Thursday, April 27, 2017

Appraisal of a 5-star hotel in Vancouver





This renovated 5-star hotel, the Rosewood Hotel Georgia, had recently been acquired by a publicly traded Chinese joint venture company for $145 million.  The purchase price was equivalent to a capitalization rate of 4.16% of the adjusted net operating income of the hotel in 2016, or CAD$930,000 per room, although NOI had reportedly quadrupled between the years 2014 and 2016.
This improvement in the hotel’s performance coincided with 3 years of double digit increases (10 to 12%) in RevPAR (Revenue per available room) in downtown Vancouver as Vancouver experiences steady increases in tourism, reaching an all-time high in 2016.  Every year in the last 25 years has shown an increase in tourism except, naturally, for 2009.
Tourism statistics for British Columbia continue to show that the leading country of origin for tourists is Canada itself.  With improving commodity prices since last year, this should be a secure niche.  The second largest tourist contingent is U.S. tourists, and the devaluation of the Canadian dollar relative to the U.S. dollar should increase U.S. tourism to Canada.  In third place are Chinese tourists, perhaps the most rapidly increasing tourist segment, with Chinese visits said to have increased by 94% from 2011 to 2015.

That being said, there is an ongoing increase in hotel room inventory represented by the following hotel projects:
·       J.W. Marriott, 350 rooms
·       Autograph collection – The Douglas, 188 rooms
·       Trump International Tower, 147 rooms
This marks a 6.5% increase in high-end downtown rooms.  HVS (Hospitality Valuation Services) forecasts RevPAR growth of about 6% in 2017 and flat growth in 2018 as this new inventory hits the market. They also anticipate more competition from AirBnb as visitors try to save money, and I have an investor friend doing just that.
Since such valuations are based mainly on the Income Approach (U.S.) or the “Profits Method” (Hong Kong), it was looking very difficult to support the $145 million price. Projecting next year with a 6% increase in RevPAR, and a smaller increase in expenses, I still forecasted a 9% increase in NOI, but there was no local data to support a 4.16% capitalization rate.  There had been no published transactions on capitalization rates in Vancouver in a couple of years, so I had to rely on a CBRE investor sentiment survey from the first quarter of 2017, in which investors in downtown Vancouver hotels were seeking rates of return from 5.5% to 6.5%, which were an all-time low for this particular survey.  Back in 2003 the expected rates of return for Vancouver hotels were 12 to 14%. Needless to say, I could not support any capitalization rate that supported a valuation of $145 million.
One problem is that a 4.16% rate of return is considered high in Hong Kong but low in Canada, and the investors were using Hong Kong investment expectations. In this sense, return on investment will meet investor expectations, but estimating market value is a different matter, as I needed to estimate a price that it could sell for.
The second problem was the sales comparison approach. Up to this date, the highest price per room achieved in Vancouver was the sale of the Westin Bayshore for $567,500 per room in September 2015. This waterfront hotel was built in 1960 and 1974 and in need of some upgrading, although some have speculated that this hotel was really bought for eventual redevelopment as condos in the prestigious Coal Harbor part of town. Nightly rates are similar to the Rosewood, though.
 
How was I able to justify a price of $930,000 per room and a cap rate of 4.16%?  I could not.
My valuation was done for Hong Kong Stock Exchange financial reporting purposes, and a market value appraisal was required.  I've been doing these since 2009. Unfortunately, this client did not want a market value appraisal but instead elected "to engage other valuer to conduct the valuation as its targeted figure could not be reached." They were kind enough to pay me, however, but this illustrates the point that public companies, even in Hong Kong, have the power to bias valuations in their favor, and that target values sometimes take the place of market values.
I was shown a Colliers International valuation with slightly higher rates of growth in earnings -- 13.5% in 2017 and 11.5% in 2018, but the most remarkable part of their report was that not one single comparable sale was from Vancouver, and most comparable sales were taken from Hong Kong and New York, also adding their contention that 5-star hotels anywhere in the world start at $1 million per room..
 
 
 

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