FINANCIAL FEASIBILITY STUDY

Transcription

1 12/19/2018 FINANCIAL FEASIBILITY STUDY Sleep Inn / MainStay Suites Mineola, Texas P.O. Box Laurel Heights San Antonio, Texas (210) SourceStrategies.org

2 Page 1 December 19, 2018 FINANCIAL FEASIBILITY STUDY: Sleep / MainStay Suites Mineola, Texas This study has been prepared to determine the financial feasibility of building and operating a Sleep Inn / MainStay Suites hotel in Mineola, Texas. 1 Four potential locations in the city were examined for the purposes of this report, with the details of the locations discussed in the Derivation Section of this study. The property is theoretically expected to open as a 74 unit Sleep Inn / MainStay Suites in January of 2020, though this opening date is not fixed. The hotel will be a needed addition to the current lodging stock in the immediate area, offering a product that is under-represented not only in Mineola, but in the wider market area. Project quality is planned to meet the physical and operating standards of the Sleep Inn and MainStay Suites brands (or like product), products of the Choice Hotels family including Comfort, Comfort Suites, Quality, Sleep, Clarion, MainStay, Cambria, Suburban, Econolodge and Rodeway Inn. This study is dependent upon the hotel operating as a 'Sleep Inn/MainStay Suites, and maintaining the operation in good standing with Choice Hotels through its first ten years. The current level of quality and acceptance by hotel consumers for these brands in Texas has been assumed in developing this financial feasibility study. Operating costs are set at the level of similar limited service hotel results. KEY FINDING: Developing and opening a Sleep Inn / MainStay Suites hotel at this site should generate an unleveraged, pre-tax return on total invested capital approaching 15%, with a return on equity over 38% (DCF) after deducting a management fee. This return on invested capital assumes that improvements are completed at the estimated cost of $66,000 per unit, plus a land value of $150,000. Project details follow: 1. We have also examined the potential for a higher end product, a Holiday Inn Express & Suites, with the results provided as an addendum to this report. P.O. Box Laurel Heights San Antonio, Texas (210)

3 2 Total Investment Land Value $ 150,000 Improvements Budget $ $66,000 per key 2 Total Investment $ 5,034,000 Pre-Tax Project Return 14.55% 3 Pre-Tax Return on Equity 38.70% 4 This study incorporates the recent fluctuations in the Texas hotel market, the rebound from the 2008 national recession, and the continued impact of the Permian Basin and the Eagle Ford Shale Oil and Gas developments. In our Market section, we highlight the historical hotel performance in Texas, noting the effect of past recessions. Consequently, our market projections consider how the lodging industry reacts in times of economic downturn and in normal times. See the Market section for further details. With a January 2020 opening, cash flow market projections for the subject Sleep Inn / MainStay Suites hotel before taxes and after renovation reserves, should be available for debt service, income tax and dividends as follows: Occupancy Percent Project Summary Average $ Rate* $ REVPAR Total Revenue Cash Flow** Year I 61.3% $68.79 $42.20 $1,165,902 $424,658 Year II 70.0% $71.86 $50.28 $1,389,404 $539,296 Year III 72.6% $75.45 $54.75 $1,512,717 $606,227 Year IV 71.9% $79.23 $56.94 $1,573,450 $641,626 Year V 72.6% $81.60 $59.23 $1,636,620 $670,666 Year VI 72.8% $83.23 $60.58 $1,673,898 $681,918 Year VII 73.0% $84.90 $61.96 $1,712,025 $693,306 Year VIII 73.0% $86.61 $63.23 $1,747,060 $702,881 Year IX 72.5% $88.35 $64.04 $1,769,420 $705,539 Year X 71.9% $90.12 $64.82 $1,791,066 $8,255,260 *** *Year I ADR equates to approximately $67 in current market dollars. **Before Income Tax & Financing expense, but reflecting $878,436 in reserves for capital expenditures/property renovation ($11,871 per unit). ***Assumes valuing property at Year 10 cash flow at a 9% return-to-buyer, less 4% expense of sale, plus year 10 cash flow. 2. SSI estimate of land and development costs. 3. After reserve for on-going renovations and management fee. 4. Assuming 25% equity and 75% debt at a 6.5% pre-tax debt cost; calculated weighted average.

4 3 The above cash flow, assuming a Year 10 sale, has been discounted at the rate of 14.55% to a present value of $5,034,471, essentially equaling the total budgeted investment of $5,034,000. This 14.55% is the project's unleveraged return, provided capital costs are kept at the estimated level. Please note that if financial incentives were given by the city, this return would be even higher. An estimated capital budget for construction and FF&E of $66,000 per unit 'turn-key' costs is reasonable for a hotel of this size and quality, in our experience. If capital outlays vary from the current budget for this project, returns will vary accordingly. The following table and graph illustrates the linear nature of financial returns as capital requirements escalate or decline and revenue streams remain stable. Improvements Budget (000) Variance Per Unit Total Land Cost Total Investment Discounted Cash Flow Total On Project Equity (85%) $56,100 $4,151,400 $150,000 $4,301, % 49.62% (90%) $59,400 $4,395,600 $150,000 $4,545, % 45.70% (95%) $62,700 $4,639,800 $150,000 $4,789, % 42.10% BUDGET $66,000 $4,884,000 $150,000 $5,034, % 38.70% (105%) $69,300 $5,128,200 $150,000 $5,278, % 35.54% (110%) $72,600 $5,372,400 $150,000 $5,522, % 32.58% (115%) $75,900 $5,616,600 $150,000 $5,766, % 29.78%

5 4 The first stabilized year (Year III) shows the following results: Year III (2023) Room Revenues $1,478,707 Total Revenues $1,512,717 Income Before Fixed Costs $763, % Net Income Before Tax & Fin. $564, % Cash Flow Before Financing $606, % * Occupancy % 72.6% Average Daily Rate $75.45 $ REVPAR $54.75 Per Occupied Room Cost $38.24 *Before deductions of loan principal and interest, before income tax deductions, and before any equity payout. The critical statistic used in this study is REVPAR. REVPAR means revenue per available room per day, and reflects the average daily room revenue yield of every room in a property or market (not just occupied rooms). REVPAR is generated by multiplying occupancy times rate (i.e. REVPAR = % occupancy times average daily rate), and is the most effective and important tool in the evaluation of the success of any lodging concern. SUMMARY OF CRITICAL ASSUMPTIONS: Assumptions are summarized as follows (see page 12 for full Market History and Projection study, and page 8 for Methodology): 1. An analysis of the Greater Mineola Area Market 5 reflect a mixture of mostly older and some new hotels. Typically, a new hotel will have an inordinate advantage over older products. The average hotel room in the local market is 20 years old, past the peak performing first ten years of the life cycle of the typical hotel building, which becomes stylistically and structurally obsolete after 30+ years. This 30 year life cycle is significantly longer for high-rise/concrete structures. Out of 4,400 total rooms in the local market, 1,719, or 37% have been built since 2009, while 1,773, or 39% were opened before 1999 (at least 20 years old). There is typically a wide and dramatic gap between the performance of new and older properties, with newer hotel inventory easily outperforming older hotels that are well past their peak performing years. 5. Counties of Wood, Rains, Hopkins, Franklin, Camp, Upshur, Smith, & Van Zandt.

6 5 We are comfortable with market projections, and expect market demand growth levels in the area to rise to a more typical level over the next nine years. With new supply being added slowly, occupancy comes back to an equilibrium level of 59% by the later years of our projection. REVPAR is projected to grow at a 3.4% annual rate in the next five years (versus 1% annual growth in the past nine years). Detailed local market history and projections commence on page 18. Wood & Surrounding Counties Area Zip Codes Market Year Occupancy % $ REVPAR % $ % $ % $ % $ / % $40.40 Projected % $ % $ % $54.75 Historical Annual Compound Growth Rates Past 9 Year Average 0.2% 1.0% Past 4 Year Average -1.5% -1.3% Past 1 Year Average -0.3% -1.0% Future Annual Compound Growth Rates Next 9 Years 0.7% 3.7% Next 5 Years 0.4% 3.4% *Calendar Year basis except current year; 2017/2018 is through September 30, 2018.

7 6 2. Versus the local market's REVPAR dollar projections, the REVPAR index of the proposed Sleep Inn / MainStay Suites ramps upwards, peaking at 118% of the market average REVPAR in Years III-V. Thereafter, the REVPAR Index declines due to the normal aging cycle. Detailed REVPAR derivation and subsequent projections commence on page 25. Sleep / MainStay Suites Derivation Data in 2018 $'s Year I Year II Year III Base: Name & Quality x Brand Age Adjustment x Site Value Adjustment x Size Adjustment x Other Adjustments x Newness Adjustment = Performance Factor 97% 113% 118% x Market REVPAR $40.81 $40.81 $40.81 = Projected Performance $39.59 $46.04 $48.19 The projected REVPAR performance of the subject hotel, versus the local area market average REVPAR reflects the fact that this hotel is expected to perform at a level above the market average in its peak years. The hotel's REVPAR index starts in Year I at 97% of the market, rises to a peak of 118% of the market in Years III-V, then slowly loses ground versus the local area's typical inflationary growth:

8 7 3. Expenses are set at the level of similar limited service hotel products from Host Almanac by STR operating statistics, inflated at 3% per annum. See page 37 for details.

9 CONTACT SOURCE STRATEGIES FOR FULL STUDY DETAILS The full financial feasibility study is available upon request. Serious inquiries only Contact Source Strategies SOURCE STRATEGIES, INC. PO Box , San Antonio, TX sourcestrategies.org

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