Deeper Segmented Data Powers More Profitable Underwriting

By Jason Q. Freed

Whether you’re a first-time buyer or a seasoned institutional investor, the traditional model of evaluating hotel real estate hasn’t changed to reflect the evolving hotel landscape.

Despite the increased amount of data available to gain insight on a hotel’s performance, underwriters still look mainly at top-line revenue figures and forecasts as well as benchmark against a limited number of competitors in an easily identifiable market.

Perhaps the most important part of a hotel real estate valuation is projecting the property’s future performance. To do this, underwriters scan the market for opportunities the hotel might be missing, whether it’s new sets of business or as a result of repositioning the property, potentially with a new brand flag.

Underwriters then consider and project many areas that affect cash flow: housekeeping costs, franchise fees, technology spend, etc.

However, there is more valuable data and insight available today than ever before and oftentimes underwriters are only looking at half the picture. Rather than look solely at top-line revenue metrics from the hotel’s P&L, it’s more important for real estate valuations to consider what the guests pay as well as metrics that have a direct effect on profitability.

4 New Measurements to Consider

Guest Paid Revenue: A portion of the total revenue pool is not considered in traditional hotel collected ADR and RevPAR, the starting point for most underwriting models. In the digital distribution age, a growing portion of consumers are not only booking with the OTAs, but also choosing to pay the third-party intermediary directly. That third party later pays the hotel a revenue net of the negotiated commission, leading to a gap in revenue reporting between what the guest paid and what the hotel collected.

Traditional reporting lacks this insight, which equated to a $3.00 differential in ADR as of January 2020 Trailing Twelve Months (TTM). This is market- and hotel-specific; for example, there was a $7.30 ADR differential in New York City for Full Year 2019.

Channel Mix: How effective is the hotel’s current distribution strategy and where can changes be made for a more optimal flow through? As we know, not every piece of business is equal. Due to a growing reliance on digitally intermediated business, it is possible that a hotel’s Revenue Per Available Room grows while its Net RevPAR and ultimately gross operating profit shrinks.

 In January 2020, the industry’s business mix became 0.2% more expensive than January 2019, which is also market- and hotel-specific. For example, during this same time period, US Midscale hotels became 0.7% more expensive. In the end, can hotels shift channel mix to a more optimal business mix and how does that affect real estate decision making?

Rate Category Mix: A shift in the types of guests a hotel attracts also has the potential to dramatically affect revenue and profit. This is best analyzed by rate categories, which include Rack/BAR, Loyalty Redemptions, Opaque OTA, Group, Government, and Corporate. As of January 2020 TTM, Corporate business made up 16% of the total US hotel revenue while Government accounted for 3%.

Analyzing a subject hotel’s rate categories and benchmarking them against a competitive set could help a potential buyer determine whether there are simple opportunities to improve revenue such as promoting AAA rates on their website or offering packages. This analysis could also lead to non-revenue management decisions such as adding meeting space to accommodate more group business, or affiliating with a brand flag to attract more loyalty business.

Length of Stay: Knowing the average length of stay for a market and/or a competitive set of hotels helps developers and underwriters more accurately predict extended-stay hotel performance.

For example, one developer had recently identified opportune markets for new extended-stay supply. The analysis was based on identifying markets with below-average extended stay supply and above-average extended-stay demand being accommodated in non-extended-stay hotels. This allowed the developer to identify the total addressable market, select prime markets for extended-stay development, and more accurately predict a proposed hotel’s performance.

A Modern Toolbox of Data

It’s incumbent on hotel owners, developers, buyers, and appraisers to act upon the best interest of all parties involved. Therefore, it’s critical each of these roles act with the most accurate and informative data available.

Not only do you want accurate data about the property in question, but also you want the most thorough data available on the market, including guest paid revenue, channel mix, rate category mix, and length of stay data.

This deeply segmented analysis will give all parties involved a more accurate view of whether the property in question will become more or less profitable.

Find out more about using Kalibri Labs’ Market Trends reports for more accurate underwriting.