Economist, MAS Urban & Regional Planning, PhD Urban Planning, HOTEL BUILDINGS’ VALUATION – IS THERE A REAL ESTATE VALUE TO STATE OR IS IT JUST DEDUCTED AS A PARTIAL BUSINESS VALUE? THE 16th ANNUAL EUROPEAN REAL ESTATE SOCIETY CONFERENCE Stockholm 24 - 27 June 2009 João Manuel Carvalho Economist, MAS Urban & Regional Planning, PhD Urban Planning, Professor at Universidade Técnica de Lisboa / Faculdade de Arquitectura 17/11/2018

TWO BASIC ITEMS Land and built premises for their highest and best use (equipment not included); Long-term concern in a highly and specifically regulated market (land, building and environment); Operating concern (short to medium term); Brand strategies (global long-term marketing concern that prevails over the management of other assets); Physical premises may become a liability (when non-compliant with technology and brand evolution). REAL ESTATE VALUE BUSINESS VALUE 17/11/2018

CONTENTS Hotel real estate – modern rationales and investors’ role Variables available for easy modeling Model for value determination prior to, or along with, real estate valuation Outcomes Comments and conclusion 17/11/2018

Hotel real estate – modern rationales and investors’ role CONTENTS Hotel real estate – modern rationales and investors’ role Variables available for easy modeling Model for value determination prior to, or along with, real estate valuation Outcomes Comments and conclusion 17/11/2018

HOTEL REAL ESTATE EVOLUTION 1) HOTEL BUILDINGS DEVELOPED AND OWNED BY HOTEL OPERATING COMPANIES 2) HOTEL BUILDINGS OWNED BY INVESTORS AS THE OUTCOME OF SALE & LEASE BACK OPERATIONS 3) HOTEL BUILDINGS TARGETED BY INVESTORS OR AS A MARKETING ASSET FOR TOURIST RESORTS 17/11/2018

HOTEL REAL ESTATE EVOLUTION 1) HOTEL BUILDINGS DEVELOPED AND OWNED BY HOTEL OPERATING COMPANIES Hotel companies owned their own real estate either as a company asset or as their shareholders’; Ancient hotel companies tend to hold real estate at the best sites in consolidated tourist destinations; Meager operating profits justify to analyze the balance between “investment with future (higher) profits” or “capture now the real estate added value”. Traditional stance 17/11/2018

HOTEL REAL ESTATE EVOLUTION 2) HOTEL BUILDINGS OWNED BY INVESTORS AS THE OUTCOME OF SALE & LEASE BACK OPERATIONS Expanding hotel companies tend to find attractive the sale of their real estate to a real estate fund, whenever possible with a re-purchasing clause, that keeps within reach the share of real estate gains above the average financial return the fund envisages It may become a cheaper (even if compulsory) way of funding for hotel companies under financial pressure. 17/11/2018

HOTEL REAL ESTATE EVOLUTION 3) HOTEL BUILDINGS TARGETED BY INVESTORS OR AS A MARKETING ASSET FOR TOURIST RESORTS In a world of huge global liquidity, hotel real estate became a portfolio asset – i.e., hotel developers (e.g., like office developers) targeted investors from the begining through searching for an operating company with a brand good enough to make it attractive as a tenant to an investor whom the real estate would be sold to; This stance might provide comparably good opportunities for investors and operating companies whenever tourist resort developers had to install an hotel as a permit obligation or a marketing device. 17/11/2018

Hotel real estate – modern rationales and investors’ role CONTENTS Hotel real estate – modern rationales and investors’ role Variables available for easy modeling Model for value determination prior to, or along with, real estate valuation Outcomes Comments and conclusion 17/11/2018

VARIABLES AVAILABLE FOR EASY MODELING The question is: “Though real estate value is not independent from operational issues, can we find a set of variables that reflect mainly real estate features and explain the building value, even if some of them also represent business features?” (i.e., left over are the variables that are mostly representative of business features). This would at least provide real estate appraisers with a device for controlling valuation outputs even without having to be hotel business experts (who reciprocally don’t have to be real estate experts), though specificities should further on be taken into account. Variables easily available that represent real estate features are size, structural and obsolescence risks, type of hotel building and location category. Real estate features and business features are mostly represented by unitary sales, which translate both the management abilities and the property potential. The capital value of the building is therefore the dependent variable. 17/11/2018

VARIABLES AVAILABLE FOR EASY MODELLING (cont.) The capital value of the building is taken, in our model, as the “value per room”. Size is taken as “number of rooms”. Structural and obsolescence risks are taken as “age of the building” (we must acknowledge that most operated hotel buildings have to be in a permanent good physical condition). Type of hotel building is taken as “average room area” (i.e., gross construction area of the hotel, divided by number of rooms); higher values of this variable tend to correspond to hotel buildings that have a lot of non-lodging hotel business premises. Location is classified into categories such as “Seaside”, “Town I”, “Town II”, “Resort” and “Nature/Heritage”, which bear scores between 1,00 and 2,00, “Seaside” being the most scored category and “Nature/Heritage” the least scored. Unitary sales is taken as the “revpar” (i.e., average daily rate x occupancy rate). 17/11/2018

Hotel real estate – modern rationales and investors’ role CONTENTS Hotel real estate – modern rationales and investors’ role Variables available for easy modeling Model for value determination prior to, or along with, real estate valuation Outcomes Comments and conclusion 17/11/2018

MODEL FOR VALUE DETERMINATION PRIOR TO, OR ALONG WITH, REAL ESTATE VALUATION Multiple linear regression model Sample with 36 independent observations in Portugal Observations cover all types of hotels in several location categories, within a non-stratified sample (i.e., the representation of location categories in the hotel universe has not been acknowledged in the sample) R sq = 0,57 Value per room = 18.963,65 + 3,87.”Revpar” + 472,055.”Number of rooms” – 482,515.”Area per room” – 213,184.”Age of hotel building” + 18.777,981.Location score Currency Unit = € 17/11/2018

Hotel real estate – modern rationales and investors’ role CONTENTS Hotel real estate – modern rationales and investors’ role Variables available for easy modeling Model for value determination prior to, or along with, real estate valuation Outcomes Comments and conclusion 17/11/2018

OUTCOMES Revpar is the result of statistical analysis for tourist destination and hotel category within it, though combined with specific information on the hotel building under valuation; it should be an average approach not the approach of the smartest hotel manager. For revpar = 0 a partial real estate value is nonetheless supposed to exist which the model allows for. The non-revpar component of the total real estate value averages 73% in our sample, which means that, whenever it fares less than that, total value should be re-investigated (why should management features or commercial goodwill of the building have such high value?). A survey of the sample denotes that lower non-revpar proportions correspond to quite specific hotel buildings which are prone to very subjective value judgements. 17/11/2018

OUTCOMES (cont.) The negative correlation between value per room and area per room is quite startling, as it runs against expectations. It does however fit the industry’s business mantra that rooms are the core of hotel operation (non-room area is there just to enhance occupancy and room rates, whenever room and destination features are not enough by themselves). Marginal value per m2 of additional average room area (i.e., total building area divided by number of rooms) is minus 483 €, in this sample. If this relationship proves to be true, in larger or dedicated (e.g., hotel categories) samples, it may provide an indicator for hotel buildings design optimization. 17/11/2018

Hotel real estate – modern rationales and investors’ role CONTENTS Hotel real estate – modern rationales and investors’ role Variables available for easy modeling Model for value determination prior to, or along with, real estate valuation Outcomes Comments and conclusion 17/11/2018

COMMENTS AND CONCLUSION It makes sense to explicitly address the real estate value of hotel buildings since these are portfolio properties for real estate investors (i.e., whose concern is the property value). Furthermore the split between real estate and operating business became more common for hotels in recent years, as the market assigned specific roles to investors (i.e., landlords), end-users (i.e., hotel operating companies) and developers (e.g., resort developers that include a hotel in the development mix). The appraisers’ response to the accrued demand for hotel buildings evaluation has been a growing involvement in the analysis of the operating business, to extract from it the real estate value. 17/11/2018

COMMENTS AND CONCLUSION (cont.) A control mechanism might be welcome as far as splitting real estate value from business value is concerned, within the determination of the former from the analysis of the latter. That mechanism may be an empirical model that allows for the determination of the proportion the business features (associated with the building potential and with the management abilities) may average in the real estate value. As a matter of fact doubts presently arise concerning the role either of the hotel company brand, or of the hotel client list, or of the operational perspectives of the hotel company, in the real estate value. 17/11/2018

COMMENTS AND CONCLUSION (cont.) The experiment with the present model (not in its definitive form) proves that it is possible to create such a control device. The models we might conceive of this type and for the above mentioned purpose will however have a regional basis (i.e., the sample should cover a universe which should be assimilated to a regional market). The experiment has been enlarged through the utilization of the model to search for possibly overvalued (a concern of present times) hotel buildings in the portfolio of a real estate investor. The outcome (i.e., “suspicious” hotel buildings) fitted the a priori idea – i.e., some buildings had been valued with the incorporation of a great business goodwill which partly vanished, while the bricks and mortar were still there for good. 17/11/2018