Potential Hotel Deal

[Chris Winterhalter]

My business partner and I have been wanting to get into the hotel investment side of the business for the last year or so. We have a hotel construction business where we generally handle 2-3 projects a year that range from 100-400 room hotels (mid scale brands i.e. Sheraton, Hilton, etc). I came across an off market deal for an economy brand hotel (101 rooms) in an area that I know very well. The hotel is located 30 minutes from downtown Cincinnati and sits on a major freeway right off the highway (with excellent visibility). The area is a solid, desirable area that is growing. I have been in contact with several hotel management companies and have been going through the numbers. I'm getting some variance in pro-forma numbers though mainly in the expenses. The hotel is a full service hotel however is only operating as a limited service hotel right now. It has 10-12k sq/ft of banquet, bar, and restaurant space that is shut down. The hotel was purchased out of foreclosure in 2011 (was shut down at the time) and has reopened since then. They underwent somewhat of a renovation and have had a decent year for something that isn't professionally managed (owner resident operator). They lack a history of financials & properly recorded expenses too. I am basically taking their numbers with a grain of salt like I would on a foreclosure deal. The main numbers we are reviewing are the STR report and a comparable STR report if we move up brands (we are thinking an economy plus brand like Quality Inn). The variance I am worried about is related to the operating expenses specifically the departmental and undistributed expenses. What is a realistic GOP % for an economy hotel like this...35%? I've looked up industry averages however am still trying to gain confidence in my numbers.

In summary here are a few deal points:

-Off market deal - The sellers have came down to 2.3MM and are saying this is the lowest they will go. I might be able to get them down to 2.2MM however I'm not sure they will go much lower. I submitted an offer at 1.6MM to see how they would respond and they countered to 2.3MM. They are on par to do a little over 1MM in revenue this year.

-101 room economy brand hotel that was built in 89

-Was purchased in 2011 out of foreclosure for 1MM and they have put in upgrades of around 700k along with implementing the current brand and reopening the hotel.

-30 minutes from DT Cincinnati and sits on 4 acres right off a major highway with excellent visibility in a growing suburb. Very much a highway transient hotel.

-The bar/restaurant/banquet space could potentially be demoed which would create a nice size lot for a QSR. It already sits next to two major fast food chains.

-The STR report supports a small jump up in brand to something like a Quality Inn with numbers that would support a $75+ ADR with 50-55% occupancy.

-We can handle the construction & FF&E internally however need to get the property under contract to have a PIP performed. Then we can really estimate the rehab & FF&E costs involved. I'm just taking a guess based on my walk through of the hotel. On a brand conversion they can require items that could easily triple my numbers. It really depends...however this is something that can be estimated during due diligence.

Take a look at my very basic pro-forma attached showing the potential conversion to a Quality Inn. -

If anyone in the industry can help I would greatly appreciate the input. I have follow up conversions scheduled with my management contacts and a few other people in the industry however I wanted to get BP take on the project.

Thanks for the help!

Chris