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• Estimating Hotel Income

ESTIMATING HOTEL INCOME

Do you have a prospect who owns hotels? How can you estimate how much income a hotel can generate?

Before you begin your analysis of potential individual hotel property earnings, get an overview of hotel industry economic trends. In addition, you will need to find such specifics as the industry occupancy rate averages and average profits to prepare your income estimate. Since many hotels have a mixed revenue stream that includes rooms, food and beverage, telecommunications and other services, the percentage of income from the various sources is important.

One way to do this is to visit the Hotel Online site and scan the News.

http://www.hotel-online.com/News/

Or type "trends," "occupancy rates" or "profits" into the site search engine at:

http://www.hotel-online.com/find.html

Read articles like this one, titled Operating Profits for the Average U.S. Hotel Dropped 9.6% in 2002, at:

http://www.hotel-online.com/News/PR2003_2nd/Apr03_PKFHRGTrends.html

where I found a Mix of Revenues Chart for 2002 that indicates only around 70 percent of hotel income comes from rooms. The article shows that hotel profits were down in 2001 and 2002.

Another article, First Half 2004 Hotel Profits Solidify 2005 Outlook, at:

http://www.hotel-online.com/News/PR2004_4th/Dec04_FirstHalf04.html

indicates profits are rising, but still are not approaching the highs of the late 1990s.

Another source of information is the PKC site. The firm does hospitality consulting, research and financing.

http://www.pkfc.com

They have some great trend publications for sale and there are also free articles in their newsletters at:

http://www.pkfc.com/common/newsreleases.aspx

The articles include PKF Study Finds Hotel Food and Beverage Recovery Improving But Behind Room Revenue Growth

http://www.pkfc.com/common/news/11July2005.aspx

which states that hotel income from restaurants, room service and other sources is also back up.

Find more interesting stuff in their industry reports at:

http://www.pkfc.com/common/industryreports.aspx

such as the report entitled U.S. Hotels Break Three-year Losing Streak, and

http://www.pkfc.com/common/industry/april2005-2.aspx

which offers further insight into hotel profits and revenue mixes. There is a nice profit performance chart by hotel type in this report.

You can also do a Google search using such terms as "hotels," "trends," "occupancy" and "profits" in some combination to find interesting articles like Report Tracks Trends in Hotel Occupancy Rates, Notes Surge in Renovations, at:

http://www.afe.org/vip/portal/index.php?option=com_content&task=view
&id=2236&Itemid=2

You could even try including the state or city name where the property is located to get regional trends.

Background research like this can tell you if the profit analysis you are doing is accurate and if the level of earnings you calculate are a recent or short or long-term trend. It can tell you if your prospect may be making or losing money on a hotel investment now and over time. It also gives you the specifics you need to estimate your prospect's income potential.

Once you have a sense of the market, go to a travel site or use a search engine to find the number of rooms and the range of room rates for each hotel property. Figure out the average room rate: either average the high and low of the price range or, if you have enough information, calculate it based on how many rooms the hotel has in each rate category. Then multiply your figure by the number of rooms and again by 360 to calculate the maximum gross income from the property if it is fully occupied on all but the five major holidays.

Multiply this figure by the average occupancy rate you find (right now it's around 65 percent) during the course of your research. You may want to adjust the occupancy rate based on location if it's in a hot spot or a bad neighborhood. This gives you the income based on a more realistic occupancy rate.

Then, multiply this number by the average profit you find (for instance, 25 percent, the current industry average) to get net profits.

Here is an example of an analysis I recently performed to illustrate.

Prospect X owns a number of properties in his name only. One is the Smith Hotel in STown, with a market property value of $1,822,460. The Smith has 73 rooms with rates ranging from $54.95 to $89.95, making the average room rate around $75. Assuming a 40 percent daily occupancy rate (industry average of 65 percent adjusted down for the property's location), the hotel makes about $800,000 annually before deducting expenses. On top of this amount, the Smith could generate another $377,000 in gross annual income; an industry source states that only about 68 percent of hotel revenues come from room rentals. If the hotel earns the 25 percent profit that is the current industry average, then based on a total of $1,177,000 in gross income, the hotel nets an estimated $295,000 annually. Hotel industry research indicates that hotel profits have only recently risen after a significant decline in the early 2000s, making profit from the previous four years likely much lower.

If I could have found out when the prospect purchased the property, I would have included that information in the estimates. Properties over 25 years old are more likely to have their loans paid in full and have the potential for higher profits.

Good luck with your calculations!

Chris Mildner

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