Whether it is the acquisition of an existing hotel property or new land, the process remains equally complex and requires extensive due diligence. The potential owner must conduct his or her own valuation and market studies to decide whether an opportunity is of interest. In addition, a potential investor must count on the assistance of a professional Hotel Asset Manager (HAM) who can advise on the hotel acquisition strategy. The skills of a HAM is reflected in their ability to unlock the potential value of a hotel. Having advised our owners on the acquisition of various existing hotel properties in the UAE, TFG Asset Management is confident to share our processes and strategies.
Before assessing the opportunity, the HAM should understand the type of owner who will be buying the property. In this industry, the diversity of owners ranges from Real Estate Investment Trusts (REITs), individual owners, hotel owning companies to family offices.
During the preliminary stages, the appointed HAM is required to set a grid of criteria to evaluate the potential acquisition, taking into consideration the owner's interests and objectives. Other criteria that the owners need to consider can be classified into financial, commercial and building facility terms.
- The financial aspect: Factors such as the cost of land or existing building, potential appreciation of the asset, past earnings and future forecast, present value, and a proper valuation are some of the primary requirements.
- The commercial aspect: Factors such as the property type, location, current and future competition, actual management set up (i.e. franchise, lease, or management contract etc.) and the positioning of the hotel or area within the local community.
- Building facility aspect: Factors such as the existing facilities of the hotels, configuration, concept, insurance and warranty etc.
The HAM is also expected to conduct a re-valuation of the opportunity. A large asset management firm, such as TFG Asset Management, will also advise the owner on the main commercial factors to consider during the negotiation process.
As part of the due diligence, the HAM should be able to provide an in-depth market analysis covering the changes in competitive supply and demand and assessment of demand generators, along with any other trends which can have a considerable impact on the land and/or property.
The clearer the information presented during the due diligence, the easier it is for the HAM to point out the critical elements affecting the purchase of the asset.
Additionally, the HAM should also be familiar with the potential zoning regulations affecting the project if any future changes are proposed to be made as part of the value enhancement of the project.
On a property-level, historical performance metrics against the competitive set (ARI, RGI and MPI), positioning, and net earnings need to be reviewed thoroughly. The historical performance will also help the asset manager to quantify assumptions and forecast the future performance.
From a strategic level, the HAM shall value the opportunity, not only from the discounted cash-flow perspective, but also to identify the main operational and revenue upsides of the project. Furthermore, it is imperative for asset managers to ensure that the EBITDA will be able to support the debt service if the investor is leveraging the operation.
As part of the process, a building surveyor shall be appointed and supervised by the HAM. They will inspect the building (in case of an existing building) and provide a full technical due diligence.
The appointed surveyor will certify if the building is maintained properly and that there are no potential hidden flaws that could lead to major losses in the future. The technical due diligence reveals all faults, some of which are not material.
The HAM shall evaluate the report and highlight elements that will affect the operations of the hotel. The HAM will have to evaluate them and incorporate those insights into their Capital Expenditure model. Whether or not this will affect the final purchase price, will be subject to the owner's decision.
This article summarises the general principles and critical keys to assess an opportunity and presents a process to evaluate an existing hotel building or land. In reality, the process is much more sophisticated and many external factors should also be considered, such as the impact of government regulations and potential developments in the neighborhood.
Whether the objective of an owner is to optimise the rate of returns or maximise residual values, the most critical step is to ensure a wise purchase decision. By employing a credible asset management company the processes can easily be accelerated, as due diligence will be done more thoroughly, helping to minimise the owners' acquisition risk.