Equity Yield Rates Shifting Higher As Interest Rates Decline and Discount Rates Remain Steady

In our most recent review, we found that equity yield rates, on average, have shown a continued trend of decline in the full-service and luxury hotels sector, as well as the lower-tier limited-service sector, with the select-service and upscale limited-service sector showing stability.
Katy Black, MAI HVS continually tracks the rates of return on the assets on which we consult. In our most recent review, we found that equity yield rates, on average, have shown a continued trend of decline in the full-service and luxury hotels sector, as well as the lower-tier limited-service sector, with the select-service and upscale limited-service sector showing stability.

Equity yield rates were slightly lower for full-service and luxury hotels, averaging 16.6% for 2019, 120 basis points (bps) below the 17.8% most recent peak level recorded in 2017. This decrease was driven largely by a decline in the number of transactions in 2018 and 2019. Moreover, 31% of the recorded transactions with derived equity yield rates occurred in New York City, which drove down the average modestly. With interest rates at new lows and discount rates remaining steady, equity yield rates are otherwise on the rise, albeit modestly, when New York City hotels are removed from the average.
 
Source: HVS

Equity yield rates for the select-service and upscale limited-service hotels averaged 18.7% for 2019, registering a slight uptick from the 2018 level. The stability in this asset class reflects that a low point was found in the 2018/19 period; a difference of essentially one percentage point is considered reasonable and normal between this category and the lower-tier limited-service category. 
The average equity yield rate for lower-tier limited-service hotels similarly showed a decline in 2019. The average for the year fell to 19.5%, or 150 bps lower than the 2017 peak. Factors that have contributed to this trend include several hotels in the Pacific Northwest that sold with equity yield rates in the 17.0% to 18.0% range; however, most sales shown with equity yield rates did trade in the 19.0% to 20.0% range.

Total property yields (overall discount rate) similarly declined for the full-service and luxury hotels, as well as the lower-tier limited-service category, while holding steady in the select-service and upscale limited-service category. Total property yields are averaging 10.0% thus far in 2019 for the full-service and luxury category. Higher levels of 10.8% for select-service and upscale limited-service hotels and 11.4% for lower-tier limited-service hotels were recorded.

Rates of return are calculated using the actual sale prices of the hotels with forecasted cashflows and inputting market terms for fixed-rate financing on a ten-year hold.
Katy Black, MAI, is the Managing Director and Leader of the consulting and valuation practice of the Denver office. She is an appraisal and consulting expert in the lodging markets throughout the Western U.S. Since joining HVS in 2013, Katy has gained diverse experience spanning limited-service motels, city-center hotels, luxury assets, golf resorts, and mixed-use developments, as well as resort-residential and rental-management programs. She specializes in high-end, complex resorts and has provided valuation and consulting services for gaming assets and large hotel portfolios. In addition, Katy has worked extensively on unique lodging properties, such as glamping resorts, casino hotels, hostels, and waterpark resorts. Katy graduated from the University of Delaware with an honors BS in Hotel, Restaurant, and Institutional Management. She also earned an MS in Accounting from the University of Akron. She is a state-certified general appraiser and a Designated Member of the Appraisal Institute (MAI). Contact Katy at (970) 305-2229 or [email protected].
As President of HVS Americas, Rod oversees strategy execution for HVS throughout its 40 Americas locations. Rod’s tenure with HVS spans over 25 years, during which time he has played an important role in growing the company from a few locations across the Americas to 40. In a typical year, Rod’s group consults on over 2,500 existing or proposed hotels and resorts, and in 2021, he oversaw the 568-hotel Extended Stay America appraisal portfolio. In 2003, Rod founded the firm’s sister appraisal division, U.S. Hotel Appraisals, which completes roughly 1,000 hotel appraisals annually. Rod is a founding owner/partner of HVS Mexico-Latin America, and he re-launched the firm’s U.S. Brokerage and Capital Markets division in 2018. Rod is a Designated Member of the Appraisal Institute (MAI) and a licensed real estate broker. Furthermore, Rod is proudly Latino and gay, and his firm is welcoming of all races and colors, sexual orientations, ages, genders, and gender identities. Once associates join HVS, they tend to stay due to the extraordinary culture Rod has inspired, a culture defined by the ideals of balance, connectivity, efficiency, collaboration, honesty, integrity, kindness, and excellence, among others. Rod resides in northern Colorado where he and his husband Jeff are raising their daughter, Rory. Contact Rod at (214) 629-1136 or [email protected].

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