Hospitality Lab is a website which provides data, information and tools relating to the hospitality industry and the correlated tourism services. Market data made available by various public and private sources are usually structured and classified in a way which does not facilitate easy consultation; we have therefore created a tool that allows you to retrieve these data according the user’s specific needs of analysis and classification.
The structure of the navigation functions allows you to first of all select the area of your research and obtain the reports of the domestic data. Through the Drilldown function, which is guided by further menus, is then possible to reach levels of greater detail to respond to specific demands.
The Hotel Financial Control function generally analyses the Hotel activity through a standard P&L reclassification that identifies four main departments that represent the main business area of the Hotel: Rooms Revenues, Food & Beverages Revenues, Telephone Revenues and Other Income. Rooms and F&B are the main drivers of value, while the other revenues may help the total contribution. For each of the four department the Hotel Financial Control calculates the department profit and then the cumulative Department Profit of the Hotel.
Further in our accounting, we subtract the Undistributed Expenses (including Adm. & General, Marketing, Repairs and Maintenance, Energy Costs, etc.) to obtain the Gross Operating Profit of the Hotel and we subtract Fixed Charges (including Equipment and other Rent/lease, Real Estate and other Taxes, Building and other Insurance, etc.) to obtain the Net Operating Income.
The main size and performance measure in the Hotel industry are identified as the Occupancy Rate, multiple occupancy factor, annual sleepers, GUR (number of sleepers per available bed) ARR (Average Room Rate), Revenues PAR (per available room), Revenues POR (Per Occupied Room). The main profitability measures of an Hotel are based on Gross Operating Income (GOI-Par and GOI-Por) and to Net Operating Income (NOI-Par and NOI-Por). Hotel valuation multiples are often linked to RevPar, GopPar and NoiPar.
Nice, but it is time to make few changes. Although the Hotel industry is almost stable compared to other businness, there are two drivers that would suggest to the Hotel Financial Control to make some development to the above Profit & Loss reclassification: these are the Internet based booking and the new Real Estate financial structures. Let's see how these two drivers may lead to some upgrades in our way to look at the accounts of an Hotel.
Hotel bookings include direct bookings at the Hotel (via telephone or Internet based), "chain" label driven bookings and Internet media bookings (via major Internet bookings media). Each of these channel requires a different organisation structure, different contracts and different costs. It is not a simple sales and marketing choice with associated Sales and Marketing costs: the decision to stress the Internet channel changes rather than the traditional channels dramatically change the Hotel operations and the Hotel P&L. We worked as Advisor together with an Hotel manager in a famous location in Italy. We decided that the "chain" label driven booking was too expensive and could be replaced by Internet media bookings. The result was an increase in the overall Hotel occupancy rate with no decrease in the Avg Room Rate. The installation of the new system required an overall three months investment, peanuts in comparison with what the Hotel was paying to have a famous label on the door. But in order to really monitor each cent of cost we needed to chance the Hotel Financial Control system.
The issue is: Is it correct that the Hotel Financial Control considers Sales costs as Undistributed Expenses, as these costs are not evenly insisting on the different revenue stream? In other words: what we noticed is that the Sales channel brings different Sales costs on Room Dept and on F&B Dept. If these is the case, we might therefore decide to include the different impact of Sales channel expenses on the department. P&L with more accuracy.
A different issue on the Hotel Financial Control structure rely upon the new Real Estate ownership. Hotel Real Estate are increasingly owned by financial investors that very little care about the characteristics of the Hotel business and are very demanding: they require a stable financial flow, possibly a higher reward based on the performance of the Hotel and they look at long-term capital appreciation. The structure of the lease / rent contract and its cost is therefore not simply one of the fixed costs of the Hotel but is "the" cost. The Hotel Financial Control cannot simply include this in a row down in the P&L, but a much in depth analysis is needed. We might want to include the contingency share of the lease /rent in operating expenses so that our Dept. profit really reflects the profit to the firm. In addition we might want to define into a proper P&L figure the relevant lease / rent expenses.
Finally a few words on other issues: telephone revenues and SPA revenues.
Everybody attending an hotel owns at least one mobile telephone and pretends full Internet coverage: Hotel telephone revenues are therefore limited. The wellness area, including SPA and fitness revenues instead are increasing: the Hotel Financial Control often replaces the telephone Dept line with the SPA Dept. line.
As Advisor in this industry, we are therefore challenged with the clients' need for further improvements in Hotel Financial Control so that it really supports the management in its decisions.
Mr. Cesare Carbonchi is an international investment banker with large European and US experience in top tier institutions and with CEO experience in leading corporations. Cesare Carbonchi runs EqS Equity Studio in Milano, Italy.
EqS Equity Studio is an independent corporate finance boutique that provides financial advisory and transaction services to corporate clients relating to their business in Milano, Italy. See website at www.eqsstudio.com
In Hotel Valuation practise, we are used to apply few simple and powerful tools such as Price multiples based on common industry data such as RevPar (Revenues Per Available Room), GopPar (Gross Operating Profit Per Available Room), NoiPar (Net Operating Income Per Available Room). As advisor in this industry we also deal with Price per Room in different cities, an easy way to summarise in one single data a more complex set of Price multiples.
There are however two issues that strongly limit this preliminary Hotel Valuation approach: rents and Hotel Capex.
The Hotel rent (or lease) tends to be an strong amount today due to two factors. One: the raise in Real Estate values, which in year 2009 are now finally decreasing but are still much higher in real terms then years ago. Two: the additional reward based on the Hotel economic performance that the Real estate owner demands over the base rent. Rent is therefore becoming an increasing percentage of the Hotel Revenues. As a result, the Hotel Valuation based on RevPar and GopPar which are earnings values computed prior to deducting the value of the rent might be misleading: two Hotel with the same RevPar and GopPar but very different Rent clearly have very different values as the amount of the Rent dramatically reduces the final value of NoiPar. We therefore have to consider Net Operating Profit as the only reasonable P&L figure in a high rent environment.
In addition, should we apply Hotel Valuation technique to existing assets rather than to an Hotel that has to be built yet (which is clearly the most common case), we have to consider that Hotel Capex for renewal and non recurring Maintenance might be a relevant figure in our Free Cash Flow projections.
From a legal viewpoint one might suggest that this additional Hotel Capex is often to be paid by the Real Estate owner and not by the Hotel manager: however we cannot avoid investigating about the amount of Hotel Capex and who will really pay for it. As Advisor in this industry we noticed that the amount of Hotel Capex related to the renewal of important and fashionable premises located in town centre in major European cities might be very relevant with a strong impact on FCF.
The easy way to deal with additional Hotel Capex is to prepare a “after Capex” Hotel Valuation (i.e. an Hotel Valuation as if Capex was already incurred) and then deduct the Capex amount from the “after Capex” Hotel Valuation to obtain an “as-it-is” Hotel Valuation. We consider this technique a dangerous approximation because in the Hotel industry the final Capex is often higher than the budgeted Capex for various reasons: the long timing to prepare an appropriate architectural and technical plan, obtaining all licences, complete works in the centre of a major city; the additional cost of the partial or even total closure of the hotel, plus the cost of financing. That's why we strongly suggest our clients to rely upon FCF Hotel Valuation technique and leaving Price Multiples as a way to calculate the terminal value only.
In conclusion, today's Hotel Valuation technique merges deep industry knowledge with Financial forecasting capability and tends to leave the simple RevPar multiple approach.
About the Author: Mr. Cesare Carbonchi is an international investment banker with large European and US experience in top tier institutions and with CEO experience in leading corporations. Cesare Carbonchi runs EqS Equity Studio in Milano, Italy. EqS Equity Studio is an independent corporate finance boutique that provides financial advisory and transaction services to international corporate clients relating to their business in Milano, Italy. See website at www.eqsstudio.com
A capitalization rate (cap rate) is a ratio that can be used to estimate the value of income-producing properties. Put simply, a cap rate is the net operating income of an asset divided by its sales price or value expressed as a percentage. A cap rate is determined by evaluating the financial data of similar properties which have recently sold in a specific market.
