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Elham Bolooki and Conrad Sokolnicki FINN901 Hotel Feasibility Project Hilton Niagara Falls Fallsview Hotel and Suites

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Hotel Feasibility Project Hilton Niagara Falls Fallsview Hotel and Suites

Executive Summary

The following report is a financial feasibility study on acquiring the Hilton Niagara Falls Fallsview Hotel and Suites. Niagara Falls, Ontario, Canada is a popular tourist destination with many entertainment and natural attractions that welcomes around 12 million visitors annually. The Hilton Niagara Falls located in the destination is a 965 room property with 6 food and beverage outlets and meeting spaces located conveniently close to many attractions in the city. Three competitors of the hotel include the Four Points by Sheraton Niagara Falls Fallsview, Fallsview Casino Hotel, and the Crowne Plaza Niagara Falls Fallsview. Valuation of the hotel was based on a three year average city wide ADR of USD 109.20 and occupancy of 57.4%. A national debt to equity ratio of 60:40 was identified with a 4% interest rate and 17% ROE resulting in a cap rate of 10.71%. These figures valued the property at USD 103,015,000. Upon further investigation it was identified that an owner operated management structure would produce the highest EBITDA during the stabilized year of around USD 11,139,000. Ten year cash flow, amortization, and depreciation are calculated for the property. Using these figures NPV of the cash flow is calculated along with discounted payback. The results showed a negative NPV and payback periods of longer than 10 years (i.e. the holding period) under cash flow from property and cash flow to equity. As such it is deemed that under current and forecasted market conditions, acquiring the Hilton Niagara Falls Fallsview Hotel and Suites would not be feasible and therefore it is not recommended to proceed with the investment. Should the investor proceed to go ahead with the project, great efforts need to be made to increase revenues or decrease costs and in particular increase occupancy rates to encourage the feasibility of the project.

Table of ContentsIntroduction1Background About Niagara Falls1Description of Chosen Property3Reason for Choosing this Location and Hotel6Justifications8Average Daily Rate8Occupancy Rates8Food and Beverage Revenue8Other Revenue8Departmental Expenses9Undistributed Expenses9Fixed Charges9Valuation11Forecasted EBITDA at Purchase11Capital Requirements12Valuation Using Income Method13Operational Structures14Descriptions of Operational Structures14Operational Structures - Stable Year EBITDA17Stable Year EBITDA Summary2111 Year EBITDA Forecast22Estimated Amortization23Depreciation of the Property24Cash Flow of the Property25Feasibility of Property26Net Present Value (NPV) of Cash Flows26Average Accounting Return (ARR)26Payback Period27Discussion28References30

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Introduction

The chosen city for the feasibility study is Niagara Falls, Ontario, Canada.

Background About Niagara Falls

Niagara Falls City is an enormously popular tourist destination in the southeastern part of Ontario Canada that welcomes around 12 million visitors each year (City of Niagara Falls, 2015). The city which boasts all four seasons overlooks both the Canadian Horseshoe falls and American falls which combined have 750,000 US Gallons of water per second flow over them making it the largest waterfalls by volume in the world (Niagara Falls Live, 2015).

Niagara Falls View from the Canadian Side

Source: Niagara Falls Live, 2015

Niagara Falls has an extensive multimodal transportation network of roads, rail, air and water. The city is situated within the international travel corridor between Canada and the US. In fact, it is located directly along the border of the US, and has direct cross border connections through a series of road and rail bridges including the Rainbow Bridge, Whirlpool Bridge and Queenston-Lewiston Bridge. These road and rail links connect all major 400 series national highways in Canada to the US state highway system. Niagara Falls is also located within an hours drive from three international airports while private charter flights can make it even closer to the city at the Niagara District Airport located minutes from the downtown area (City of Niagara Falls, 2015).

The city offers visitors a wide portfolio of attractions which include Queen Victoria Park offering pristine views of the falls; The Maid of the Mist, a boat trip that takes adventurous travelers a chance to float up to the foot of the falls; the neighborhoods of Lundys Lane and Clifton Hill which offer a variety of entertainment, dining, shopping, and nightlight venues; the 775 foot Skylon Tower and Pavilion, containing a revolving restaurant and observation deck overlooking the falls; the Butterfly Conservatory at Niagara Parks Botanical Gardens; Marineland, a themed amusement and marine animal exhibition park; and several pristine golf courses (City of Niagara Falls, 2015 ).

Niagara Falls at Night

Source: Niagara Falls Tourism, 2015

Additionally, Niagara Falls boasts two famous casinos offering year round entertainment. The details of the venues are summarized in the table below:

Table 1: Casinos in Niagara Falls

Casino Name

Entertainment Offerings

Casino Niagara

2 gaming floors

1500 slot machines

45 gaming tables

A comedy club

Weekly live entertainment

4 dinning venues

Fallsview Casino Resort

300 slot machines

100 gaming tables

Live performances

Luxury hotel and spa

Many dining options

Source: Niagara Falls Tourism, 2015

In addition to the various large event MICE venues at hotels across the city, Niagara Falls is home to the 288,000 square foot LEED Certified Scotiabank Convention Centre offering businesses a multitude of options to host events, conferences, and exhibitions (Niagara Convention & Civic Centre Inc., 2015). Furthermore, Niagara Falls is also home to many blockbuster events and shows including: Canadas leading New Years celebrations; The Winter Festival of Lights; concerts, magic shows, and theatre performances; sports champion ships in hockey and cycling (City of Niagara Falls, 2015).

Description of Chosen Property

The chosen property to conduct the feasibility study is the Hilton Niagara Falls Fallsview Hotel and Suites. The hotel has a total of 965 rooms and suites spread across two towers one of which is 58 stories high, making it the tallest hotel tower in Canada. The property is awarded the AAA and CAA 4 Diamond Award, which roughly translates to a 4 star hotel (Hilton Niagara Falls Fallsview, 2015).

Room types and Amenities

At Hilton, all the rooms are equipped with coffee makers, mini fridges, hair dryers, wireless Internet access, alarm/clock, iron and ironing board. All the rooms are non-smoking. The following table displays the various types of rooms and suites at the hotel and their published online rates as at June 6th 2015 (Hilton Niagara Falls Fallsview, 2015).

Table 2: Room Type Details as of June 6th 2015

Room Type

Description

View

Rate

1 King Studio

Built as a guest room and a suite, newly renovated, king-sized bed, separate living area with Queen pullout bed, sofa, desk and plasma TV, bathroom with separate shower and Jacuzzi for four people plus a roll away bed.

Casino View

$126.75

US Fallsview

$134.25

Fallsview

$149.25

1 King Bed

King-sized bed, armchair, couch, desk, Plasma TV, bathroom with corner shower and bathtub

Casino/City view

$119.25

2 Queen Beds

2 queen-sized beds, couch, desk, plasma TV, bathroom with bathtub

No View

$111.75

City View

$119.25

Casino/City View

$126.25

US Fallsview

$134.25

Fallsview

$149.25

2 bedroom deluxe Suite

2 bedrooms with King-sized beds, plasma TV, vanity area, fireplace, pull out sofa bed, bathroom with Jacuzzi,

US Fallsview

$149.20

Fallsview

$156.75

Premium Fallsview

$164.45

2 room Tower King Suites

Living and dining area, bedroom with queen-sized pull out sofa, plazma TV, fireplace, king sized bed, bathroom with Jacuzzi overlooking the suite

Falls View

$156.75

Premium Fallsview

$164.25

2 bedroom Suite

2 bedroom with king-sized beds, plasma TV, vanity area, Queen pullout sofa and bathroom with Jacuzzi

Casino/City View

$134.50

Source: Hilton Niagara Falls Fallsview, 2015

Hotel Facilities

The following section details the various types of services available at the hotel along with a description of the food and beverage venues on the property.

Table 3: Various Services at Hilton Niagara Falls

Services offered

Concierge Services

Laundry Services

In-Room dining

Shuttle Service

Valet Service

Meeting Spaces

Wedding Ballroom

Complementary Pool and Gym

Complimentary High Speed Internet in Lobby, charges apply in guest rooms

On-site AV services

In-room movies (charges apply)

Coffee Makers in guest rooms

Hair Dryer

Iron and Ironing Board

Alarm clock/radio

Playpen available upon request

Two-line telephones

Voicemail

Data Port

Daily newspaper

Roll Away beds available

Pet Free Property

Source: Hilton Niagara Falls Fallsview, 2015

Food and Beverage Venues at Hilton Niagara Falls (Hilton Niagara Falls Fallsview, 2015):

Pranzo Italian Grill: offering authentic Italian food prepared in their open kitchen, which is well paired with their elaborative list of wines allowing their guests to host events for groups larger than twelve (12) people and is often included in the itinerary of many leisure sightseeing groups.

Brasa Brazilian Steakhouse: an authentic Brazilian Churrascaria (shu-has-caria) or Steakhouse, is a Hilton branded restaurant that has been newly launched. The restaurant service operates family-style that even allows guests to host events for groups larger than twelve (12) people and is often included in the itinerary of many leisure sightseeing groups.

Watermark Rooftop Restaurant: This restaurant is located on the 33rd level of the property allowing guests to experience a unique cuisine with an elaborative wine list. This restaurant also allows guests to host events for groups larger than twelve (12) people and is often included in the itinerary of many leisure sightseeing groups.

Spyce Lounge: a special restaurant located on street level right in the heart of the Niagara Falls entertainment district.

Grand Cafe Breakfast Buffet: a spacious breakfast buffet offering European cuisines that incorporates numerous live cooking stations as well.

Mercato Market Caf: a small caf brewing Starbucks coffee and offering Yogurtys frozen yogurt. The restaurant also offers many different food items from pizzas to muffins.

Packages Offered

The following at the special packages offered on the hotels website as of June 6th 2015.

Table 4: Special offers at Hilton Niagara Falls

Packages

Description

Average Rates

Family

Two bedroom deluxe suite for 6 people

$24 Dinner at Pranzo Italian

Full Buffet for 4 people

Two day city wide WEGO Shuttle passes for 4 people

$329.00

Family Summer Adventure

Stay in room of your guests choice

$40 Dinner voucher

Full Buffet Breakfast for 4 people

Adventure pass classic for 2 adults and 2 children

2 day city-wide WEGO Shuttle Passes for 4 people

$499.00

1 Night Couple Getaways

Stay in King Jacuzzi Studio

$40 dinner for Brasa Brazilian Steakhouse

Full buffet for 2

$330.00

Couple Summer Adventure

Stay in room of choice

$40 dinner voucher

Full breakfast buffet for two

Adventure Pass for 2 Adults

2 day city wide WEGO Shuttle passes for two

$458.00

Couples Fallsview Dining

Stay in Jacuzzi studio with fallsview

$100 dinner voucher for Watermark Fallsview Restaurant

Full Breakfast Buffet for two

$354.00

Couple Casino (1 Night)

Stay in room of choice

$40 dinner at Brasa Brazilian Steakhouse

50% Slot machine voucher at Fallsview Casino

Full buffet breakfast for two

$370.00

Couples Casino (2 Nights)

Stay in room of choice

$40 Dinner at Brasa Brazilian Steakhouse

50% slot machine voucher at Fallsview Casino

Full Buffet for two

600.00

Source: Hilton Niagara Falls Fallsview, 2015

Details on Competitors

The following table displays the two main competitors for the Hilton Niagara Falls.

Table 5: Main Competitors for Hilton Niagara Falls

Main Competitors

Four Points by Sheraton Niagara Falls Fallsview

Fallsview Casino Hotel

Crowne Plaza Niagara Falls Fallsview

Number of Rooms

391

374

234

Number of F&B outlets

5

21

4

Rate

$150.00

$140.00

$88.50

Meeting Spaces

6

None

9

Recreation and Entertainment

Gym

Indoor Pool

Golf Course Nearby

Gift Shop & Shopping Mall Nearby

Gym and Spa

Pool

Golf Course Nearby

Shopping Mall Nearby

Winery Nearby

Spa

Connected to indoor waterpark next door

Connected to Casino Niagara

Source: Starwood Hotels & Resorts Worldwide, Inc., 2015; Fallsview Casino Resort, 2015; Falls Avenue Resort, 2015

Reason for Choosing this Location and Hotel

As discussed above, Niagara Falls City offers tourists of all ages a multitude of activities both natural and manmade. Already a globally recognized tourism destination in its own right (Niagara Region, 2013), visiting the falls is frequently listed as a top attraction to see when also visiting the city of Toronto, a major tourism destination for Canada as well, located only a 2 hour journey away.

The city already welcomes 12 million tourists annually (Niagara Falls Tourism, 2015) 42% of which are international visitors (Niagara Region, 2013). Visitors to the city bring in CAD 1.5 billion in annual receipts accounting for 10% of the province of Ontarios annual tourism receipts (Niagara Region, 2013). Over one-third of all visitors to Niagara Falls stay overnight with 50% of overnight visitors staying in a hotel, motel or B&B (Niagara Falls Tourism, 2015). In addition to Niagara Falls already having a vibrant and diverse tourism industry, choosing Niagara to invest in is strongly supported by the economic development plans of the city. Tourism is listing among the 4 key areas that the Niagara Region will focus on for continual development over the coming years (Niagara Region, 2013).

That being said however, no new construction of any hotel properties was seen in 2013 and 2014 in the Niagara Falls region (Colliers International, 2015). 2015 is also not expected to see any new hotel opening, so the room count for the city will remain stable. Nationwide there was a growth in RevPAR of 6.2% in 2014, which is anticipated to be a peaking point, meaning that there will be a dampened gain in 2015. Taking this into account, average growth in ADR in the property is expected to be around 0.5% over the coming years. The following table gives a snapshot of the hotel market performance in Niagara Falls.

Table 6: Niagara Falls Hotel Market Performance

2014

2013

2012

Number of Rooms

14,643

14,643

14,643

Annual Occupancy

56.9%

56.06%

59.3%

Average Daily Rate (USD)

115.70

106.34

105.54

RevPar (USD)

65.82

59.60

62.65

Available Room Nights

5,344,695

5,344,695

5,344,695

Occupied Room Nights

3,041,131

2,996,236

3,169,404

Source: City of Niagara Falls, 2015; Queens Printer for Ontario, 2015

The reason behind choosing the Hilton Niagara Falls Fallsview Hotel and Suites as the property to perform the feasibility study is for its size and location. The property is located within walking distance of to many of the major destinations and attractions Niagara Falls has to offer that were discussed above. In addition, the property is also connected by an enclosed footbridge to the Fallsview Casino Resort which is just across the street from the Hilton. This makes the location very attractive and convenient for visitors to Niagara Falls without having the property concerned about dealing with the operations and costs of the many attractions guests can easily access from the hotel. The following sections provide estimations on the value of the property, financial implications, and the feasibility of acquiring the property.

Justifications

The following section provides justifications for the values used in conducting the feasibility study. A table summarizing all the performance details can be found at the end of the section.

Average Daily Rate

The average daily rate in the Niagara Falls region was found to be USD 105.54 in 2012, 106.34 in 2013 and USD 115.70 in 2014 (City of Niagara Falls, 2015; Queens Printer for Ontario, 2015). An average of these three rates was taken to estimate the ADR for Niagara Falls in 2015, which calculates to USD 109.20. This will be the estimated probably ADR used for the valuation of this property. USD 20 will be added and subtracted for the optimistic and pessimistic scenarios respectively.

Occupancy Rates

Occupancy rates in Niagara Falls region were found to be 59.3% in 2012, 56.1% in 2013 and 56.9% in 2014 (City of Niagara Falls, 2015; Queens Printer for Ontario, 2015). As with the ADR, an average of these three values was taken to estimate the occupancy for Niagara Falls in 2015, which calculates to an occupancy percentage of 57.4%. This will be the estimated probable occupancy percentage for the valuation of this property. 7% will be added and subtracted for the optimistic and pessimistic scenarios respectively.

Food and Beverage Revenue

After looking at the various food and beverage outlets at the property, it was estimated that the average check per person would be around USD 40.00 (Hilton Niagara Falls Fallsview, 2015). It is assumed that each room has an average occupancy of 2 people per room (i.e. considering an average of single occupancy, couples, and small families). However since there are a variety of dining options outside of the hotel it is therefore assumed that average food and beverage revenue per room is 1.5 of the average check, i.e. around USD 60.00. USD 5.00 will be added and subtracted for the optimistic and pessimistic scenarios respectively.

Other Revenue

Apart from a small gift shop, the property does not have many facilities other than rooms and restaurants that could generate extra revenue. Spa and retail space that is advertised on the website is actually available next door in the Fallsview Casino Resort, connected by bridge which does not generate revenue for the Hilton (Hilton Niagara Falls Fallsview, 2015). However, there is a relatively small ballroom and several meeting rooms which total to around 8,700 square feet in area (Hilton Niagara Falls Fallsview, 2015). The combined revenue is rather small and so it is only estimated that around 5% of total revenue can be classified as other revenue.

Departmental Expenses

Due to the similarities in culture, business processes, and economic ties, some calculations and figures will be based on US or North American figures.

Rooms: according to Rushmore (2011) expenses for rooms varies across the globe. In India they are quite low while in Europe they are quite high because of various regulations and high labor costs. In North America and South America rooms department expenses are said to be around 22%. For the valuation of this property, 22% rooms department expense will be used.

Food and Beverage: as well according to Rushmore (2011) expenses for food and beverage varies around the world. As with rooms, in India the costs are lower at around 45.5%. In the United States the rate is around 68%. This same rate will be used for the valuation of this property.

Other: according to an HVS report (Rushmore, 2011), other departmental expenses were at around 29% of other revenue in the US. Therefore this same rate will be used for the valuation of this property.

Undistributed Expenses

Undistributed operating expenses include expenses related to administrative and general operations, sales and marketing, utilities (i.e. water and electricity), and final repairs and maintenance. Findings from an HVS report based on a hotel in the US will be used to calculate the percent total of the undistributed expenses as follows (Rushmore, 2011):

Administrative and General: 7%

Sales and Marketing: 6%

Utilities: 3%

Repairs & Maintenance: 4%

Fixed Charges

According to the Niagara Falls City government, commercial tax rate for the property will be around 3%. This will then be applied to the valuation of the property (City of Niagara Falls, 2015).

Insurance for full service hotels was said to grow to around 2.5% of total revenue in Canada in 2015 (Rosszell, 2002).

Table 7: Summary of Performance Details

Scenarios

Pessimistic

Probable

Optimistic

Occupancy(%)

50.4

57.4

64.4

Revenue

ADR (USD)

89.2

109.2

129.2

F&B (USD)

55

60

65

Other (%)

5

5

5

Expenses (%)

Room

24

22

20

F&B

70

68

66

Other

31

29

28

A&G

6

5

4

Util.

9

8

7

Sales & Marketing

8

7

6

Repairs & Maint.

7

6

5

Tax

3.25

3

2.75

Insur.

2.75

2.50

2.25

Source: Hilton Niagara Falls Fallsview, 2015; Rushmore, 2011; City of Niagara Falls, 2015; Rosszell, 2002

Valuation Forecasted EBITDA at Purchase

The following is the EBITDA at purchase calculation based on the assumptions from the previous section.

Pessimistic

Probable

Optimistic

ADR

$ 89.20

$ 109.20

$ 129.20

Occupancy

50.40%

57.40%

64.40%

RevPAR

$ 44.96

$ 62.68

$ 83.20

F&B Rev. Per Occ. Room

$ 55.00

$ 60.00

$ 65.00

Other Revenue

5%

5%

5%

Rooms

965

965

965

REVENUES

%

Rooms

59%

$15,834,908.88

61%

$ 22,077,744.78

63%

$ 29,306,810.68

F&B

36%

$ 9,763,677.00

34%

$ 12,130,629.00

32%

$ 14,744,138.50

Other Operated Departments

5%

$ 1,347,293.99

5%

$ 1,800,440.73

5%

$ 2,318,471.01

Total Operating Revenue

$ 26,945,879.87

$ 36,008,814.51

$ 46,369,420.19

DEPARTMENTAL EXPENSES

Rooms

24%

$ 3,800,378.13

22%

$ 4,857,103.85

20%

$ 5,861,362.14

F&B

70%

$ 6,834,573.90

68%

$ 8,248,827.72

66%

$ 9,731,131.41

Other

31%

$ 417,661.14

29%

$ 522,127.81

27%

$ 625,987.17

Total Departmental Expenses

$ 11,052,613.17

$ 13,628,059.38

$ 16,218,480.72

TOTAL DEPT. INCOME

$ 15,893,266.70

$22,380,755.12

$30,150,939.47

UNDISTRIBUTED EXPENSES

Administrative & General

6%

$ 1,616,752.79

5%

$1,800,440.73

4%

$ 1,854,776.81

Sales & Marketing

9%

$ 2,425,129.19

8%

$ 2,880,705.16

7%

$ 3,245,859.41

Utilities

8%

$ 2,155,670.39

7%

$ 2,520,617.02

6%

$ 2,782,165.21

Repairs & Maintenance

7%

$ 1,886,211.59

6%

$ 2,160,528.87

5%

$ 2,318,471.01

TOTAL UND. EXPENSES

$ 8,083,763.96

$ 9,362,291.77

$ 10,201,272.44

Gross Operating Profit

$ 7,809,502.74

$13,018,463.35

$19,949,667.03

FIXED CHARGES

Property Taxes

3.25%

$ 875,741.10

3.00%

$1,080,264.44

2.75%

$1,275,159.06

Property Insurance

2.75%

$ 741,011.70

2.50%

$900,220.36

2.25%

$1,043,311.95

TOTAL FIXED CHARGES

$ 1,616,752.79

$1,980,484.80

$2,318,471.01

EBITDA

$6,192,749.95

$11,037,978.55

$17,631,196.02

Capital Requirements

The following displays the capital requirements for the valuation of the property followed by justifications of the findings.

Table 8: Capital Requirements of Valuation

Pessimistic

Probable

Optimistic

Debt

50%

60%

70%

Interest Rate

4.55%

4.00%

3.75

Term (Years)

15

20

25

Mortgage Constant

9.34%

7.36%

6.23%

Equity

50%

40%

30%

ROE

19%

17%

15%

Cost of Capital

14.17%

11.22%

8.86%

Growth

0.25%

0.50%

1.00%

Cap Rate

13.92%

10.71%

7.86%

Justifications

Division of Debt and Equity: The average leveraging amount for financing hotels in Canada is 60% with minimum of 50% and maximum of 70% (HVS in Canada, 2012). Therefore debt percentages of 60%, 50% and 70% are given for probable, pessimistic, and optimistic scenarios respectively.

Interest Rate: The average interest rate for financing hotels in Canada is 4% with minimum of 3.75% and maximum is 4.55% (HVS in Canada, 2012). Therefore interest rate of 4%, 4.55% and 3.75% are given for probable, pessimistic, and optimistic scenarios respectively.

Term: The average loan term for financing hotels in Canada is 20 years with minimum of 15 and maximum of around 25 years (HVS in Canada, 2012). Therefore a term of 20, 15 and 25 years are given for probable, pessimistic, and optimistic scenarios respectively.

Return on Equity: According to the JLL Investor Sentiment Survey (JLL, 2014) the ROE in the Americas is around 17%. This was therefore used as the probably scenario for the valuation of this property. 19% and 15% were used for pessimistic and optimistic scenarios respectively (i.e. +/- 2%)

Growth: Overall growth in Canada is 1.1%, however it is stated that limited to no grow is expected in Niagara Falls so the value of growth has been estimated as 0.50%, 0.25% and 1.00% for probable, pessimistic and optimistic scenarios (Colliers International, 2014).

Valuation Using Income Method

The following table shows the valuation of the property using the Direct Capitalization Method of valuation with the data presented and justified from above. The rounded number under the probable scenario will be used as the valuation of the hotel. The property is therefore valued at USD 103,015,00.00 at a per room value of USD 106,751.30. The average per room value in Niagara Falls (which includes properties of all ranges) was USD 63,117 (HVS in Canada, 2014). It is therefore assumed that the valuation for the property is appropriate as the property is in the upper category range.

Table 9: Valuation of Property

Pessimistic

Probable

Optimistic

EBITDA

$ 6,192,749.95

$ 11,037,978.55

$ 17,631,196.02

Cap Rate

13.92%

10.71%

7.86%

Value

$ 44,482,687.86

$ 103,015,178.71

$ 224,223,663.92

Rounded

$ 44,483,000.00

$ 103,015,000.00

$ 224,224,000.00

Per Room

$ 46,096.37

$ 106,751.30

$ 232,356.48

Chosen Value

Probable (Rounded)

$ 103,015,000.00

Debt

60%

$ 61,809,000.00

Equity

40%

$ 41,206,000.00

Operational Structures

The following section looks at the EBITDA at the stabilized year with probable, pessimistic, optimistic scenarios under four different management structures: owner-operated, management contract, franchise, and management contract with franchise. Descriptions of the four operational structures are provided followed by the EBITDA calculations for each structure under the three scenarios. All details on ADR, occupancy, expenses and fees for each structure is highlighted in the table after at the end of the descriptions.

The stabilized year is predicted to be at year 3 after purchase. As already stated, the growth in the region is assumed to be around 0.5%. This will make an ADR in the stabilized year to be USD 110.29 under and F&B revenue per room in the stabilized year USD 60.60 in the probable scenario. Occupancy is expected to drop slightly upon acquisition, however will then return to at EBITDA purchase amount of 57.4% for probable.

Descriptions of Operational StructuresOwner-Operated

This is when the hotel is owned and operated by the owner themselves and having full control over the operation and keeps all the profit. However, the owner would then have to manage the operations, which could be more efficiently done by somebody else and one would not be able to access the market like an already established brand would. There are no fees in this structure; however expected ADR and occupancy levels will also not be as high as they potentially could. In addition, expenses will be the highest out of all three structures (Rushmore, ONeill & Rushmore, 2012).

As such ADR and occupancy at the stabilized year will be set at area averages with the expected growth and expenses will be kept the same as with the EBITDA at purchase.

Management Contract

A management contract is between an operator or a management company and an owner. This is when the operator takes complete responsibility of the hotel operations and can reduce costs and improve revenues. However, they may not take control over the policies and procedures and is financially responsible of the property. In this situation, the income less the management fee, goes directly to the owner (Rushmore et al., 2012).

Fees with this structure include a basic fee (% of total operating revenue) and an incentive fee (% of gross operating profit). Basic fee is set at 2.9% and incentive fee is set at 10% based on HVS statistics for upper upscale properties (Detlefsen & Glodz, 2013). ADR and occupancy at the stabilized year will be set at area averages with the expected growth. However, since the hotel would be run more efficiently, departmental expenses will be reduced by 2%.

Franchise

This happens when a contract is signed between a hotel company and an owner that is looking to take the name, trademarks and some or all services offered by the hotel company. This is a good way to go about purchasing a property because it gives the owner instant reputation and identity in the market, dependent on the property one would also have the rates already decided due to the classification of the hotel, one would get access to the central reservation, advertisements, manuals, purchasing and loyalty programs. However, should, at any point in time, the property fail, the hotel company can withdraw the franchise and the owner assumes all liabilities (Rushmore et al., 2012).

Fees with this structure include a franchise fee (% of total operating revenue). Franchise fee is set at 12% based on HVS report specifying the royalty, loyalty, marketing, reservation and miscellaneous fees (Rushmore & Bagley, 2014). ADR and occupancy at the stabilized year will be set higher than at area averages with the expected growth as the brand recognition and reservation system will improve the figures. However expenses will be kept the same as with the EBITDA at purchase.

Management Contract with Franchise (Manchise)

In this structure the elements of a management contract and a franchise are combined. By matching the goals, objectives, property, location and standards. One would use the name of the company brand as that is better for lenders and to reach the targeted market. However, they are a financial risk to owners due to the dual fees and the franchisor would decide on the operating standards (Rushmore et al., 2012).

Fees with this structure include a basic fee (% of total operating revenue), an incentive fee (% of gross operating profit) and a franchise fee (% of total operating revenue). ). Basic fee is set at 2.9% and incentive fee is set at 10% based on HVS statistics for upper upscale properties (Detlefsen & Glodz, 20130). Franchise fee is set at 12% based on HVS report specifying the royalty, loyalty, marketing, reservation and miscellaneous fees (Rushmore & Bagley, 2014). ADR and occupancy at the stabilized year will be set higher than at area averages with the expected growth as the brand recognition and reservation system will improve the figures. Also since the hotel would be run more efficiently, departmental expenses will be reduced by 2%.

Table 10: Summary of Figures

Structure

Scenario

ADR (USD)

F&B (USD)

Occ. (%)

Expenses (%)

Fees (%)

Room

F&B

Other

Basic

Incentive

Franchise

Owner Operated

Pessimistic

90.29

55.60

50.40

24

70

31

0

0

0

Probable

110.29

60.60

57.40

22

68

29

0

0

0

Optimistic

130.29

65.60

64.40

20

66

27

0

0

0

Management

Pessimistic

90.29

55.60

50.40

22

68

29

2.9

10

0

Probable

110.29

60.60

57.40

20

66

27

2.9

10

0

Optimistic

130.29

65.60

64.40

18

64

25

2.9

10

0

Franchise

Pessimistic

110.29

60.60

57.40

24

70

31

0

0

12

Probable

130.29

65.60

64.40

22

68

29

0

0

12

Optimistic

150.29

70.60

71.40

20

66

27

0

0

12

Manchise

Pessimistic

110.29

60.60

57.40

22

68

29

2.9

10

12

Probable

130.29

65.60

64.40

20

66

27

2.9

10

12

Optimistic

150.29

70.60

71.40

18

64

25

2.9

10

12

Operational Structures - Stable Year EBITDA

The following section provides the EBITDA for the property under pessimistic, probable and optimistic scenarios with all four operational structures

Owner Operated

Table 11: Stable Year EBITDA - Owner Operated

Pessimistic

Probable

Optimistic

ADR

$ 90.29

$ 110.20

$ 130.29

Occupancy

50.40%

57.40%

64.40%

RevPAR

$ 45.51

$ 63.25

$ 83.91

F&B Rev. Per Occ. Room

$ 55.60

$ 60.60

$ 65.60

Other Revenue

5%

5%

5%

Rooms

965

965

965

REVENUES

%

Rooms

59%

$ 16,028,407.21

61%

$ 22,279,921.93

63%

$ 29,554,058.54

F&B

36%

$ 9,870,189.84

34%

$ 12,251,935.29

32%

$ 14,880,238.24

Other Operated Departments

5%

$ 1,363,084.06

5%

$ 1,817,466.17

5%

$ 2,338,647.20

Total Operating Revenue

$ 27,261,681.10

$ 36,349,323.39

$ 46,772,943.98

DEPARTMENTAL EXPENSES

Rooms

24%

$ 3,846,817.73

22%

$ 4,901,582.82

20%

$ 5,910,811.71

F&B

70%

$ 6,909,132.89

68%

$ 8,331,316.00

66%

$ 9,820,957.24

Other

31%

$ 422,556.06

29%

$ 527,065.19

27%

$ 631,434.74

Total Departmental Expenses

$ 11,178,506.67

$ 13,759,964.01

$ 16,363,203.69

TOTAL DEPT. INCOME

$16,083,174.43

$22,589,359.38

$30,409,740.29

UNDISTRIBUTED EXPENSES

Administrative & General

6%

$ 1,635,700.87

5%

$ 1,817,466.17

4%

$ 1,870,917.76

Sales & Marketing

9%

$ 2,453,551.30

8%

$ 2,907,945.87

7%

$ 3,274,106.08

Utilities

8%

$ 2,180,934.49

7%

$ 2,544,452.64

6%

$ 2,806,376.64

Repairs & Maintenance

7%

$ 1,908,317.68

6%

$ 2,180,959.40

5%

$ 2,338,647.20

TOTAL UND. EXPENSES

$ 8,178,504.33

$ 9,450,824.08

$ 10,290,047.68

Gross Operating Profit

$7,904,670.10

$13,138,535.30

$20,119,692.61

Fees

Basic Fee

0%

$ -

$ -

$ -

Incentive Fee

0%

$ -

$ -

$ -

Franchise Fee

0%

$ -

$ -

$ -

Total Fees

$ -

$ -

$ -

FIXED CHARGES

Property Taxes

3.25%

$886,004.64

3.00%

$1,090,479.70

2.75%

$1,286,255.96

Property Insurance

2.75%

$749,696.23

2.50%

$908,733.08

2.25%

$1,052,391.24

TOTAL FIXED CHARGES

$1,635,700.87

$1,999,212.79

$2,338,647.20

EBITDA

$6,268,969.23

$11,139,322.51

$17,781,045.42

Management

Table 12: Stable Year EBITDA - Management

Pessimistic

Probable

Optimistic

ADR

$ 90.29

$ 110.20

$ 130.29

Occupancy

50.40%

57.40%

64.40%

RevPAR

$ 45.51

$ 63.25

$ 83.91

F&B Rev. Per Occ. Room

$ 55.60

$ 60.60

$ 65.60

Other Revenue

5%

5%

5%

Rooms

965

965

965

REVENUES

%

Rooms

59%

$ 16,028,407.21

61%

$ 22,279,921.93

63%

$ 29,554,058.54

F&B

36%

$ 9,870,189.84

34%

$ 12,251,935.29

32%

$ 14,880,238.24

Other Operated Departments

5%

$ 1,363,084.06

5%

$ 1,817,466.17

5%

$ 2,338,647.20

Total Operating Revenue

$ 27,261,681.10

$ 36,349,323.39

$ 46,772,943.98

DEPARTMENTAL EXPENSES

Rooms

22%

$ 3,526,249.59

20%

$ 4,455,984.39

29%

$ 8,570,676.98

F&B

68%

$ 6,711,729.09

66%

$ 8,086,277.29

64%

$ 9,523,352.47

Other

29%

$ 395,294.38

27%

$ 490,715.87

25%

$ 584,661.80

Total Departmental Expenses

$ 10,633,273.05

$ 13,032,977.54

$ 18,678,691.25

TOTAL DEPT. INCOME

$16,628,408.05

$23,316,345.85

$28,094,252.73

UNDISTRIBUTED EXPENSES

Administrative & General

6%

$ 1,635,700.87

5%

$ 1,817,466.17

4%

$ 1,870,917.76

Sales & Marketing

9%

$ 2,453,551.30

8%

$ 2,907,945.87

7%

$ 3,274,106.08

Utilities

8%

$ 2,180,934.49

7%

$ 2,544,452.64

6%

$ 2,806,376.64

Repairs & Maintenance

7%

$ 1,908,317.68

6%

$ 2,180,959.40

5%

$ 2,338,647.20

TOTAL UND. EXPENSES

$ 8,178,504.33

$ 9,450,824.08

$ 10,290,047.68

Gross Operating Profit

$8,449,903.72

$13,865,521.77

$17,804,205.05

Fees

Basic Fee

3%

$ 790,588.75

$ 1,054,130.38

$ 1,356,415.38

Incentive Fee

10%

$ 844,990.37

$ 1,386,552.18

$ 1,780,420.51

Franchise Fee

0%

$ -

$ -

$ -

Total Fees

$ 1,635,579.12

$ 2,440,682.55

$ 3,136,835.88

FIXED CHARGES

Property Taxes

3.25%

$886,004.64

3.00%

$1,090,479.70

2.75%

$1,286,255.96

Property Insurance

2.75%

$749,696.23

2.50%

$908,733.08

2.25%

$1,052,391.24

TOTAL FIXED CHARGES

$1,635,700.87

$1,999,212.79

$2,338,647.20

EBITDA

$5,178,623.73

$9,425,626.42

$12,328,721.97

Franchise

Table 13: Stable Year EBITDA - Franchise

Pessimistic

Probable

Optimistic

ADR

$ 110.29

$ 130.29

$ 150.29

Occupancy

57.4%

64.40%

71.40%

RevPAR

$ 63.31

$ 83.91

$ 107.31

F&B Rev. Per Occ. Room

$ 60.60

$ 65.60

$ 70.60

Other Revenue

5%

5%

5%

Rooms

965

965

965

REVENUES

%

Rooms

61%

$ 22,298,117.87

63%

$ 29,554,058.54

65%

$ 37,796,229.21

F&B

34%

$ 12,251,935.29

32%

$ 14,880,238.24

30%

$ 17,755,098.69

Other Operated Departments

5%

$ 1,818,423.85

5%

$ 2,338,647.20

5%

$ 2,923,754.10

Total Operating Revenue

$ 36,368,477.01

$ 46,772,943.98

$ 58,475,082.00

DEPARTMENTAL EXPENSES

Rooms

24%

$ 5,351,548.29

22%

$ 6,501,892.88

20%

$ 7,559,245.84

F&B

70%

$ 8,576,354.70

68%

$ 10,118,562.00

66%

$ 11,718,365.14

Other

31%

$ 563,711.39

29%

$ 678,207.69

27%

$ 789,413.61

Total Departmental Expenses

$ 14,491,614.39

$ 17,298,662.57

$ 20,067,024.58

TOTAL DEPT. INCOME

$21,876,862.63

$29,474,281.41

$38,408,057.41

UNDISTRIBUTED EXPENSES

Administrative & General

6%

$ 2,182,108.62

5%

$ 2,338,647.20

4%

$ 2,339,003.28

Sales & Marketing

9%

$ 3,273,162.93

8%

$ 3,741,835.52

7%

$ 4,093,255.74

Utilities

8%

$ 2,909,478.16

7%

$ 3,274,106.08

6%

$ 3,508,504.92

Repairs & Maintenance

7%

$ 2,545,793.39

6%

$ 2,806,376.64

5%

$ 2,923,754.10

TOTAL UND. EXPENSES

$ 10,910,543.10

$ 12,160,965.43

$ 12,864,518.04

Gross Operating Profit

$10,966,319.52

$17,313,315.98

$25,543,539.37

Fees

Basic Fee

0%

$ -

$ -

$ -

Incentive Fee

0%

$ -

$ -

$ -

Franchise Fee

12%

$ 4,364,217.24

$ 5,612,753.28

$ 7,017,009.84

Total Fees

$ 4,364,217.24

$ 5,612,753.28

$ 7,017,009.84

FIXED CHARGES

Property Taxes

3.25%

$1,181,975.50

3.00%

$1,403,188.32

2.75%

$1,608,064.75

Property Insurance

2.75%

$1,000,133.12

2.50%

$1,169,323.60

2.25%

$1,315,689.34

TOTAL FIXED CHARGES

$2,182,108.62

$2,572,511.92

$2,923,754.10

EBITDA

$4,419,993.66

$9,128,050.78

$15,602,775.43

Manchise

Table 14: Stable Year EBITDA - Manchise

Pessimistic

Probable

Optimistic

ADR

$ 110.29

$ 130.29

$ 150.29

Occupancy

57.4%

64.40%

71.40%

RevPAR

$ 63.31

$ 83.91

$ 107.31

F&B Rev. Per Occ. Room

$ 60.60

$ 65.60

$ 70.60

Other Revenue

5%

5%

5%

Rooms

965

965

965

REVENUES

%

Rooms

61%

$ 22,298,117.87

63%

$ 29,554,058.54

65%

$ 37,796,229.21

F&B

34%

$ 12,251,935.29

32%

$ 14,880,238.24

30%

$ 17,755,098.69

Other Operated Departments

5%

$ 1,818,423.85

5%

$ 2,338,647.20

5%

$ 2,923,754.10

Total Operating Revenue

$ 36,368,477.01

$ 46,772,943.98

$ 58,475,082.00

DEPARTMENTAL EXPENSES

Rooms

22%

$ 4,905,585.93

20%

$ 5,910,811.71

29%

$ 10,960,906.47

F&B

68%

$ 8,331,316.00

66%

$ 9,820,957.24

64%

$ 11,363,263.16

Other

29%

$ 527,342.92

27%

$ 631,434.74

25%

$ 730,938.52

Total Departmental Expenses

$ 13,764,244.85

$ 16,363,203.69

$ 23,055,108.16

TOTAL DEPT. INCOME

$22,604,232.17

$30,409,740.29

$35,419,973.84

UNDISTRIBUTED EXPENSES

Administrative & General

6%

$ 2,182,108.62

5%

$ 2,338,647.20

4%

$ 2,339,003.28

Sales & Marketing

9%

$ 3,273,162.93

8%

$ 3,741,835.52

7%

$ 4,093,255.74

Utilities

8%

$ 2,909,478.16

7%

$ 3,274,106.08

6%

$ 3,508,504.92

Repairs & Maintenance

7%

$ 2,545,793.39

6%

$ 2,806,376.64

5%

$ 2,923,754.10

TOTAL UND. EXPENSES

$ 10,910,543.10

$ 12,160,965.43

$ 12,864,518.04

Gross Operating Profit

$11,693,689.06

$18,248,774.85

$22,555,455.80

Fees

Basic Fee

3%

$ 1,054,685.83

$ 1,356,415.38

$ 1,695,777.38

Incentive Fee

10%

$ 1,169,368.91

$ 1,824,877.49

$ 2,255,545.58

Franchise Fee

12%

$ 4,364,217.24

$ 5,612,753.28

$ 7,017,009.84

Total Fees

$ 6,588,271.98

$ 8,794,046.14

$ 10,968,332.80

FIXED CHARGES

Property Taxes

3.25%

$1,181,975.50

3.00%

$1,403,188.32

2.75%

$1,608,064.75

Property Insurance

2.75%

$1,000,133.12

2.50%

$1,169,323.60

2.25%

$1,315,689.34

TOTAL FIXED CHARGES

$2,182,108.62

$2,572,511.92

$2,923,754.10

EBITDA

$2,923,308.46

$6,882,216.80

$8,663,368.90

Stable Year EBITDA Summary

The following table displays the EBITDA at the stable year for all four management structures under each scenario. From the table it is evident that under the probable scenario, the owner operated structure has produced the greatest EBIDTA. This management structure will therefore be used for further analysis.

Table 15: Summary of EBITDA

EBITDA

Pessimistic

Probable

Optimistic

Owner Operated

$ 6,268,969.23

$ 11,139,322.51

$ 17,781,045.42

Management

$ 5,178,623.73

$ 9,425,626.42

$ 12,328,721.97

Franchise

$ 4,419,993.66

$ 9,128,050.78

$ 8,663,368.90

Branded

$ 2,923,308.46

$ 6,882,216.80

$ 8,663,368.90

11 Year EBITDA Forecast

The following table displays the 11 year EBITDA calculation with an owner operated structure based on the details provided earlier in the report.

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Year 11

ADR

$ 109.20

$ 109.75

$ 110.29

$ 110.85

$ 111.40

$ 111.96

$ 112.52

$ 13.08

$ 13.65

$ 114.21

$ 114.78

Occupancy

55.4%

56.4%

57.4%

57.4%

57.4%

57.4%

57.4%

57.4%

57.4%

57.4%

57.4%

RevPAR

$ 60.50

$ 61.90

$ 63.31

$ 63.63

$ 63.94

$ 64.26

$ 64.58

$ 64.91

$ 65.23

$ 65.56

$ 65.89

F&B Rev. Per Occ. Room

$ 60.00

$ 60.30

$ 60.60

$ 60.90

$ 61.21

$ 61.52

$ 61.82

$ 62.13

$ 62.44

$ 62.75

$ 63.07

Other Revenue

5%

5%

5%

5%

5%

5%

5%

5%

5%

5%

5%

Rooms

965

965

965

965

965

965

965

965

965

965

965

Revenue Growth

0.50%

REVENUES

Rooms

61%

$ 21,308,485.38

$ 21,801,580.66

$ 22,299,074.17

$ 22,410,569.54

$ 22,522,622.39

$ 22,635,235.50

$ 22,748,411.68

$ 22,862,153.74

$ 22,976,464.51

$ 23,091,346.83

$ 23,206,803.56

F&B

34%

$ 11,707,959.00

$ 11,978,890.47

$ 12,252,238.56

$ 12,313,499.75

$ 12,375,067.25

$ 12,436,942.58

$ 12,499,127.30

$ 12,561,622.93

$ 12,624,431.05

$ 12,687,553.20

12,750,990.97

Other Operated Departments

5%

$ 1,737,707.60

$ 1,777,919.53

$ 1,818,490.14

$ 1,827,582.59

$ 1,836,720.51

$ 1,845,904.11

$ 1,855,133.63

$ 1,864,409.30

$ 1,873,731.34

$ ,883,100.00

$ 1,892,515.50

Total Operating Revenue

$ 34,754,151.98

$ 5,558,390.66

$ 36,369,802.87

$ 36,551,651.89

$ 36,734,410.14

$ 36,918,082.20

$ 37,102,672.61

$ 37,288,185.97

$ 37,474,626.90

$ 7,662,000.03

$ 37,850,310.03

DEPARTMENTAL EXPENSES

Rooms

22%

$ 4,687,866.78

$ 4,796,347.74

$ 4,905,796.32

$ 4,930,325.30

$ 4,954,976.93

$ 4,979,751.81

$ 5,004,650.57

$ 5,029,673.82

$ 5,054,822.19

$ 5,080,096.30

$ 5,105,496.78

F&B

68%

$ 7,961,412.12

$ 8,145,645.52

$ 8,331,522.22

$ 8,373,179.83

$ 8,415,045.73

$ 8,457,120.96

$ 8,499,406.56

$ 8,541,903.59

$ 8,584,613.11

$ 8,627,536.18

$ 8,670,673.86

Other

29%

$ 503,935.20

$ 515,596.66

$ 527,362.14

$ 529,998.95

$ 532,648.95

$ 535,312.19

$ 537,988.75

$ 540,678.70

$ 543,382.09

$ 546,099.00

$ 548,829.50

Total Departmental Expenses

$ 13,153,214.11

$ 13,457,589.93

$ 13,764,680.68

$ 13,833,504.08

$ 13,902,671.60

$ 13,972,184.96

$ 14,042,045.88

$ 14,112,256.11

$ 14,182,817.39

$ 14,253,731.48

$ 14,325,000.14

TOTAL DEPT. INCOME

$21,600,937.87

$22,100,800.73

$22,605,122.19

$22,718,147.80

$22,831,738.54

$22,945,897.24

$23,060,626.72

$23,175,929.86

$23,291,809.51

$23,408,268.55

$23,525,309.90

UNDISTRIBUTED EXPENSES

Administrative & General

5%

$ 1,737,707.60

$ 1,777,919.53

$ 1,818,490.14

$ 1,827,582.59

$ 1,836,720.51

$ 1,845,904.11

$ 1,855,133.63

$ 1,864,409.30

$ 1,873,731.34

$ 1,883,100.00

$ 1,892,515.50

Sales & Marketing

8%

$ 2,780,332.16

$ 2,844,671.25

$ 2,909,584.23

$ 2,924,132.15

$ 2,938,752.81

$ 2,953,446.58

$ 2,968,213.81

$ 2,983,054.88

$ 2,997,970.15

$ 3,012,960.00

$ 3,028,024.80

Utilities

7%

$ 2,432,790.64

$ 2,489,087.35

$ 2,545,886.20

$ 2,558,615.63

$ 2,571,408.71

$ 2,584,265.75

$ 2,597,187.08

$ 2,610,173.02

$ 2,623,223.88

$ 2,636,340.00

$ 2,649,521.70

Repairs & Maintenance

6%

$ 2,085,249.12

$ 2,133,503.44

$ 2,182,188.17

$ 2,193,099.11

$ 2,204,064.61

$ 2,215,084.93

$ 2,226,160.36

$ 2,237,291.16

$ 2,248,477.61

$ 2,259,720.00

$ 2,271,018.60

TOTAL UND. EXPENSES

$ 9,036,079.51

$ 9,245,181.57

$ 9,456,148.75

$ 9,503,429.49

$ 9,550,946.64

$ 9,598,701.37

$ 9,646,694.88

$ 9,694,928.35

$ 9,743,402.99

$ 9,792,120.01

$ 9,841,080.61

Gross Operating Profit

$12,564,858.36

$12,855,619.16

$13,148,973.45

$13,214,718.31

$13,280,791.91

$13,347,195.87

$13,413,931.84

$13,481,001.50

$13,548,406.51

$13,616,148.54

$13,684,229.29

FIXED CHARGES

Property Taxes

3.00%

$1,042,624.56

$1,066,751.72

$1,091,094.09

$1,096,549.56

$1,102,032.30

$1,107,542.47

$1,113,080.18

$1,118,645.58

$1,124,238.81

$1,129,860.00

$1,135,509.30

Property Insurance

2.50%

$868,853.80

$888,959.77

$909,245.07

$913,791.30

$918,360.25

$922,952.05

$927,566.82

$932,204.65

$936,865.67

$941,550.00

$946,257.75

TOTAL FIXED CHARGES

$1,911,478.36

$1,955,711.49

$2,000,339.16

$2,010,340.85

$2,020,392.56

$2,030,494.52

$2,040,646.99

$2,050,850.23

$2,061,104.48

$2,071,410.00

$2,081,767.05

EBITDA

$10,653,380.00

$10,899,907.67

$11,148,634.29

$11,204,377.46

$11,260,399.35

$11,316,701.34

$11,373,284.85

$11,430,151.28

$11,487,302.03

$11,544,738.54

$11,602,462.23

Reversion Value

The reversion value for the property (i.e. the value at which you can sell it) is calculated by taking the year 11 EBITDA after purchase and the terminal cap rate (i.e. initial cap rate + 2% using the Rushmore method). As such, the reversion value after the 10 year holding period is USD 91,251,000 (rounded). This means that the year 10 EBITDA would actually be USD 102,796,000 (rounded). The below table summarizes the findings.

Table 16: Reversion Value and Actual Year 10 EBITDA

Initial Cap Rate

10.71%

Terminal Cap Rate

12.71%

Reversion Value

$91,250,876.17

Year 10 EBITDA

$102,795,614.71

Estimated Amortization

Based on the findings in the previous sections, the following tables display the estimated amortization details with a 10 year holding period.

Table 17: Amortization Details

Debt Amount

$ 61,809,000.00

Rate

4.00%

Term

20

Payment

$ 4,548,014

Holding Period

10

Mortgage Balance

$ 36,888,471

Table 18: Amortization Schedule

Period

Payment

Interest

Principal Paid

Ending Balance

1

$4,548,014

$ 2,472,360

$2,075,654

$ 59,733,346

2

$4,548,014

$ 2,389,334

$2,158,681

$ 57,574,665

3

$4,548,014

$ 2,302,987

$2,245,028

$ 55,329,637

4

$4,548,014

$ 2,213,185

$2,334,829

$ 52,994,808

5

$4,548,014

$ 2,119,792

$2,428,222

$ 50,566,586

6

$4,548,014

$ 2,022,663

$2,525,351

$ 48,041,235

7

$4,548,014

$ 1,921,649

$2,626,365

$ 45,414,870

8

$4,548,014

$ 1,816,595

$2,731,420

$ 42,683,451

9

$4,548,014

$ 1,707,338

$2,840,676

$ 39,842,774

10

$4,548,014

$ 1,593,711

$2,954,303

$ 36,888,471

Depreciation of the Property

For this property the building, FF&E and land is estimated to be worth 70%, 20%, and 10% respectively of the total value. Straight line depreciation will be completed with a useful life of 39 years and 10 years for the building and FF&E respectively. Based on the valuation of the property done in the previous section and the above details, the total annual depreciation for the property is USD 3,909,287.18. The table below shows the details of the depreciation for the property.

Table 19: Depreciation of the Property

Value

$ 103,015,000.00

Useful Life

Annual Depreciation

Building

70%

$ 72,110,500.00

39

$ 1,848,987.18

FF&E

20%

$ 20,603,000.00

10

$ 2,060,300.00

Land

10%

Total

$ 3,909,287.18

Cash Flow of the Property

The following table displays the estimated cash flow of the property within the 10 year holding period. It is followed by a table that then looks at the total year 10 cash flow based on the remaining mortgage balance.

Table 20: 10 Year Cash Flow

Year

1

2

3

4

5

6

7

8

9

10

EBITDA

$ 10,653,380

$ 10,899,908

$ 11,148,634

$ 11,204,377

$ 11,260,399

$ 11,316,701

$ 11,373,285

$ 11,430,151

$ 11,487,302

$ 11,544,739

Depreciation

$ (3,909,287)

$ (3,909,287)

$ (3,909,287)

$ (3,909,287)

$ (3,909,287)

$ (3,909,287)

$ (3,909,287)

$ (3,909,287)

$ (3,909,287)

$ (3,909,287)

Interest

$ (2,472,360)

$ (2,389,334)

$ (2,302,987)

$ (2,213,185)

$ (2,119,792)

$ (2,022,663)

$ (1,921,649)

$ (1,816,595)

$ (1,707,338)

$ (1,593,711)

EBT

$ 4,271,733

$ 4,601,287

$ 4,936,361

$ 5,081,905

$ 5,231,320

$ 5,384,751

$ 5,542,348

$ 5,704,269

$ 5,870,677

$ 6,041,740

Tax (30%)

$ 1,281,520

$ 1,380,386

$ 1,480,908

$ 1,524,571

$ 1,569,396

$ 1,615,425

$ 1,662,704

$ 1,711,281

$ 1,761,203

$ 1,812,522

NET INCOME

$ 2,990,213

$ 3,220,901

$ 3,455,452

$ 3,557,333

$ 3,661,924

$ 3,769,326

$ 3,879,644

$ 3,992,989

$ 4,109,474

$ 4,229,218

Depreciation

$ 3,909,287

$ 3,909,287

$ 3,909,287

$ 3,909,287

$ 3,909,287

$ 3,909,287

$ 3,909,287

$ 3,909,287

$ 3,909,287

$ 3,909,287

Principal Payment

$ (2,075,654)

$ (2,158,681)

$ (2,245,028)

$ (2,334,829)

$ (2,428,222)

$ (2,525,351)

$ (2,626,365)

$ (2,731,420)

$ (2,840,676)

$ (2,954,303)

CASH FLOW

$ 4,823,846

$ 4,971,507

$ 5,119,712

$ 5,131,792

$ 5,142,989

$ 5,153,262

$ 5,162,566

$ 5,170,856

$ 5,178,085

$ 5,184,202

Table 21: Actual Cash Flow Year 10

Reversion Value

$ 91,250,876.17

Mortgage Balance

$ 36,888,470.85

Proceeds to Equity

$ 54,362,405.32

Year 10 Cash Flow

$ 59,546,607.34

Feasibility of PropertyNet Present Value (NPV) of Cash Flows

The following table displays the NPV of cash flow from property and cash flow to equity.

Table 22: NPV of Cash Flows

Year

Cash Flow from Property

Year

Cash Flow to Equity

0

$ (103,015,000.00)

0

$ (41,206,000.00)

1

$ 10,653,380.00

1

$ 4,823,845.75

2

$ 10,899,907.67

2

$ 4,971,507.27

3

$ 11,148,634.29

3

$ 5,119,711.73

4

$ 11,204,377.46

4

$ 5,131,791.62

5

$ 11,260,399.35

5

$ 5,142,988.99

6

$ 11,316,701.34

6

$ 5,153,261.72

7

$ 11,373,284.85

7

$ 5,162,565.97

8

$ 11,430,151.28

8

$ 5,170,856.08

9

$ 11,487,302.03

9

$ 5,178,084.58

10

$ 102,795,614.71

10

$ 59,546,607.34

Discount Rate

11.21%

Discount Rate

17.00%

NPV

$ (6,385,562.28)

NPV

$ (6,320,411.15)

IRR

10.12%

IRR

13.95%

From the calculations under both conditions, we can see that NPV is negative with an IRR lower than the discount rate.

Average Accounting Return (ARR)

The following table displays the ARR for the property

Table 23: ARR for Property

Total Net Income

$ 36,866,473

Average Net Income

$ 3,686,647

Total Investment

$ 103,015,000

ARR

3.58%

Payback Period

The following tables display the payback period for overall property and equity cash flows as well as at discounted cash flows. Cash flow from property is set at a discount rate of 11.21% while cash flow to equity is set at 17%.

Table 24: Payback for Property

Year

Cash Flow from Property

Discounted Rates

Accumulated Payback

Payback Tipping Point

0

$ (103,015,000.00)

1

$ 10,653,380.00

$9,579,093.73

$9,579,093.73

($93,435,906.27)

2

$ 10,899,907.67

$8,812,453.30

$18,391,547.04

($84,623,452.96)

3

$ 11,148,634.29

$8,104,620.50

$26,496,167.53

($76,518,832.47)

4

$ 11,204,377.46

$7,323,787.76

$33,819,955.29

($69,195,044.71)

5

$ 11,260,399.35

$6,618,183.68

$40,438,138.98

($62,576,861.02)

6

$ 11,316,701.34

$5,980,560.43

$46,418,699.41

($56,596,300.59)

7

$ 11,373,284.85

$5,404,368.44

$51,823,067.85

($51,191,932.15)

8

$ 11,430,151.28

$4,883,689.18

$56,706,757.03

($46,308,242.97)

9

$ 11,487,302.03

$4,413,174.32

$61,119,931.35

($41,895,068.65)

10

$ 102,795,614.71

$35,509,506.37

$96,629,437.72

($6,385,562.28)

Table 25: Payback from Equity

Year

Cash Flow to Equity

Discounted Rates

Accumulated Pay Back

Pay Back Tipping Point

0

$ (41,206,000.00)

1

$ 4,823,845.75

$4,122,945.08

$4,122,945.08

($37,083,054.92)

2

$ 4,971,507.27

$3,631,753.43

$7,754,698.51

($33,451,301.49)

3

$ 5,119,711.73

$3,196,597.26

$10,951,295.77

($30,254,704.23)

4

$ 5,131,791.62

$2,738,580.84

$13,689,876.61

($27,516,123.39)

5

$ 5,142,988.99

$2,345,774.64

$16,035,651.25

($25,170,348.75)

6

$ 5,153,261.72

$2,008,940.29

$18,044,591.54

($23,161,408.46)

7

$ 5,162,565.97

$1,720,143.12

$19,764,734.66

($21,441,265.34)

8

$ 5,170,856.08

$1,472,568.67

$21,237,303.33

($19,968,696.67)

9

$ 5,178,084.58

$1,260,365.14

$22,497,668.47

($18,708,331.53)

10

$ 59,546,607.34

$12,387,920.37

$34,885,588.85

($6,320,411.15)

From the calculations it is evident that under both cash flow from property and cash flow to equity, the payback period is longer than the 10 year holding period with discounted values. There is a balance of over six million dollars in both cases.

Discussion

Niagara Falls City, Ontario, Canada is a very popular tourist destination that makes up around 10% of the province of Ontarios annual tourism receipts. Located along the USA-Canada border, the city has an extensive transportation network leading in and out connecting Niagara Falls to the rest of Canada, the US and the globe. In addition, Niagara Falls has a wide portfolio of entertainment, dining options, and natural beauty not the mention the falls themselves. With the city focused on developing the tourism industry, one would think that Niagara Falls would be an ideal location to invest in a property.

The chosen hotel to perform the feasibility study, Hilton Niagara Falls Fallsview Hotel and Suites, also seems like an ideal property to invest in as it is located near the falls and near many attractions as well as being directly connected to the Fallsview Casino by an enclosed foot bridge. This allows the property to benefit from being a convenient location for guests to stay at without the need to be concerned about the operational requirements of these attractions.

Upon reviewing current market conditions of Niagara Falls, it was estimated that the property is worth USD 103,015,000. With further investigations, it was identified that under an owner operated management structure, the property would generate the highest EBITDA out of all four structures. Continued analysis revealed the anticipated cash flows from the property based on a 0.50% growth rate and a stabilized occupancy rate of 57.4%. According to the net present value calculations, it was revealed that the cash flow from the property and the cash flow to equity at a discounted rate of 11.21% and 17.00% respectively would result in a negative (-) NPV. Additionally, it was found that payback periods again for both cash flow from property and cash flow to equity would be longer than the 10 year holding period of the property.

These two findings indicate that under the current and forecasted market conditions, acquiring the Hilton Niagara Falls Fallsview Hotel and Suites would not be feasible and therefore it is not recommended to proceed with the investment.

Encouraging Project Feasibility

Should the investor proceed with the acquisition, there is a possibility to make the project a feasible investment. Efforts to improve overall ADR in the property should be made as well as an attempt to improve cost percentages for example by improving operational efficiency or leasing out all food and beverage outlets and collecting rent from each unit. Additionally, the revenues coming from other operated departments (i.e. the meeting and ballroom space) could be improved.

However, even at the same market and operational conditions in this report, the project can be made feasible overall by significantly improving occupancy levels. It is estimated that by increasing occupancy to around 66% at the stabilized year, the project could become feasible. However further investigation and analysis would need to be performed to support this estimation.

Improving occupancy in the city can in fact be a collective effort by all business, organizations, and municipal entities involved with tourism. Working together would indeed improve the overall financial performance of the city as well as benefitting the economy, creating more jobs, and various other economic and social factors. Overnight visitors were found to be at one-third of total visitors to the city, which could be a result of the city having a very well connected transportation network. As such, special campaigns to encourage more overnight stays could be implemented. As well, special deals for hotel guests with various attractions and entertainment destinations could be launched to encourage day visitors to stay the night. As said, the increase in overnight visitors would surely not only benefit Niagara Falls City but indeed potentially make the acquisition of the Hilton Niagara Falls Fallsview Hotel and Suites a feasible project.

References

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