By Morag McKenzie
As the number of travellers show no sign of slowing, it could be said there has never been a better time to invest in hotels.
Hotels are an attractive investment as they can be an excellent source of income as well as long-term real-estate value. CBRE’s Canadian Hotel Industry Outlook Report (Q3 2023) projects strong and stable occupancy and Revenue Per Available Room (RevPAR) growth for the Canadian hotel industry through to 2027. Occupancy is projected to remain at a profitable 66 to 68 per cent, with RevPAR growing to $140 by 2027. This growth is driven by demand in Canada’s largest cities led by Vancouver, Toronto and Montreal.
This strong financial picture has both first time and experienced investors looking for hotels with growth potential. But how do you measure this, and minimize the risks associated with any real-estate investment?
Financial Benchmarks
The hotel industry uses many financial benchmarks to measure success, including Average Daily Rate (ADR), RevPAR, occupancy and Market Penetration Index (MPI). Understanding each of these is critical when evaluating a hotel’s financial viability and an investor’s ability to grow profitability.
At InnVest Hotels, a prescribed scorecard is used to measure a hotel’s success. “We use a matrix of five key measures to access a hotel for potential investment, including bottom-line performance, flow through, retention market share, RevPAR to market and guest-satisfaction scores,” explains Jeff Hyslop, senior VP, Asset Management and Investment, InnVest Hotels.
The Big Picture
While looking at the financial picture of an existing hotel is critical, it’s equally important to take a look at the big picture to imagine the hotel’s potential.
Tracy Prigmore, founder of She Has a Deal, an organization dedicated to creating pathways to hotel ownership for women, says, “We use a matrix of many scores, including occupancy, RevPAR, et cetera. However, what we’re really looking for is investing in hotels that we can create and expand value in. We need to see the potential to enhance revenue and guest satisfaction prior to investing,” says Prigmore. “A deal is something that you need to create a high opportunity for a great return on your investment for you and your fellow investors.”
Know your Competition
Industry experts agree that knowing your competitive market environment and your potential hotel’s place in it is critical for an investment decision. One resource many organizations and individuals turn to when trying to gain an understanding of a hotel’s market potential is STR Benchmarking.
“At We have a Deal, we provide our investment team with contacts and expertise on how to conduct due diligence, get a loan, structure a deal and raise capital,” says Prigmore.
Listen to your Guests
Finding a hotel to invest in is easy, but finding a hotel that’ll increase in value is more challenging.
“We’re listening to hotel comments. If the Internet is not up to standard or the guest check-in experience is negative, then that is an opportunity for us to grow revenue and return on investment (ROI) with a relatively small investment in people and resources,” says Prigmore.
Hyslop agrees that guest satisfaction is a key indicator of a hotel’s success. “We review all guest feedback and build the cost of solving that issue into our capital investment plan,” he says.
Choosing a Brand
Identifying and solidifying the right brand for the right market is one of the keys to success in hotel investment. Investors often look at changing brands when investing and the potential upside of doing so.
“We purchased a Radisson Hotel that had mixed reviews and converted it to another brand to create real value for the property,” says Prigmore. “When you switch from one brand to another, you need to consider what you would be competing with in your new market and do your operational and financial analysis based on that. We also factor in renovation costs.”
However, while switching brands might seem like an ideal solution, it also comes with a cost.
“We compare the cost of brands, including their fees and required property-improvement plan, to the incremental value the brand will bring,” says Hyslop. “We also assess whether a brand is required or whether the property has enough value without it as was the case with a recent acquisition in Banff, Alta.”
Investing in a hotel means you’re investing in an ongoing operating business, so understanding how to efficiently and profitability manage it is critical. “We do a comparison of all operating costs and staffing models of the potential property to similar assets we manage. Hotels can be either over or understaffed, both of which can affect profitability and guest satisfaction,” says Hyslop. “We also look at what a normalized cash flow and stable income would be for the target asset.”
As labour is a hotel’s single biggest cost, training and retaining staff is also a key operational consideration.
Investors also need to look at the potential to increase value by increasing operational income both from rooms and other operations including food and beverage, meetings, spa, et cetera.
