ROI: Planning the exit strategy

As the hospitality industry continues to navigate through the ebbs and flows of the market, the subject of when and how to plan an exit strategy for a hotel asset remains crucial.

Owner Viewpoint

“We go into every deal with an exit strategy and a provisional exit value,” said Rick Takach, chairman and CEO of Vesta Hospitality.

This forward-thinking approach relies on a five-year pro forma, factoring in acquisition costs, estimated debt, capital improvements and revenue. However, this doesn’t mean Vesta will want to sell any given property within five years. The real trigger to sell hinges on whether the property has reached its projected exit value in conjunction with the current market conditions and a variety of other elements, such as debt maturities and future capital requirements.

“Deciding when to sell remains one of those areas that involves both art and science,” Takach said. He underscored the significance of operational management in enhancing asset value, along with the importance of considering the longevity of the property’s cash flow and the terms of existing debt.

The hotel’s legacy and brand play an important role in exit strategy considerations, he added. Strong branding or an outstanding independent legacy can drive higher operating revenues and, by extension, higher exit values. However, Takach noted the nuanced preference of some buyers for flexibility in branding, which can also impact exit value.

When asked about the critical preparations for an exit strategy, Takach highlighted three key elements: achieving the highest possible EBITDA, maintaining the property well to manage property improvement plan costs and simplifying the sales process to remove potential complications. These factors collectively serve to maximize the attractiveness of the hotel to buyers and streamline the transition.

From his experiences, Takach offered this advice: Ensure the transaction benefits all parties involved, believe in your exit value and be selective with potential buyers. He also advised sellers to consider replacement assets and tax implications, and suggested that sometimes “there is less risk and more reward in not selling.”

Brand Viewpoint

Ryan Rivett, co-founder and CEO of My Place Hotels, emphasized the importance of foresight and precision in decision-making. With that, the blueprint for an exit begins with the initial business plan.

“A sound initial business plan will incorporate a forecasted exit period at some point in the future based on projected asset performance and forecast market conditions,” Rivett said, asserting the need for a “sunset expectation” for a well-rounded strategic approach.

The course to a smooth exit is not without its hurdles. Rivett identified external market and economic forces as the predominant challenges in exit strategy planning. Overcoming these obstacles boils down to “simple good judgment and fiduciary due diligence,” he said, focusing on the greater good for stakeholders and maintaining perseverance.

Rivett outlined three crucial elements in exit preparation: market timing, management transition and capital recapture and redeployment. He underscored the delicate balance required in timing. “Both protracted time-on-market and untimely management transitioning can be harmful to market perspective and continuity of operations,” he said.

“Thoughtful management transition is accretive to the integrity and retention of the management teams on both sides of any transaction. The operating period immediately prior to and after a transaction has significant implications to success on both sides of the deal. For an optimal outcome, the teams must be well-informed, and the timing must be thoughtful,” Rivett added.

Reflecting on lessons learned, Rivett advised on the importance of a holistic view of the transaction, the criticality of timely and clear communication with management and the necessity to have a solid plan for the re-deployment of capital. “Sidelined capital erodes captured gains,” he said, advising that dynamic and proactive financial strategy is paramount.

Operator Viewpoint

Conventional wisdom suggests that the best time to plan an exit strategy is at the point of purchase. However, Michael Nixon, chief development officer and president of Expotel Hospitality, pointed out that “most buyers plan their exit strategy at purchase, but this isn’t always the case today.”

“Sophisticated owners often associate their exit plan with a ‘hold period’ that is determined at purchase. With the volatility in the debt market, even those owners can be presented with exit opportunities tied to their financing,” Nixon said. “Some hotels having to refinance today are moving from an interest rate of 4.5 percent to, in many cases, over 9 or 10 percent. Some of these organizations are looking for ways to exit before PIPs come into play or to avoid supply concerns in growing markets.”

The gulf between buyer and seller expectations poses significant hurdles in executing an exit strategy. Nixon describes the market as “tricky,” where “sellers cannot offload their assets for the value they perceived during purchase.” He suggested patience and a dose of realism, advising that sellers align their expectations with the prevailing cap rates and lending conditions.

Nixon emphasized the necessity of three key preparations when planning an exit strategy:

  • Predetermined hold period: Owners should begin evaluating PIP-related improvements a year before their hold period ends to mitigate the burden for new buyers.
  • Property ranking: Enhancing a hotel’s rank among branded properties showcases its value and stability to potential buyers.
  • Operating income optimization: It’s crucial to align the hotel’s net operating income with the desired cap rate to withstand the scrutiny of buyers.

“Buyers are going to ask difficult questions, so prepare to provide confident answers,” Nixon said.