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Valuation Improvement Data (.xslx).
These documents contain all the information needed to complete this assignment.
HOSP 4040 Asset Management
Assignment: Capital Prioritization
This assignment is due via the Assignment Link by
11: 59 PM Eastern, on the due date.
This assignment is worth 50 points, and will be graded based on the rubic. You may view the rubric by clicking on the assignment link.
Late work will not be accepted.
The Case
You are working as an Asset Manager for a major hotel ownership group. You have been tasked with reviewing several alternatives for improving the value of one of the hotels in your portfolio.
Your analyst has provided you with information about these alternatives in the attached Excel spreadsheet.
Background
Improving the value of a hotel asset is the goal of ownership, management, and the Franchisor. Every party benefits when this is done. Improved valuations create attractive investment returns for ownership, and over time attract additional investment into hotel real estate creating growth and career opportunities for all involved.
The valuation of a hotel is based on two things. Cash flow and the market capitalization rate. Cash flow is simply the cash flow before Interest, Depreciation, Amortization, and Income taxes. These items are the result of the capital structure of the asset – and that structure always changes with new ownership.
The market capitalization rate is based on the return requirements or investors in the market at the time the hotel transaction occurs. Generally, the capitalization rate increase when risk increases, and decreases when risk decreases. Individual owners cannot control the capitalization rate. It is function of market forces.
The focus of Asset Management, therefore, is to improve Cash Flow. This is done in one of two ways. Improving revenue or decreasing costs. Or both Revenue can be increased by improving market share, or maintaining market share in a market with improving demand, or adding facilitites that will generate revenue. Cost reductions can be achieved by identifying benchmark performance and moving the hotel asset to those benchmarks, or by the elimination of services, energy conservation, outsourcing, tightening up inventory controls, etc.
You tasked the management team at your hotel with suggesting 3 ways to improve cash flow. You have received this information, and your analysist has prepared an Excel spreadsheet with this information.
In these analysis, your company has a policy of taking the information that is received by the properties and discounting their improvement calculations using the following discount rates:
· Low risk of not achieving the proforma results: 10% Discount
· Moderate risk of not achieving the proforma results: 25% Discount
· High risk of not achieving the proformat results: 75% Discount.
These rates are applied to the hotel projection. So, for example, if the hotel forecast a $50,000 increase in cash flow and you assessed the risk of achievement as moderate, you would reduce their estimate by 25%. The cash flow you would use for your valuation assessment would be ($50,000 – ($50,000 X 25%)) or $37,500.
Your company monitors the capitalization rates achieved in consummated transactions across all markets. This rate is updated periodically – and is currently 7%. You will use this capitalization rate in your valuation improvments.
As a reminder, the value of a hotel is:
Cash Flow Capitalization Rate.
Requirements:
1. For each of the 3 cash flow improvements suggested, calculate the improvement in value that will result – based on the information presented AND the application of a risk discount.
2. Prepare a memo to your CEO that
· Describes each improvement suggestion
· Indicate which level of risk discount you used and why you chose that rate.
· Shows the valuation improvement if all three suggestions were implemented.
3. Submit your memo in a WORD document.
This assignment is worth 50 points and will be graded based on the assignment rubric.
Recommendation
1
| Cash Flow Imrovement | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Improve Revpar | Index | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Discussion | The property is currently underperforming the competitive set. The metrics are given below. The hotel has recently completed a full renovation and feels strongly that they will be able to leverage their new product for both pricing and attracting new group business. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Relevant Data | Steps: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Available Rooms | 350 | 1. Calculate the occupancy percentage if the INDEX were to increase by 2 points. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2. Calculate the number of new room nights based on number 1. above. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hotel | Market | 3. Multiply the number of new room nights by the CURRENT | ADR | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Occupancy | 75.0% | 82.0% | 91.5 | 4. Multiply the new revenue by the profit flow through % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ 187.50 | $ 193.00 | 97.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RevPar | $ 140.63 | $ 158.26 | 88.9 | 1. Calculate the ADR if the INDEX were to increas by 2 points. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2. Multiply ALL room nights (the existing and the new calculated above) by the change in ADR. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Increases in occupancy will flow through to profit at 77% | 3. Multiply this new revenue by the flow through % on ADR. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Increase in Occupied Rooms | 1. Calculate the total improvement in profit based on these two changes. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Increase in Revenue at Existing ADR | 2. Apply a risk discount based on your assessment of the risk | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Increased Profit | 3. Calculate the value improvement based on this cash flow improvement | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| increases in ADR will flow through to profit at 94% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Increase in ADR | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Applied to ALL room nights, including the above | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Improvement in Profit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Adjusted Discount Rate | See Assignment Document | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Adjusted Improvement in Profit/Cash flow | Multiply B29 by B30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Valuation Improvement | Divide B31 by the capitalizaiton rate given in the Assignment Document |
Recommendation 2
| Improve Housekeeping Productivity to the Company | Benchmark | ||
| The property is currently underperforming the the company benchmark for Housekeeping Productivity. The hotel has recently replaced the Executive Housekeeper. The new Executive Housekeeper has a track record of being able to improve housekeeping productivity quickly. | |||
| 95813 | |||
| Occupied Rooms Current Year | 1. Calculate the reduction in man hours if the benchmark is achieved | ||
| 2. Muitply the number of hours saved by the labor rate per hour | |||
| 3. Assign a discount rate based on your perceived risk of this recommendation. | |||
| Housekeeping Man Hours Per Occupied room | 0.55 | 0.49 | 4. Calculate the value improvement based on this cash flow improvement |
| Housekeeping Wage Rate per hour | $ 11.00 | ||
| Housekeeping Benefit Rate per Hour | $ 5.50 | ||
| Total Housekeeping Labor cost per hour | $ 16.50 | ||
| Decrease in Labor hours at benchmark | |||
| Total Housekeeping Labor Cost per Hour | |||
| Net Improvement in Profit | |||
| Multiply B21 by B23 | |||
| Divide B26 by the capitalizaiton rate given in the Assignment Document |
Recommendation 3
| Install Automated Parking Gates and Charge for Parking | ||
| This project will install automated parking gates at the two entrances to our parking lot. The office park that surrounmds the hotel has continued to grow, and non-guests are frequently using our parking facilities. We have analyized paid parking within our competitive set, and 3 of our 5 competitive hotels currently charge for parking. We have received Franchisor approval to begin charging for parking. | ||
| Parking Gate System Installation Cost | $ 65,000 | 1. Calcuate the parking revenue for the year |
| Average Vehicles Per night | 125 | 2. Calcualte the profit based on the profit margin |
| Competitive Parking Rate | $ 10.00 | 3. Subtract the cost of the project |
| Profit Margin | 95% | 4. Assign a Risk Discount based on your perceived risk of achievement |
| 5. Calculation the valuation improvement based on this impoved cash flow | ||
| Multiply B24 by B17 | ||
| Divide B20 by the capitalizaiton rate given in the Assignment Document |
Valuation Improvement Case Study Rubric
|
Criteria (Weight) |
Proficient(100%) |
Competent (67%) |
Unacceptable (33%) |
Unacceptable 2 (0.00%) |
|
Calculations are correct (80%) |
All 3 franchise recommendations are mathematically correct |
2 franchise recommendations are mathematically correct |
1 franchise recommendation are mathematically correct |
None of the improvement recommendations is correct. |
|
Memo (20%) |
Memo is professionally phrased and meets the standards specified. No grammatical or spelling errors. |
(80.00 %) Memo is not professionally phrased and or does not meet the standards specified. Occasional grammatical or spelling errors. |
(50.00 %) Memo did not meet standards. |
Memo not submitted |
JWU1001
College of Online Education
Johnson & Wales University
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