Facing Headwinds, Hotel Investors Seek to Boost Value at Acquisition

A recent investment market update from CBRE cites qualified optimism among hotel buyers. “U.S. investors have generally positive sentiment about the hotel market this year, with half of those surveyed planning to increase their hotel investments in anticipation of higher total returns and lower prices. Strengthening the balance sheet and difficulty in securing and servicing debt are the top challenges for those who plan to buy less this year.” With growth in the hotel sector projected to be modest over the remainder of 2024, those who do invest in hospitality must be vigilant about expenses and maximize value at every opportunity. Fortunately, there are ways to begin to boost GOP (gross operating profit) before the acquisition is even complete. Read on for ways to incorporate cost-saving and revenue-boosting initiatives in your due diligence process.

1. Get ahead of your Property Improvement Plan (PIP). A Property Condition Assessment (PCA) is a standard part of any acquisition due diligence effort. PCAs provide an accurate picture of the condition of the building and its systems, including deficiencies that require immediate repair and projected expenses over the term of the report. If your acquisition involves change of brands and/or a Property Improvement Plan (PIP), be sure to share this information with your due diligence consultant. The PCA may allow you to save some money by coordinating necessary repairs and maintenance with the implementation of any remodeling or redevelopment required by the PIP, and your consultant can help you identify these opportunities.

2. Reduce insurance costs. With the increasing frequency and severity of climate-related events in recent years, skyrocketing insurance costs are a concern for all property owners, especially those in coastal areas or areas prone to wildfire. One way to be certain of getting the best possible insurance rates is to provide complete, accurate property data to your insurance provider. Insurers base premiums on probable loss scenarios which are modeled on property data, particularly a set called “COPE data”: construction, occupancy, protection, exposure. COPE data can be collected during a PCA in a format ready for your insurance provider. Furthermore, a Resilience Assessment can be performed in conjunction with the PCA. Resilience assessments marry regional climate data with site-specific data to provide an understanding of how a building may perform in a severe weather event. They include recommendations to improve property resilience, which, once implemented, can improve COPE data, potentially resulting in lower insurance rates.

3. Improve efficiency and reduce utility costs. Adding an energy and water audit to your due diligence package can help you identify opportunities to reduce utility spending. An Energy and Water Audit provides a comprehensive analysis of energy and water consumption, compares usage against similar facilities, and identifies potential causes of excessive energy and water consumption. The report includes recommendations to reduce consumption and provides estimated installation costs. A qualified consultant can also provide options to help you qualify for funding and financing programs or meet other sustainability goals such as green building certifications. If space allows, adding a solar array to the site could significantly offset electricity costs. A solar feasibility study can provide conceptual plans along with an economic analysis to help determine whether an array makes sense at the site. In addition to reducing utility costs, improving the sustainability and efficiency of a hotel property may appeal to prospective guests and provide a marketing edge.

4. Explore opportunities to boost revenue. While you have engineering consultants on site, why not identify ways to capture additional revenue or improve amenities? Consider EV charging stations, for example. With the ever-increasing number of electric cars on the road, EV charging stations are no longer optional for hospitality properties. In fact, many PIPs may include EV charging requirements. Include EV charging feasibility during due diligence to ensure that you can provide this important amenity and capture related revenue.

According to McKenna Luke, Managing Director/National Hospitality Practice Lead at Partner Valuation Advisors, “Revenues have been strong over the last two years, and RevPAR in many markets has reached or exceeded pre-pandemic levels. There are headwinds, including cost of capital, wage pressures, and insurance. One key to maintaining value is being a smart operator and finding opportunities to boost revenue and to control costs.”

Due diligence is a necessary cost to manage risk at acquisition, but by customizing the scope of assessments or even adding supplemental assessments, hotel buyers can leverage insights gained in due diligence to help reduce operating expenses. Plus, using due diligence assessments strategically allows your operations team to implement cost-saving measures immediately once the transaction is complete.