Throughout my 25-year career in hospitality, I have been involved in thousands of property evaluations, hundreds of acquisitions, and I’ve analyzed just about every U.S. market from Maine to California. While each individual asset or transaction embodies its own unique set of characteristics, some specific tactics and strategies remain consistent throughout the evaluation and underwriting process, whether the subject property is a full-service branded hotel in downtown Manhattan or an upscale boutique hotel in California’s Wine Country.
Contributed by Rob Leven, chief investment officer, TPG Hotels, Resorts and Marinas, Cranston, Rhode Island
As our industry emerges from a COVID-induced hibernation, the process of assessing value is faced with an entirely new set of variables and circumstances unlike any of the previous market cycles. The post-pandemic environment is clearly much more volatile, and therefore, those of us charged with assessing value and underwriting transactions on behalf of our investment partners need to open our minds to considering new performance criteria, while also embracing the very real shifts in consumer behavior and technology adoption set in motion by the global pandemic.
I believe that, at its core, the extremely complex process of assessing value comes down to having a deep, authentic, and crystal-clear understanding of revenue sources and knowing the ‘who, what, and how’ expenses are aggregated. While this may sound like a rather fundamental exercise, I challenge those of you in my shoes to consider the following:
Revenue:
- Are we currently the willing victims of ‘revenge travel’? Consider this: the entire country has been in varying degrees of lockdown for 16 months or so; compound that with the fact that many Americans have had thousands of stimulus dollars burning a hole in their pockets. Is this industry performance the new normal, or a prolonged steroid-induced wave foretelling an inevitable pullback in 2022 and 2023?
- What does the future of business travel look like? Never before have people been forced (for an extended period of time) to rely exclusively upon technology to conduct normal business operations. How much of that truly becomes standard operating procedure(s), and how much reverts to pre-COVID behavioral patterns?
- What does the future hold for major conferences and large-scale business meetings? Initial attendance at some of our key industry conferences is off from previous peaks. Have the days of heavily attended conferences gone the way of the Blackberry, or will they be met with the excitement as the next best iPhone? Lastly, how long will it take for large-scale events to return to pre-pandemic attendance levels… if ever? Early indications suggest it could be a long, slow crawl back.
Expenses:
- Labor is a challenge unique to this market cycle, as there were no lockdowns, stimulus checks, or vaccination insecurities post 9/11 or following the Great Recession. Today, nearly every industry is struggling to find labor, and if they do, they are paying extraordinary premiums to recruit and retain top talent. Do we inflate wages and payroll expenses based off this disconnected inflationary year, or do labor expenses eventually reset to pre-COVID levels?
- How will the brands react in this environment? Many brands relaxed or waived certain requirements that have been fixtures for decades. How are service requirements, like daily housekeeping or hot breakfast, going to be reintroduced, or are some amenities gone forever? Are guests going to accept the absence of amenities they have come to expect at certain hotels, and how will this impact guest satisfaction scores?
- Does the increased velocity of technology adoption finally stick? Are we on the verge of seeing the front desk go away, and are we on our way to robotic housekeeping?
- What happens to fixed expenses like property taxes? Throughout the nation, cities, states, and local jurisdictions are struggling to recover from substantial tax revenue deficits. Will we face unexpected or substantial increases in tax rates that are completely disconnected from real property values?
- Decreased costs are being combined with outsized revenue growth in 2021, particularly in leisure destinations. How do we treat this inflated NOI from a value and underwriting perspective? Do we carry it forward, throw it out, or something in between?
There are many questions, old and new, with fewer clear answers or solutions. Successful underwriting has always been an extremely delicate balance of art and science. In a post-COVID world, successful underwriting will require a lot more art. There are vast amounts of pent-up capital on the sidelines eagerly waiting to be deployed, and some in our industry are making very aggressive bets. Who will be right, who will be wrong, and how will the myriad uncertainties above play out?
It will be critical first to stay disciplined, and adhere to time-tested methodologies analyzing supply, demand, brand opportunity or risk, capital needs, and high-level macro trends and micro trends for a specific property and market. After that, careful consideration of the new dynamics needs to be considered, and each issue overlayed into your underwriting. Nobody knows the future, but a disciplined and well-thought-through approach will put you in the best position for a successful acquisition in a very uncertain world.
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Michael Shindler
August 27, 2021 at 3:45 pmWell stated, Rob. Transaction underwriting has challenges in “normal” times, and these are anything but normal still and, likely, for some time to come.