,203	57.7%	59.7%	$95.84	$93.46	$55.30	$55.80	1.7%	-1.7%
Winnipeg, MB	3,718	61.3%	62.7%	$91.25	$91.58	$55.94	$57.42	3.8%	1.6%
Regina/Saskatoon, SK	3,677	59.2%	62.5%	$83.66	$81.10	$49.53	$50.69	1.4%	-4.0%
Calgary, AB	7,341	66.0%	66.5%	$116.97	$115.51	$77.20	$76.81	0.8%	0.1%
Edmonton, AB	5,032	76.0%	65.9%	$88.69	$92.31	$67.40	$60.83	0.0%	15.3%
Alberta Area	6,421	58.2%	63.8%	$88.81	$83.84	$51.69	$53.49	0.4%	-8.5%
Mountain Regions, AB	2,371	67.1%	68.8%	$214.38	$204.18	$143.85	$140.48	-5.1%	-7.4%
Vancouver, BC	12,260	63.2%	65.9%	$134.53	$134.65	$85.02	$88.73	2.3%	-1.9%
British Columbia Area	5,263	51.5%	51.9%	$79.59	$80.08	$40.99	$41.56	0.7%	0.0%
Victoria, BC	2,973	60.8%	61.1%	$119.63	$113.67	$72.74	$69.45	0.7%	0.2%
Provinces
Alberta	21,165	66.4%	66.0%	$111.97	$113.07	$74.35	$74.63	-0.5%	0.2%
British Columbia	23,235	60.1%	61.9%	$132.61	$131.97	$79.70	$81.69	1.2%	-1.7%
Manitoba	4,104	61.2%	62.4%	$90.33	$90.38	$55.28	$56.40	2.9%	0.8%
New Brunswick	3,092	61.1%	61.8%	$92.24	$89.10	$56.36	$55.06	0.1%	-0.9%
Newfoundland	1,521	65.0%	67.2%	$105.48	$99.14	$68.56	$66.62	0.0%	-3.2%
Nova Scotia	3,759	65.6%	67.6%	$102.03	$104.45	$66.93	$70.61	1.9%	-1.2%
Northwest Territories	INS	INS	INS	INS	INS	INS	INS	INS	INS
Ontario	64,535	61.2%	64.2%	$119.54	$120.37	$73.16	$77.28	1.0%	-3.8%
Prince Edward Island	786	48.7%	50.5%	$92.99	$89.62	$45.29	$45.26	0.0%	-3.5%
Quebec	23,094	63.2%	64.3%	$130.48	$125.02	$82.46	$80.39	1.5%	-0.2%
Saskatchewan	5,143	55.3%	58.1%	$78.52	$76.21	$43.42	$44.28	0.9%	-4.0%
Yukon Territory	638	44.1%	49.9%	$81.17	$85.74	$35.80	$42.78	0.0%	-11.7%
Canada	151,072	58.4%	60.6%	$105.14	$104.34	$61.40	$63.23	1.0%	-2.7%

###

Contact:
Kimberley Tyls
HVS International
4235 Prospect Road
North Vancouver, BC V7N 3L6
(604) 988-9743, ext. 21
[email protected]
www.hvsinternational.com

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	The Global Approach To Hotel Valuations / Canadian Lodging Outlook / June 2002
	Hotel Insurance Premiums on the Rise? / Canadian Lodging Outlook / May 2002
	Hotel Development Cost Can Determine Feasibility / Canadian Lodging Outlook / May 2002
	Hotel Internet Distribution Channels / January 2002 Month-to-Date Results / Canadian Lodging Outlook / April 2002
	2001 Was a Great Year If You Were in Edmonton! / December 2001 Year-to-Date Results / Canadian Lodging Outlook / Feb 2002
	2001 Canadian Hotel Sales / Canadian Lodging Outlook / Jan 2002
	The Effect on Capitalization Rates and Discount Factors After September 11 / Canadian Lodging Outlook / Dec 2001
	So How Bad Was September for Canadian Hotels.. Pretty Bad! / Nov 2001
	So How Bad Was September for Canadian Hotels.. Pretty Bad! / The Canadian Lodging Outlook / September 2001
	Have Hotel Values in Canada Declined Since September 11th? You Bet They Have / The Canadian Lodging Outlook / August 2001
	The Popularity of Boutique Hotels / The Canadian Lodging Outlook / July 2001
	Rising Energy Costs Cause Concern in the Lodging Industry / The Canadian Lodging Outlook / June 2001
	Niagara Falls: With Supply Comes Demand / The Canadian Lodging Outlook / May 2001
	Does Supply Generate Demand? / The Canadian Lodging Outlook / May 2001
	Optimism With a Hint of Caution, As Analysts Predict a Softer Year for the Canadian Hotel Industry / Mar 2001
	Limited-Service Growth in Canada - Where�s it Going? / The Canadian Lodging Outlook / January 2001
	HVS Canada in Review - Year End 2000 / The Canadian Lodging Outlook / March 2001
	Canadian Lodging Outlook / May 2000 Year to Date Statistics / HVS International - Canada / July 2000
	The Rule of Thumb Method...Does It Still Hold Weight? / Elaine Sahlins - HVS / Oct 2000
	What�s Hot and What�s Not in Western Canadian Hotel Markets / Mar 2000

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