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Hotel Perennial Case Study

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Yushkovskyy Artem

on 31 January 2015

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Transcript of Hotel Perennial Case Study

Hotel Perennial Overview
Location: North side of Chicago, Illinois, U.S.A
194 rooms
12 floors
95'000 square feet surface
2 meeting rooms with in total 1250 square feet
A garden terrace on the rooftop
Fitness facilities
No parking


Hotel Perennial - Chicago
Repositioning and Re branding
Third biggest city in U.S.A.
Economic and cultural capital of the Middle West(Hirsch,2004)
Geographic Location
Chicago Area Economic Situation
In 2010, Chicago’s economy is still emerging from the 2007 subprime crisis.
The rate has peaked up surpassing 11,30% which compared to 2009 is almost the double of the %. The forecasts for the future however, are promising predicting a decline to around 9,2%

in 2013.
Consumer Confidence Index
The CCI has seen an increased from 53,6 in December 2009, to almost 56 at the end of January 2010
In 2010, the total visitors entering Chicago amounts almost 40 million. It is forecasted to increase about 11% in 2011 and around 18% from 2010 until 2012
Tourism visitation

1676 new hotel rooms in the past two years
Hotel Industry Overview
ADR, Occupancy % and RevPar
Occupancy starts increasing from February 2010 and then from June 2010 ADR and RevPar as well
Demographic Data
Education is very developed in Chicago. The system is very large as it is part of the largest educational institutions in North America. It includes many public primary and secondary schools, private schools, special schools and several universities, some of which are among the most prestigious in the country.
Chicago’s total population in 2010 is around 12’830’632
From an evaluation of the hotel category, design, quality level, facilities, selling prices, location and reputation, we have found 10 direct rivals that could hold stakes in our market segments as there are similar to our property concept.
Competition Analysis
Fashionable design
Already a well developed chain
Focuses on local culture
Sustainable initiatives
How would we insure the success of repositioning?
Bar Lounge Competition
Direct Competition
Future projects potential competition
This property is to be converted into an upscale boutique hotel with a significant difference in quality and standards.
The range of amenities will be extended with a trendy rooftop bar, hi-tech conference rooms and a fitness center.
Renovation costs
Current property appraisal: 46,000,00$

However EL investment bought it for less; 11,595,000$ taking the average of the following two methods and facts:

- According to Bronster (2010), foreclosed properties are sold for a lower price than their appraisal

- According to HVS report in 2010 average price room is 65,000$, which result in 12,610,000$

- 77% discount factor based on a similar acquisition of the InterContinental Chicago, which result in 10,580,00$

Purchase Price
High Net Worth Investors
Bank Loan
Institutional Investors
Private Equity
EL Investment Equity

Different Financing Resources

- According to Jimmy & Detledsen (2010) Loan to Value Ratio is 50-70%

-Previous investment group was 37.8% equity and 62.2% debt

- According to Ben-Aida, assistant vice president in Brown Brothers Harriman back in 2010 it was needed and recommended to have 40% equity and 60% debt

- EL Investment decided to finance there equalization by 50% equity 50% debt

EL Investment Strategy

Investment Amount
20% Institutional Investors
50 % DEBT
30 years loan
= 9,295,892$
30% EL Investment
=5,577,535 $
25 % Rate of return
17 % Rate of return
Monthly payment
= 45,272$
Pre-opening and Renovation costs

5'014'737 $
Purchase price

11'595'000 $
18'591'785 $
Working Capital

1'982'48 $
Two scenarios were compared:
Brand agreement with ''NYLO"
Non-flagged hotel
When a hotel
The status of the brand will change in regards to the brands of the competition.
When a hotel
A new name, a new symbol, design and term is being given to the established brand, having the purpose to develop a new, distinguished distinctiveness in the customers, investors and rivalries observances.
Capitalization Rate Approach
Terminal value = NOI (1+g) / Cap. Rate
The terminal value of the brand scenario is higher which means that EL would be able to sell is for more in 2020 than the independent scenario.
Discounted Cash Flow Approach
Discount rate based on CAPM
Re = Rf +β (Rm – Rf)
Re = 2.2% + 3.01% x 5.00% = 17.25%
However, the discount rate was increased by 2% for the non-branded scenario as it is riskier - 19.25%
Why ? How ? Which ? When ? How Much ?
Incremental Analysis
Investment Strategy
Holding period decision
- Owner's initial objective: 3-5 years holding period
- MRR<IRR between 2013-2014
- Therefore a 3 to 3.5 years holding period
Any other concerns
Concern 2
Concern 4
- Incremental NPV is negative, in terms of financial return it is not worth to brand the property, as it does not cover the costs of renovations on the long term

- EL Investments could consider buying the property to lease it instead of having a franchise and a management operator. The lease would provide a fixed rent and thus fixed revenue not subject to the risks of the market.
Concern 1
Owner's Interests
Brand's Interests
Concern 3
- The hotel has lost a great chunk of its recognition amongst the public.

- It might take long to build up a new customer base.

- However this long closing can also represent an advantage for the hotel, as there is no perceived value by any customers.

- The reputation of the old hotel is completely vanished, thus it facilitates "NYLO" to enter in the Chicago market more easily without any previous apprehensions.

An appropriate brand and correct positioning are key drivers of sucess in the hotel industry.(Jiang,Dev, and Rao 2002)
Market Overview
Conclusion and recommendations
- Even though "NYLO" is a brand that well fits the property and the market environment, the Net operating income would be slightly higher with a non-flagged hotel, and the incremental analysis showed the NYLO renovation expenses will not be covered during the holding period.
- Therefore it would be more profitable, althought more risky to leave the hotel non-flagged.

No past data about hotel performance
NPV based on constant growth of inflation
Projected Growth or Real estate Market
Unexpected Events

Why ?
Bring the hotel back to competition
Increase Market Share
Recovery of the image of the Hotel
How ?
Hotel Perenial was 85 % completed
Hard renovations regarding the 15% incompleted
Total Soft renovations
Refurbishment of the furniture
Meet Nylo standards
The Renovation Process
Hotel previously 85% completed as boutique hotel
15% to be completed upon Nylo Standards
Refurbishment of the furniture
The renovations would last 6 months: Hard and soft + permits and licenses
Planned Reopenning : June 2011
Renovation Costs $$$
The competition analysis has showed us that the best fit for this part of Chicago is a 4* boutique hotels with conference amenities.
$1’172’425: El Investments to finish the hard renovations of the property (15% of the hard renovation costs)
$3’142’312 for the soft renovations
4’314’737 as a Total if they wish to brand the property.

Preopening Expenses:
the estimated pre-opening expenses for the Perennial Hotel would be $700’000 for both branded and non-branded scenarios.
According to HVS (2013) :$12'291'205.38 = Book Value
Same Depreciation for both branded and non-branded scenario

According to Clark & Hanley, 2010 :Depreciation for real estate buildings is assumed to be 30 years, while FF&E are depreciated over 10 years.
The NPV represents the present value of the investment, annual cash flows and terminal value in 2020 in today’s dollars term.
The IRR is higher than the discount factor, however the market situation is not taken into account
IRR is lower than the discount factor as the market situation is not taken into consideration, contrary to the discount rate, which is based on the CAPM and thus evaluates the risk
Net Operating Income
The non-branded scenario results in higher returns
Incremental NPV
Incremental Analysis
In щorder to decide whether we keep the hotel as an independent or we brand it, an incremental analysis was completed. It shows quantitative evidence of the implementation of brand or not.
Demand Generators
Chicago targets many business, leisure and groups.
Many events and conventions are forecasted in the future
Factors to consider
- Owner's holding period and goals : Opportunistic - Buy low and sell high

- Tax laws

- Equity build-up: Longer period -> higher value
+ possibility of new loans

- Growth prospect

$ 5’014’737
$ 1’872’425
NPV negative = costs of branding the property are not covered in ten years time by the difference in cash flow from branded to non-branded property.
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