I n t e r n a t i o n a l A p p r a i s a l s

International Appraisals

I n t e r n a t i o n a l A p p r a i s a l s

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Hotel Proposal

LEED Certified HotelQuito, Ecuador

Table of Contents

Introduction 1 Executive Summary

2 Market Trend Analysis

3 Projection of Market Occupancy and Average Rate

4 Forecast of income and expense statement

5 Feasibility Analysis

6 Valuation and Investor Returns

7 Proposed Neighborhoods for Green Hotel

8 Opposing Viewpoints and Risks

Appendix A: Investor Requirements Survey

Appendix B: Feasibility of New Hotel Projects, Steve Rushmore Sr.

Appendix C: Construction Budget Source

Appendix D: MasterCard Ranking of Cities with Highest Growth Rates in Tourist

Spending

Appendix E: Most Visited Sites in Quito, Ecuador

Appendix F: Green Building Cost Premium

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IntroductionRecently Quito, Ecuador received the World Travel Award (WTA) Best Travel

Destination for 2013 .The city has also been recognized by the New York Times,

National Geographic, and Trip Advisor as a top world tourist destination. The city is

developing its tourism infrastructure to further increase the growth of tourist

arrivals. This year a new airport in Quito was opened. The Mariscal Sucre

International Airport. A bigger airport that will support more flights arriving and

departing from Quito. The city of Quito has also initiated the largest urban

development project in recent years, the Quito Convention and Events Center

Complex, which will be created within 11 hectares of the land where the old airport

once operated. Since 2009 Quito has experienced 16% increase in inbound

tourism1. In the 2012 MasterCard ranking of cities with the highest growth rates of

tourist spending tourist spending, Quito ranked 3rd, behind only Rio de Janeiro and

Tokyo2. The increase in tourism has increased hotel occupancy levels past 72%.

From the table below we can see that Quito ranks 2nd behind Rio de Janiero in Latin

American hotel occupancy rates. Ahead of well know cities like Santiago de Chile,

Bogota, Colombia and Buenos Aires, Argentina.

1 http://www.hotelesecuador.com.ec/downloads/12%20Eduardo%20Dousdebes%20Quito.pdf2 See Appendix D

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1.Executive Summary

This report proposes the development of a luxury hotel property in Quito, Ecuador.

A Smith Travel Research (STR) classified Upper Upscale brand hotel property.

There is a market trend analysis performed. It shows the proposed property would

achieve a viable 73.9% occupancy with a projected 101.2$ average daily rate (ADR)

in the first year. Occupancy and ADR are both projected to grow with the market

trend at 1.65% and 6.4% respectively. A valuation and development feasibility

analysis is performed. The estimated development budget for this proposed 220-

room hotel would be $ $30,249,982. The value of the hotel, assuming a 11% going-

cap rate would be $34,906,000. There would be an 18% internal rate of return (IRR)

to the equity component, assuming a mortgage with a loan to value ratio of 55%. A

10% IRR to the mortgage component, and 15% IRR to the value of the property

component. There are two proposed neighborhoods included in the report. The

Mariscal neighborhood of Quito offers the central location and density of foot traffic

to sustain a new LEED Certified property. The conversion of a colonial style building

into a green hotel in Quito’s Centro Historico, would take advantage of the natural

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synergy that preservation has with sustainability. The report concludes with

opposing viewpoints and project risks are identified.

2.

Market Area Analysis

Luxury Hotel Market Trends

Table 1

Market Data

Quito EcuadorCompetitive Set No. Rooms Occupancy

2007 2008 2009 2010 2011 2012 2013Primary: Sheraton 138 77.06%

Swisshotel 232 70.13%JW Marriott 257 -Hilton Colon 255 74.58%

Average Occ. Primary set 73.92%

Secondary:Mercure Alameda 147 71.18%Le Parc 30 67.64%Dann Carlton 212 70.68%Patio Andaluz 32 72.16%Quito 215 75.95%Radisson 112 76.14%

Total No Rooms 748Secondary Set Average Occ. Rate 72.29%Total Average Occupancy Rate 71.50% 62.90% 66.90% 69.40% 74.1%

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Occupancy Growth Rate 6.000% -13.67% 5.98% 3.60% 6.3%1.65%

Total Average Daily Rate (ADR) $74.3

0 $80.90 $86.90 $89.50 $92.90 $101.2

0% Change in ADR 8.90% 7.50% 2.90% 3.80% 8.90%Average Yearly Growth Rate 6.40%Source:http://www.captur.travel/web2011/estadisticas_turisticas/documents/BOH77_78_79datosadiciembre2012.pdf

Luxury ranked hotels have the highest occupancy rate amongst all lodging facilities

in Quito, Ecuador. The table above shows the market trend in occupancy and

average daily rate in the luxury category. The competitive set of hotels used in the

analysis are full service hotels that are considered luxury facilities by the

Ecuadorian Ministry of Tourism or fall into the Smith Travel Research (STR) brand

classification as Upper Upscale and Luxury category. The competitive set is divided

into primary competitive hotels, the hotels most alike in brand, service, and

amenities according to STR Global Chain Scales classification; and secondary

competitive hotels; hotels which might capture the same type of customer if the

primarily competitive hotels are fully occupied. The primary set includes the

Sheraton Hotel, Swisshotel, JW Marriott Hotel, and Hilton Colon Hotel. The

secondary competitive hotels include: Mercure Alameda Hotel, Le Parc Hotel, Dann

Carlton Hotel, Patio Andaluz Hotel, and the Radisson. From the table we can see that

the primary competitive set has the highest occupancy rate of 73.92%; compared to

72.3% occupancy for secondarily competitive hotels. The luxury hotel set as a whole

has grown 1.65% a year on average Since 2008, Steady occupancy growth has led to

a 6.4% average growth rate in ADR.

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3.

Projection of Market Occupancy and ADR

Forecast of Market Occupancy for Upper Upscale Brand Hotels

Table 2

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10-Year Projected Market Occupancy

To forecast how the addition of an Upper Upscale/Luxury branded full service hotel

in Quito would perform. A supply and demand analysis was performed using the

HVS build-up approach3. In the analysis, total room supply counts, occupancy, ADR,

and market segmentation are used to quantify both supply and demand in the

market. Total room nights accommodated in the sector is compared against the

total room nights available for the year. The market segments are divided into the

commercial traveler, meeting and group travelers, and the leisure travelers. The

total room nights for each market segment are allocated to each hotel in the primary

competitive set and to the aggregate of the secondary set using a subjective

competitive factor. A market area occupancy projection forecast is in table 2 above.

It displays the occupancy penetration of the proposed property over a 10-year

period.

The ADR for the primary competitive set is $101.2 and shows a 6.40% year over

year growth rate

3 Spreadsheet calculations can be found in the accompanying excel workbook in the room night analysis spreadsheet

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4.

Forecast of Income and ExpenseA ten-year forecast of income and expense was performed and can be seen in the

table below. The projected revenues were calculated from projected occupancy,

ADR, of a standard 220-room hotel. Expenses were estimated using the historic

percentage expenses have to revenues in hotels. The historic percentages come

from Steve Rushmore Sr. CEO of HVS. The first years projected net operating income

after the base year of 2012 is $2,847000. The annual compound growth rate (CGR)

in NOI is 3.25%.

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5.

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Valuation and Investor Returns

Assumptions:

Projected first year NOI: 3,311,000 Going in cap rate: 10%

LTV: 55% Terminal cap rate 10%

Amortization period: 10 years

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Value conclusion:

1) A 10 year PV Factor of 14.79%(Projected IRR of property) was used

to discount projected net income before debt service. The 11th year

projected NOI was capitalized at 11% terminal cap rate to arrive at

The Value of the Property: $27,370,000

2) A 10 year PV Factor of 10%(projected IRR of the mortgage

component) was applied to discount the yearly mortgage payments to

arrive at the

Value of the Mortgage Component: $15,054,000

3) A PV factor of 18%(Projected IRR to the equity investor was applied

to the net income portion flowing to equity over 10 year period to arrive

at the:

Value of the Equity Component: $12,317,000

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Feasibility Analysis

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A construction budget was derived from the most recently developed Upper Upscale

brand hotel in Guayaquil, Ecuador, the Wyndham Guayaquil Hotel. It is a 180-room

hotel and the cost per room was $137,499. A similar type of hotel with 220 rooms

would cost approximately $30,249,000.

To test feasibility a NPV calculation was performed. The development cost and a 10-

year forecast of income and expense including the 11h year reversion value was

calculated. An 10% terminal cap rate was used to capitalize the 11th year NOI to

arrive at the reversion value. The NPV is positive. The project is feasible at an 11%

discount rate.

Green Building Premium:

There is ongoing debate whether building to LEED Certified standards cost more

than conventional construction. This report will assume the costliest scenario that

sustainable construction adds between 2% to 8% to development costs4.

LEED Certification would increase the development budget to a range between

$30,854,981.86 to $32,669,980. This would reduce the NPV calculation slightly from

$60,425,715 to a range between $59,880,667 to $58,245,533.

4 http://www.cconstruccion.net/portal/index.php/revista/articulos/118-articulo-

sostenibilidad (Spain Green Building Council®)

http://www.diariodelhotelero.com.ar/noticias/detalle/sustentabilidad-y-hoteleria-

certificaciones-leed/ Arq. Nicole Michel, LEED® AP, Miembro ArgentinaGBC

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7.

Proposed Neighborhoods

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Green Hotel

Total Hotel arrivals by Neighborhood

2007 2008 2009 2010 2011 2012Mariscal 253.076 301.108 295.069 285.046 266.145 289.390Norte 216.523 213.415 204.704 201.263 206.058 208.474La Carolina 97.939 122.429 107.756 109.339 114.977 141.243La Floresta 69.297 63.499 57.716 76.075 67.506 74.938Centro 38.643 43.610 44.807 49.509 56.810 51.464Centro histórico

37.744 47.419 41.747 31.595 31.811 30.573

Santa Clara

32.604 34.476 31.882 32.571 26.084 29.908

Sur 46.496 47.583 38.637 30.151 31.606 29.103Total 792.322 873.539 822.318 815.549 800.997 855.093

ACCORDING TO TH HOTEL OCCUPANCY BULLETEIN PUBLISHED BY QUITO DISTRITO

METROPOLITANO. THE NEIGHBORHHOOD WITH THE HIGHEST YEARLY ARRIVALS TO HOTELS IS LA

MARISCAL. This area is considered the entertainment center of Quito. It is centrally

located and close El Centro Historico, the place visited most by tourist.5 Mariscal has

the location and foot traffic to support a newly constructed LEED Certified hotel.

El Centro Historico de Quito has fewer hotels so receives fewer arrivals. But it is the

place most visited by tourist. Quito, along with Kraków, were the first World

Cultural Heritage Sites declared by UNESCO in 1978. There is a vibrant nightlife and

the Ecuadorian government is looking to convert many colonial era buildings to

hotels. The conversion of a colonial style building in El Centro Historico de Quito to

a green hotel would take advantage of the natural synergy that preservation has

with sustainability. It would cost less than new development, be more

environmentally sound, and create a unique hotel property for authentic

experiences that most travelers look for now. The property would be similar to the

recently developed JW Marriott in Cusco, Peru’s Historic Center pictured below:

5 Appendix E

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Opposing viewpoints

Political risk:

Ecuadorian President Rafael Correa is a self-proclaimed socialist and perceived as

hostile toward international investment.

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Legal risk:

Related to political risk, there is perceived corruption and low credibility of

Supreme Court judges. The executive branch of government exerts undue influence

and control over the judiciary.

Lack of Transparency: Ecuador is a developing nation. It lacks the history and data

used to quantify risks and audit information publicly.

Business Climate: The World Bank Doing Business Report in 2012 ranked Ecuador

130 out of 183 countries. The report cited burdensome regulatory procedures and

high corporate taxes.

Although investors are wary of anti-capitalist rhetoric from President Rafael Correa,

the president has become more practical on issues of foreign investment. The

Ecuadorian government is actively seeking foreign investment for strategic sectors

like tourism and mining. While Ecuador does not have a competitive business

climate, a group of leading international brands including IHG, Hilton, and Marriott

has successfully penetrated the market. In addition, Clay Dickinson of JLL Hotels and

Hospitality Group indicated that the poor perception that markets like Ecuador and

Bolivia have amongst international investors could serve as an advantage;

competitive barrier to entry for firms willing to invest in these markets. Lastly,

reduced international capital flows have keep costs and prices down. Compared to

Bogota, Lima, and Rio de Janeiro, hotel rates, food, and entertainment are less

expensive in Ecuador.

Appendix A:

Recent stated investor requirements:

A) Cap rates/Yields around 10.2%; unleveraged IRR 20% to 17%; all dependent

on risk.

B) Buy 20-25% below replacement costs in urban settings

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C) If land is too expensive for development, mixed use development will be

needed

Sources: Meridia Capital

Appendix B: Feasibility of New Hotel Projects

By Steve Rushmore, HVSWhen designing a hotel, the architect and development team need to create a project that is ultimately economically feasible. Unless the hotel’s owner is ego

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driven rather than economically motivated, most investors are looking for a return on their invested capital. Since feasibility means different things to different people, and as a hotel consultant having prepared thousands of feasibility studies, I have been asked to provide my perspective on this topic.

The process I like to use for determining whether a proposed hotel is economically feasible is to compare the total project cost (including land) with the hotel’s estimated economic value on the date it opens. A feasible project is one where the economic value is greater than the cost. Accurately estimating the total project cost is a relatively simple process for the architect and development team. However, determining the economic value is much more complicated.

The first step in the valuation process is to perform a market study where the local hotel demand is quantified and allocated among the existing and proposed supply of lodging facilities. The allocation of room night demand is based on the relative competitiveness of all the hotels in the market. The end result is a projection of demand captured by the proposed subject hotel, which is then converted into an estimate of annual occupancy. A similar procedure is used to project the average room rate.

The second step is to project the hotel’s operating revenue and expenses based on the previously estimated occupancy and room rate. This results in an estimate of annual net operating income. Most consultants use a five- to 10-year projection period, so this process needs to be repeated for each year. The last step is to convert the projected NOI into an estimate of value using a weighted cost of capital discounted cash flow procedure. The end result is an estimate of economic value that can be compared to the total project cost.

Some consultants will substitute a net present value calculation or determine the internal rate of return (IRR) for the last step. However, I prefer using the economic value approach because you end up comparing “apples with apples” — i.e. cost with value.

As you can see, this process of determining economic value requires local market knowledge, hotel financial expertise and experience with valuation methodology. Luckily for architects and hotel developers, there are two simple rules of thumbs that will provide a rough approximation as to whether a project is economically feasible.

The first thumb rule tests the cost of the land to determine whether it exceeds a supportable economic land value. The following formula calculates economic land value:

Occupancy x ADR x Rooms x 365 x .04 / .08 = Economic Land Value.

As example, a proposed hotel is being considered on a parcel of land that can be

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acquired for $3,800,000. Zoning permits the development of 200 rooms. Based on local market conditions, the proposed hotel should achieve a stabilized occupancy of 70% and an average room rate of $150. Using these inputs the Economic Land Value would be calculated as follows:

.70 Occupancy x $150 ADR x 200 Rooms x 365 x .04 / .08 = $3,832,500.

The calculation shows the Economic Land Value is above the cost of the land so the developer is not overpaying for the land. If the land cost was $4,000,000 or above, the developer needs to re-evaluate the project because the hotel does not support it’s underlying economics. Perhaps additional rooms could be added, which would increase the room count or a higher quality of hotel developed would increase the average room rate. This Economic Land Value formula works well in most markets. For prime center city locations the .04 factors can be moved up to .08.

The second rule of thumb is the Average Rate Multiplier formula. This is a very simple way to approximate a hotel’s total economic value. The formula is as follows:

ADR x Rooms x 1,000 = Economic Value

Using the numbers from the example above produces the following Economic Value:

$150 x 200 x 1,000 = $30,000,000

If the hotel’s total development cost is over $30,000,000, there could be a feasibility problem. In most cases where the development cost is significantly higher than the economic value it is because the local market’s average room rate is too low to support the contemplated improvements. In these situations the proposed plans and specifications need to be scaled back in order to produce a lower total project cost, which might then create a feasible project.

One additional point of reference looks at the percentage relationship between the hotel’s land cost and the economic value. In this example, the value of the land is approximately 13% of the overall economic value ($3,832,500/30,000,000 = 13%). This relationship should be no more than 15% to 20%. In other parts of the world where labor cost is low, this percentage relationship can be higher.

Using these hotel feasibility rules of thumb combined with a professionally prepared study will insure the architect and developer are not creating a project that has no economic viability. As with any rule of thumb, there are numerous exceptions that need to be factored into the evaluation. Before abandoning a project because the rules don’t produce the desired results, it is a good time to call in a professional consultant to prepare a more in depth analysis to either verify or

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dispute the conclusions produced by the rules of thumb.

Stephen Rushmore is president and founder of HVS, a global hospitality consulting organization with offices around the world. Steve has provided consultation services for more than 12,000 hotels throughout the world during his 35-year career and specializes in complex issues involving hotel feasibility, valuations and financing. He can be reached at srushmore@hvs.com or 516 248-8828 ext. 204.

www.hvs.com

Proposed Guayaquil Hotel:Economic land value: Occupancy *ADR* Rooms*365*.04/. 08=Economic Land Value

.7*104*365*(.04/. 08)

Appendix C: Construction Budget

Budget Source:Budget Estimate figures are drawn fromFideicomiso Hotel Cuidad del Rio: Wynham Hotel,The most recent comparable upper upscale hotel constructed in Guayaquil, Ecuadorhttp://www.bolsadequito.info/uploads/inicio/prospectos/titularizaciones/110518163304-2dc4f9d0baf245539992c8ecd8c3099e_sic1.pdf

Appendix D:

MasterCard ranking of cities with highest growth rates in tourist spending

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Appendix E: Most visited sites in Quito

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Fuente: Ministerio de Turismo Quito

Appendix F: Green Building Cost Premium

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http://www.cconstruccion.net/portal/index.php/revista/articulos/118-articulo-

sostenibilidad

Por Aurelio Ramírez Zarzosa, Presidente del Consejo de la Construcción Verde

España® (Spain Green Building Council®)

http://www.diariodelhotelero.com.ar/noticias/detalle/sustentabilidad-y-hoteleria-

certificaciones-leed/

Arq. Nicole Michel, LEED® AP, Miembro ArgentinaGBC arq.nmichel@gmail.com Ing. Carlos Grinberg, Presidente ArgentinaGBCGF / Estudio Grinberg Ingenieros Consultores carlos@estudio-grinberg.com.ar

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International Appraisals is a global real estate, hospitality and sustainable development consultancy specializing in hotels in Latin America.

We empower our clients with objective analysis, leading edge expertise, thorough due diligence, and trusted advisement.

International Appraisals is especially dedicated to modernizing and developing the hotel sector in South America.

We provide complete project proposals, LEED project management and consulting, hotel valuation and investment analysis , and luxury spa training and consulting.

 

President/Founder Ivan Garay graduated with honors from Baruch College’s MBA program in real estate. He holds a certification in hotel appraisal from HVS and is a LEED AP BD&C. In addition, Ivan Garay has over 16 years of hotel operational experience, both in food and beverage as well as spa and fitness. He has worked at many five-star properties in New York including the Four Seasons Hotel, The Carlyle, A Rosewood Hotel, and the Plaza Hotel. Ivan is a native of New York City and keeps close ties with his family in Guayaquil, Ecuador. He is bilingual, he reads and writes in both Spanish and English. 

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