Hotel Valuation: Price-to-Sales, Coke Can & Room Rate multiplier

[Account Closed]

So apparently The Coke Can Multiplier is some sort of a hotel valuation technique that can drastically send the wrong message about the value of a property. Do hotel owners really use this to buy and sell property? The Coke Can Multiplier seems to suggest the value of the hotel property = Number of rooms * $100,000 * Price of can of coke at on-site vending machine.

I happen to be looking to buy a hotel with these numbers:
# of rooms = 200;
Median nightly rent (area specific median) = $109
Number of days per year = 365;
Occupancy rate (national average)=65%
Revenue per year = 200 * 109 * 365 * .65 = $5,172,050
Revenue per door = $5,172,050/200 = $25,860
Estimated net profit = $478,932

Hotel/Lodging industry data (see table below)
median net profit margin = 9.26%
median price-to-sales=2.13
median price-to-earnings=29.59

So if the Coke Can Multiplier were correct, it appears the hotel is worth (based on the price of coke at a nearby commercial facility): 200 rooms * $100,000 * $1 or $20,000,000. If we check this against yet another multiplier approach, the room rate multiplier, the property is worth: 109 *1000 * 200 or $21,800,000. Sort of close or is it?

The stock market seems to be sending a completely different message though; unless of course stock prices are currently undervalued, although the stock market generally has been experiencing positive gains last few years.

Based on the hotel/lodging industry data (see table below), mean price-to-sales ratio = 2.13. This seems to suggest a value of the property of about: { $ 5,172,050 * 2.13 } or $11,016,466.

Again, using the hotel/lodging industry mean price-to-earnings ratio of 29.59, this would suggest a property value of: { $478,932 * 29.59 } or $14,171,593.

So the 200 room hotel is worth somewhere between $11,016,466 and $14,171,593 in a rent ready condition. At these prices, it appears a can of coke would have to be priced at $0.54 to $0.70 if it were to signal actual property value. That is almost below wholesale. You literally might direct traffic from the convenience store to your hotel at that price.

The 200 room property in question, according to owner relative of sorts, says last he 'heard', the asking price was around $4.2 million (“as is” condition); but that building requires 'an exceptional and significant' amount of work.

Is the 'apparent' discount supposed to hint the level of rehab work to be expected or are stock prices just inflated? The market has been making almost outrageous gains last few years so perhaps there is a bubble in the price that may throw the numbers off. Some may say heck no, the stock market is still recovering from the recent 2008 hangover, prices aren't inflated.

The income approach can be a pain when trying to estimate income and expenses for 10 years out or to decide what actual holding period, discount or capitalization rate to use some of which can be almost pure speculation but I would like to hear how any numbers you are experiencing mirrors what is happening in the stock market if it actually is. 

The net income of 9.26% does seem painfully low and market price-to-sales and price-to-earnings ratio may be inflating acquisition prices or is that the case?

Company	Price-to-earnings	Price-to-sales	Net Profit Margin %
Marriott International	37.41	2.31	4.57
ILG Inc	10.37	2.58	19.69
Marriott Vacation...	22.69	1.79	7.58
Priceline Group Inc	41.98	8.52	19.87
Hyatt Hotels Corp...	31.72	1.62	4.61
Hilton Worldwide ...	195.62	1.83	3.12
Wyndham Worldwide...	17.24	1.94	10.93
Choice Hotels International	25.12	3.99	15.07
InterContinental ...	27.46	6.17	24.31
La Quinta Holding...	44.15	1.72	−0.11
MEDIAN	29.59	2.125	9.255

| Hotel Valuation | Room Rate Multiplier |Coke Can Multiplier | Price-to-Sales | Price-to-Earnings | Discounted Cash Flows |