Quantifying The Revenue Impact of Hotel Property Improvement Plans

A question central to hotel investors when acquiring properties with a PIP is what type of pickup will I see in revenue after completion? A newer and fresher hotel should command higher revenue, but knowing what increase to underwrite can feel like a complete tossup.

To help answer this question, we analyzed hotel transactions in Texas between 2017 and 2022. In order to isolate cash flowing sales with a PIP, we looked at branded hotels sold with a 5-7 year hold period and no renovations done during the hold period. Turnkey and portfolio sales were removed. To assess the change in top line, we looked at the revenue on those hotels during the 12 months prior to the sale, and then compared that to the revenue on those hotels between new ownership months 7 and 18 (inclusive), as shown below. The 6-month delay ensures that new ownership is not still completing their PIP during the analysis period. If there was not sufficient data to compare a 12-month time frame, we adjusted the time frame to 6 months or 3 months.

Other market factors can contribute to a change in hotel revenue between those two-time frames. To account for this, we looked at the change in the hotel’s CoStar submarket RevPAR over the same time frame. Then we compared the change in the hotel specific revenue to the change in the overall submarket RevPAR to isolate the hotel specific change. For example, if a hotel saw a 20% increase in revenue over those time frames, and the submarket saw a 15% increase in RevPAR over that same time frame, the hotel specific impact would be 5%.

Our sample spanned 9,802 keys from 92 hotels. On average, these properties saw a 9% increase in RevPAR over market. Removing midscale and below hotels raises this average to 17%. There were likely a lot of transactions where the hotel was an upper midscale brand prior to the sale and converted to a midscale brand after the sale. On those transactions there would be a decrease in revenue after the PIP, which would contribute to the negative 9% revenue increase over market for midscale and economy properties. The following chart breaks out the average by brand scale (brand after the sale). While more upscale brands have larger PIPs, the size of the PIP relative to the value of the room is similar as you go throughout the brand scale, so it makes sense that the increase in revenue does not change much with the scale (excluding midscale and below). Upper midscale core brands such as Holiday Inn Express, Hampton, and Fairfield saw strong increases between 15% and 24% over market. Other brands’ revenue increases over market do not have enough keys supporting them to be credible. Extended stay brands experienced lower increases over market (6%) than non-extended stay brands (9%). This is not due to the scale mix, as only one extended stay hotel was midscale or below.

Investors completing a PIP 5-7 years after the hotel’s previous PIP can expect to see around a 17% increase to hotel revenue from the improvements to the hotel. Other factors that impact top line will need to be considered when forecasting revenue growth, such as changes in brand contribution, changes in sales and marketing operations, and changes in market hotel demand. If you would like an analysis for a particular asset or portfolio feel free to reach out to us.