Is It Time to Rebalance?

Just as you should periodically rebalance your stock portfolio, hotel owners also should regularly review their hotel portfolio to see if it needs a little pruning and rebalancing, too.

With the recent hot hotel real estate market, chances are pretty good that you have been thinking about selling at least one of your hotels. Values have been increasing for three or four years, and now may be the time to harvest some of that appreciation. According to Hotel Brokers International data on national hotel real estate sales, the average sales price per key in 2005 was $96,000, compared to $119,000 by the last months of last year.

On the other hand, you've developed and grown your hotel business for many years, and it can be hard to let go after putting in all that hard work. One factor that may help an owner make this crucial decision is knowing where the market is in its historic cycle.

Selling at the top of a market is always optimal, but extremely difficult to predict. The investor's mantra of “buy low, sell high” applies equally to stocks and hotels. However, hotels, which typically take three to six months from listing to closing, are not as liquid as stocks, which makes timing less precise. Given the long run-up in hotel real estate prices, it can be argued that the market is at or close to its peak.

The hotel industry has always been cyclical, and with the roiling of the credit markets, concerns about inflation and recession and the specter of overbuilding, this is an especially good time to review your hotel portfolio. Here are several factors to consider:

Is there a demand for your type of hotel?

Buyers always seek upside potential. If you are in a stable or growing market, a buyer will be more interested in your hotel, and pay more accordingly. However, if your brand segment in your local market is having a bad year or if there is significant hotel development, don't expect the top price.

If you have to sell in the near future for tax purposes or any other reasons, you may need to be satisfied with getting out with a nice profit, but not necessarily the maximum profit. For some properties, you may just get the price you paid. If you're in a market that's feeling an economic pinch or if you need to refinance at an interest rate that doesn't make the deal work, taking a price less than you paid may be better than riding out a downturn. It is difficult to predict the length of a downturn, which could produce negative or substantially lower cash flows and, subsequently, a lower value for your hotel.

Have hotels been selling in your market?

Have other hotels in your market been getting a good price? Your broker can give you good comps and an opinion of value. If your property is comparable or better, then you may want to put yours on the market.

Is your hotel in good repair?

If you have very few or no capital requirements to maintain your franchise agreement, then many buyers will find your hotel more attractive. They can simply step in and continue operating it. Many owners typically believe with their expertise they can improve the operating results of a property due to economies of scale, experience in that market, etc.

If your hotel needs some work, there is a substantial group of buyers who may covet your hotel. These buyers seek reasonably priced properties to reposition. They believe an extensive renovation, coupled with a new franchise flag, can create a hotel with greater value. Balance the cost, risk and hassles of renovating your property against the cash you will receive if you sell and use the proceeds to either develop or acquire other hotel real estate.

However, these types of buyers will bargain hard because of the risks and temporary loss of income associated with renovation. The hotel industry continues to enjoy record profits, and PKF Hospitality Research forecasts the average hotel's bottom line will increase a healthy 8.5 percent in 2008. Other investors want to participate.

Is overbuilding a potential problem?

While new hotel construction has been slower than expected in the past few years and hasn't kept pace with demand, the number of rooms is expected to increase substantially in 2008 and 2009. Lodging Econometrics' most recent forecast notes that nearly 1,500 hotels are under construction and approximately 2,500 more are scheduled to begin construction within the next 12 months. Ask your broker or contact Lodging Econometrics or Smith Travel Research to determine the development outlook for your market.

By asking yourself these questions and taking a good hard look at your hotel assets, you can determine if it is time to rebalance. The research may indicate it is a good time to sell two or three of your bottom-tier assets. Even if you are fortunate enough to have all well-performing hotels, now may be a good time to take an especially hard look at your bottom-tier properties and compare them to your long-term investment strategy. And remember, just as buyers think they can add value to your hotel, you, too, have the opportunity to create more value by reinvesting in different hotel assets that match up better to your strengths. The challenge of periodically shaking up your portfolio by adding and disposing of assets also helps keep you fresh and more interested in all of your properties.

With values higher than ever before, this may be the time to sell. Brands in a market you no longer find attractive, or RevPAR well below your portfolio average are good indicators that it may be time to rebalance your portfolio.

In other cases, you may be thinking of retiring. You have enjoyed a long successful run. Your children are all grown and on their own. It is time for you and your spouse to kick back and enjoy the good life without worrying if something might happen to the staff, the competitive market, the economy or the hotel. Or, it may be a great time to simply step to the sidelines and wait for the next, inevitable downturn. At least twice a year, take a good hard look at your portfolio. Sit down with your broker, legal, accounting and other real estate advisors to get their counsel about what they see as the best plan to maximize your values.

Regardless of the cycle, there are always buyers and sellers. Today, there are more buyers than sellers, which makes it a good time to prune those assets that don't hold long-term, upside potential for your growth strategies.


Brandt Niehaus, CHB, CHA, CCIM, is president of Louisville, KY-based Huff Niehaus and Associates, Inc. and is president of Hotel Brokers International (HBI). He may be reached at brandt@huffniehaus.com.

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