Today, every hotel owner is making one of three decisions: do I hold, sell or refinance? There have been thousands of pages, reports, articles and books written on the subject, however I believe the answer could be much simpler. If you own a franchised hotel, you should be a seller when there are buyers and when your hotel still qualifies for a new full-term franchise.

Within the US, most franchise companies are what we refer to as, asset light. Meaning, they own very few hotels and very little real estate. Franchised hotels represent a high percentage of the US lodging supply.

I am often asked, “when should I sell?” With franchised hotels, there comes a point in ownership where diminishing returns overtakes the projected value return. Many of the suburban and tertiary select-service franchised hotels you see today will eventually be viewed and valued as brand obsolete and will struggle to maintain operational profitability.

When contemplating exit strategies, the central decision driver should be the brand. In fact, the value of a franchised hotel is tied directly to the brand and that brand’s performance. Therefore, the decision should be based on the longevity of the brand. One example would be a 10-year-old Hilton, Marriott, or IHG hotel that can still be pipped deep enough to qualify for a new full term license. Therefore, one simple answer to the question is to sell when you are certain the buyer can still get a new full-term license. Another example is owning a 15-year-old box when the economy is heading into a down cycle. Since most down cycles last 5-6 years on average, by the time the economy has improved your 15-year-old hotel is now 20 years old and potentially at risk for its brand. If your franchisor is within one of the top tier brand families, the death nail to your investment is hearing the words from the franchisor, “remaining term only.” This basically means that your franchisor does not believe your hotel meets the long-term needs and image of the brand. When you hear those words, it is most likely you waited too long to sell.

Therefore, my market advice is to sell when there are buyers and to sell while the buyer can still obtain a new full-term license. The definition of what makes a buyer a buyer is simple; they can get a loan and can see some upside. The life term of a franchise is continually a moving target and it is incumbent that the hotel owner understands where the brand is heading and the cost to maintain the hotel within brand guidelines. There are, of course, many other factors that impact value, but these are the most basic guide lines that may help a hotel owner maintain value in their real estate. KT

As of mid-October 2019, the hotel real estate market seems to be stable, bordering on bullish. This current market performance is very different from one year ago in October of 2018.

In last August of 2018, the publicly traded lodging companies began to mirror the rest of the stock market in a downward trend. There was investor concern, and by the middle of September, the publicly traded market was showing signs of stress that signaled what many thought was going to be the start of a downturn. In October of 2018 lodging stocks and the greater stock market continued in a downward trend resulting in very compressed EBITDA multiples. The average publicly-traded lodging company lost 10.2% of its equity value just in the month of October.

During that time, I personally thought that we were at the bottom, however, I quickly realized in early November that most stocks were continuing to decline. I remember leaving the office two days before Christmas of last year knowing that almost every lodging stock had hit a 52-week low that day. I believe there were some 92 publicly traded stock companies that were also at a 52-week low during that same week. It gave Everyone in our industry pause for concern as to whether the stock market in January was going to continue to decline or begin to rebound.

The title of this article is, “What a Difference a Year Makes,” and in business, as well as in life, it is always difficult to plan the path ahead. Looking back to January of this year, we saw stocks begin a gradual rebound which, looking back was a welcomed occurrence. During the first quarter of 2019, most of the publicly traded lodging companies saw a 10-20% increase in the equity value of their stock from the levels at the end of 2018. Even with many companies rebounding this year, many lodging company stock values are still short (10-15%) of the trading ranges in late 2017 and early 2018.

Today, in October 2019, lodging stocks are still mostly down from their highs, but there seems to be comfortable confidence that the last quarter of 2019 will not be a repeat of 2018. We are seeing greater amounts of deals under sale contract than a year ago, and there is hope that the transaction market will continue to be strong for the next couple of quarters. Many of the lodging news pundits seem to be split 50/50 as to whether we will see a recession in 2020. Basically, no one knows for certain (as was the case in 2008), therefore the best path forward is one of guarded optimism. I have often said that sellers should be sellers when there are buyers. Pretty straightforward. Am I right? We believe the definition of what makes a buyer a buyer are two things: whether they can get a loan and whether they can see some upside. That is the most simplistic picture of where we see the market today. KT