week 8 - hotel vals Flashcards
explain freehold investment intrerest - landlords interest
Owns the land and buildings
Right to receive rental for the unexpired term of the lease
Typically responsible for structural repairs and maintenance and Land Tax
Reversionary right to the business at expiry of the lease
Liquor licence attached to the land
explain lease hold going goncern - tennants interest
Business Interest subject to Lease agreement with Landlord
Market price a Tenant would be willing to pay in order to have the right to occupy the premises for the unexpired term of the lease
Pays rental to Landlord
Right to receive the business profits for the unexpired term of the lease
Saleable asset – option terms are usually exercised.
Interest usually includes all fittings, fixtures & equipment (FF&E) requisite for the ongoing operation of the business
explain freehold going concern interest - land, buildings and business
No lease in place - no rent
Property and business are held together
The owner of the Freehold Going Concern has the rights to the profits/liability for the losses regarding the business
Tenant and Landlords interest combined
major hotel interets include
Freehold Going Concern
Land, buildings and business held together.
Freehold Investment
Landlords interest, owns land and buildings and receives rent
Leasehold Going Concern
Business interest held subject to lease with Landlord.
major valuation tecnahiques for hotels
Freehold Going Concern Interest – EBITDAR
Leasehold Interest – EBITDA
Freehold Investment – Net Market Rental
explain ebitdar / ebitda
Earnings - Profit Before - Ignore Interest - Owners purchasing costs Taxation - Income Tax Depreciation - Capital Purchases Amortisation - Capital Purchases Rent - Rent paid to occupy premises
Stripping back the Net Profit to represent the operational income
Add back one off expenses and costs not directly related to the ongoing operation of the business
Freehold Going Concern Val Methodology
methodology:
Assess EBITDAR
Capitalise EBITDAR in perpetuity
value drivers: Business Trading History Potential Trading Growth Liquor Licence provisions Underlying Land Value Zoning Redevelopment potential Highest and Best Use
value drivers of freehold going concern val methodology
Business Trading History Potential Trading Growth Liquor Licence provisions Underlying Land Value Zoning Redevelopment potential Highest and Best Use
explain Freehold Investment Val Methodology
methodology:
Capitalise Net Market Rental in perpetuity
Rent less Landlords outgoings, usually Land Tax
explain value drivers/determinants
Underlying Land Value Zoning Redevelopment potential Strength of Tenant eg ASX listed company Remaining tenure on lease Rent review provisions Over/under rented Landlord outgoings
explain leasehold going concern valuation methodology
Assess EBITDA
Capitalise EBITDA
Can use Discounted Cashflow Analysis where lease is close to expiration where value reverts to zero.
value drivers: Business trading history Potential trading growth Liquor Licence provisions Remaining tenure Rent review provisions
value drivers of leasehold going concern
Business trading history Potential trading growth Liquor Licence provisions Remaining tenure Rent review provisions
what is marriage value
Marriage Value is essentially the combined value of the freehold investment and leasehold interests, and approximately equates to the value of the freehold going concern.
Any valuation of a freehold going concern should be checked or supported by a marriage value assessment of the freehold investment and leasehold going concerns
explain existing use rights
Due to long historical trading at most hotels (many date back to the early 1900s), existing use rights apply.
If the hotel use is not permissible under the planning scheme, continued use is allowed providing proof of 15 years of continued use.
Existing Use Rights can be lost if the use ceases for more than two years
explain clacluating the market rental
The market adopts the profits method in assessing rentals in the hotel industry whereby the rental is a product of EBITDAR
Through analysis of rentals struck in the open market, comparison can be drawn between the rental to EBITDAR ratio
It is common to see Rentals in the order of 35% to 40% of EBITDAR
Each hotel must be assessed on a case by case basis as there are different factors at play
explain good averge management
In assessing EBITDAR and EBITDA we should assume Good Average Management principals eg. Industry benchmarks for wages, costs of goods sold, repairs and maintenance etc
Again, we are mirroring purchaser decision making – a purchaser is going to have regard to the profit THEY can obtain from the investment. If the incumbent operator appears to be exceptionally good, the purchaser is going to be wary of their ability to maintain profitability
Likewise if an incumbent operator is perceived to be very poor, the purchaser is going to factor into their assessment the likelihood of their ability to increase profitability.
In the instance of a Market Rent Review, good average management principals are important to ensure that an exceptionally good operator (eg Celebrity drawcard) is not penalised for their own talents via a higher assessed rental and conversely that a Landlords asset is not diminished by the Tenant being a poor operator through a lower assessed rental.
Our assessment under Good Average Management is driven by benchmarks with comparable venues.
4 levels of profit and loss can include
revenue:
inceom received from sales (excludeds gst)
ideally per week basis
costs of goods sold:
represents the direct cost of the raw goods that are sold. Eg, Beer kegs, food, stock for bottle shop.
For a typical pub, bars might have a COGs 30%, so that means for a $10 G&T, the venue spends $3 on ingredients which leaves a $7 Gross Profit
expenses
addbacks One Off Expenses Consultant fees eg. Relating to a planning permit application Purchase of new equipment Fines or penalties
explain hotel layout
Be careful with Benchmarking!
Each hotel must be assessed on a case by case basis taking into consideration the attributes of each
Eg. Hotel A would have a lower wage bill than Hotel B, benefitting from staffing efficiency via single service point for both food and beverage.
