Whilst Covid has been a massive blow to the Hotel sector, in normal times our experienced team can choose from a range of lenders to support new purchases and refinances. Across our careers we have funded all sorts of hotels large and small and in and out of town.
Typically, we can source the right funder for the purchase and ongoing requirements of: Hotels, Apart hotels, Boutique Hotels, Budget Hotels, Mid-market hotels, Luxury Hotels and Serviced apartments.
Typically businesses are valued on a multiple of EBITDA, and these vary regionally reflecting the cost of property and the prevailing prices paid for businesses – it is hard to forecast what the next couple of years will look like however historically these could be in the range of Scotland 11x, North East 9.5x, North West 11x, Yorkshire and Humber 10x, East Midlands 10x, East Anglia 9.5x, Wales 10x, South West 11x, South East 13x and London 15-20x.
What a hotel will sell or value at can be significantly different to what a lender is prepared to lend. Lenders expect there to be “comfortable” headroom between the valuation of the hotel by a professional valuer and the loan amount. Using the above parameters this might mean that the valuation of a hotel in central Manchester is 11x EBITDA, however the lender will only lend the lower of 7-9x EBITDA because they are capped by their leverage guidelines.
Other lenders use loan to value as a guideline and it would be typical to see a loan to value max of 75% based on an MV1 valuation i.e. the valuation of the hotel when it is open trading normally and all is well.
Some lenders are more cautious and will look at the restricted sale valuation, vacant possession value and whether there is any alternative use for the property, this might mean they will only fund a certain percentage of these values regardless of the current performance.
What information do lenders ask for?
Alongside the numbers the lender wants to understand the key principles of the business and what they are asked to support so they need:
- Satisfactory Trip Advisor ratings
- Review of the management contract if one is in place, similarly any branding or business critical contracts.
- Clarity of staff employment – i.e. who employs the staff is it the hotel owner or the management company, what are the contracts, what is the churn rate
- Seasonality of trade and key drivers of trade, spread of revenue by source i.e. is the hotel dependant on weddings, conferences, weather, spread of revenue by income type e.g.restaurant (Food and beverage), accommodation etc.
- Operating analysis – an overview of generally how the hotel operates on a day to day basis.
- A monitoring surveyor for significant capex projects or development of new rooms/facilities
- If the operator is a portfolio operator then insight into other ventures and holdings will be required, particularly if there is a group structure. Lenders don’t want to see another holding disrupting their lend and there are many ways this can happen.
What other financial and performance metrics lenders ask for?
Some lenders are quite forensic in the analysis, and have the capability to compare hotel performance between similar operations in their customer base. Here are some typical benchmarks:
- Monthly P&L and cashflow should be a minimum along with commentary from the client on performance also a balance sheet prepared if not monthly then quarterly.
- Income from rooms, food, beverages
- Available rooms in the period
- Rooms sold
- Room occupancy rates (%)
- Average room rate (ARR)
- Rev-Par (Revenue per available room i.e. room revenue divided by the number of available rooms)
- Gross operating profit (operating profit before fixed charges, rent, insurance, interest, depreciation, amortisation and income taxes)
- EBITDA (GOP minus non-operating income and expenses)
- Hotel gross margin
- Catering gross margin
- Total gross margin
- Total payroll/sales (%)
- Ebitda/revenue (%)
- Restaurant spend per cover split across breakfast, lunch and dinner
- Diners from the hotel and not from the hotel.