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Setting Up The Sale

Industry Execs Examine Keys To Franchise Property Dispositions During Hotel Experience Panel

Wednesday, November 20, 2019
Dennis Nessler
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There are a myriad of elements to consider when it comes to putting branded hotel assets on the market and a trio of industry veterans recently detailed some of the key factors involved from the importance of fully executing on your due diligence to working effectively with the franchise companies.

The aforementioned topics and others were discussed during a panel discussion entitled “Preparing To Sell Your Franchised Hotel” at The Hotel Experience in New York last week. The executives began by discussing how the process of selling a hotel typically gets underway.

Steve Kirby, managing principal, Mumford Co., offered the perspective of a broker and noted the process starts well before the letter of intent (LOI).

“It typically starts when we’re approached by a seller that may want to do a disposition or we’ve been talking to them for a number years and we’ve finally agreed that the timing is good to sell the hotel. The market is right and you can get the best yield. From there the next process is we prepare a brokers opinion of value and tell them what they can expect in the marketplace and we mutually move forward,” he said.

Mary Beth Cutshall, EVP, chief development officer, Hospitality Ventures Management Group, offered some color from the owner/operator’s perspective.

“We look at the asset that we are going to sell and try to identify the maybe two, three or four brokers that we think would be a good match for that disposition. Perhaps they have buyer community relationships that fit that asset well and then we go to those brokers and we have them give us their opinion. We hear a little bit about what is their strategic sales process going to look like, how are they going to market this property, and where do they see the value? We definitely take a look at who is seeming most excited about getting the opportunity and we will select a broker and move forward,” she noted.

Ben Seidel, president, Real Hospitality Group, meanwhile, emphasized the importance of preparing well in advance for any potential sale.

“I think you’re kind of foolish if you don’t look at selling your property, not 35 days or 40 days in advance, but like two years. When you’re loan is maturing we all know that date right from the start,” he noted.

Cutshall underscored the point and detailed the importance of ensuring a property is in good condition.
“You want to plan for this disposition way in advance. You do not want to have poor QA [Quality Assurance] scores, especially at this point in the cycle. You want a property that is operating well and is a good buy. You want to make sure you’re doing well in whatever it is you’re being measured on from a KPI [key performance indicator] perspective and that it is a property that is going to be attractive to a buyer,” she noted.

Kirby, meanwhile, offered some additional advice to sellers on the importance of making sure the property is in good condition. “Do everything you can to enhance the curb appeal. Some properties you actually have to tell sellers ‘hey, you need a little more TLC on your landscaping or your grounds maintenance just to make it look better coming in.’ We also tell sellers to operate the property like you’re going to own it. Don’t start cutting back because the worse scenario is that buyers are going to see that and you’re going to lose some value there...What we’re trying to do is create a story on how the next owner can make a profit there by making this investment,” he commented.

Cutshall addressed another important issue for sellers to consider.
“When you’re doing your due diligence and trying to understand the value of your property think about the impact of real estate taxes and insurance for your buyer. Because very likely if they’re sophisticated they’re going to calculate it different other than what you have historically and that will impact the valuation they give your property,” she stated.

The panelists went on to elaborate on the importance of the entire due diligence process.
“We represent the seller and we try to do as much due diligence going in. We try to know the full story going into the sale. The more unknowns that we can take away in the process the better it is for the seller,” said Kirby.

Cutshall added, “the more prepared you are, the more you’ve done your due diligence as a seller the less surprised you’re going to be and the less retrading that’s going to happen. So it’s super important that you do your homework and you’re prepared. The last thing you want is ‘oh gosh you didn’t look at new supply in the market’ and the buyer brings that up and wants to retrade on you. So you want to go in really knowing the valuation of your property before you to market.”

The panelists outlined the importance of working with brands, particularly when it comes to understanding costly PIP [property improvement plans] requirements and how they can impact a potential deal.

“I know I wouldn’t buy anything without a PIP in hand because of the cost, especially with all the changes in standards. We all know it has that magical first paragraph that says ‘everything to meet current brand standards’ and that’s a deal killer a lot of times...I like to pay for the PIP so that I have it and chances are I have a better relationship with the brand that’s writing the PIP and finalizing it than whoever may be buying my asset may have,” said Seidel.

Kirby agreed. “From the broker perspective we like to engage the franchise early in the process so that we can have a PIP in hand and take away as many unknowns as possible before we get into the contract negotiation process. We can all hang a number and say ‘okay we think $20,000 or $30,000 a room,’ but that ‘meet current brand standards [clause],’ they change more frequently than you might imagine,” he noted.

Finally, the group talked about some of the current trends they are seeing in the market, such as an increase in refinancing hotels as opposed to selling.
“We still see a really big gap between buyers and sellers and we are seeing a lot of refinancing going on. We’ve gone after assets thinking we were going to have a chance and then it’s pulled off the market and we had something that we took to market and we didn’t like how the market responded to the valuation. We thought it was too short so we’re looking at refinancing the property. So that is in play right now a little bit more than it’s been,” said Cutshall.

Kirby amplified the point.
“I would tell you that refinancing is one of my biggest competitors. For us we need to know what the goal of the seller is in selling the property and most times it’s not just the yield on the asset, there are some other issues going on,” he noted.

Seidel, for his part, sees a bit of a shift taking place.
“I’ve been through a lot of cycles and this feels the same as it did when things went from a buyer’s market to a seller’s market. It feels the opposite now, but I don’t think that the sellers feel that way yet. So we’re getting that in-between period and all we hear is ‘recession, recession, it’s coming’ or ‘it’s not going to be that bad.’ As we’re theoretically on the down side does somebody want to buy a property now? If the basis is right it makes sense, but they are few and far between right now,” he concluded.
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Dennis Nessler    Dennis Nessler
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