Hospitality Real Estate and Investment

2023.1

Program: EMIHM Course name and No.:

S M 9214 Hospitality Real Estate and Investment

Assessment title: Final Assessment (35%) Type: Practical

Faculty: Dr. Ahmed Bakri Deadline: Sep. 03, 2023, 23:59

Dear Students, Please solve the following problem by creating your own Excel file and kindly upload the excel file on Moodle when done. Please rename the file with your name. Good Luck!

Problem

Les Roches Hospitality Group is a private hotel management company that operates several

hotels in popular tourist destinations. As part of their continuous efforts to enhance their

services and streamline their operations, Les Roches is considering a strategic investment in

a new hotel property. The proposed hotel will be located in a prime location, close to major

attractions and transportation hubs, making it an ideal choice for both leisure and business

travelers.

Les Roches envisions this new hotel as a flagship property that will not only provide

exceptional guest experiences but also improve their overall operational efficiency. To

achieve this, they are evaluating the construction of a new 30,000 square meter hotel building,

equipped with modern amenities and facilities to cater to the diverse needs of their guests.

Les Roches has approached you, a financial analyst, to help them assess the financial

feasibility of this hotel investment and provide them with a comprehensive financial analysis.

They are particularly interested in understanding the potential returns on investment, the

payback period, and the overall profitability of the project.

Your task is to analyze the given data, calculate the required financial metrics, and present

your findings and recommendations to Les Roches Hospitality Group, enabling them to make

an informed decision about the hotel investment.

Les Roches Hospitality Group is considering the construction of a new hotel to expand its

portfolio. The proposed hotel will have a total floor area of 30,000 square meters (sqm) and

will feature rooms, as well as food and beverage (F&B) outlets. The central location of the

projected hotel will attract guests, and it will be open throughout the year, operating every

day (365 days). This provides an opportunity to generate revenue from both room bookings

and F&B services. Les Roches Hospitality Group has conducted market research and

identified a strong demand for accommodation and dining in the area.

To proceed with the investment decision, Les Roches Hospitality Group requires a financial

analysis of the project. The following data has been provided:

Initial Investment

• Construction of the hotel building (30,000 sqm): EUR 17,500,000

• Purchase of furniture, fixtures, and equipment (FFE): EUR 5,000,000

Revenues • Room Revenues:

o Year 1: The hotel is projected to have an occupancy rate of 40% with

100 rooms occupied by leisure travelers and 50 rooms occupied by

corporate clients. Les Roches expects a 3% annual increase in

occupancy rate for leisure travelers and a 2% annual increase for

corporate clients.

o Room Rates: The average room rate for leisure travelers is estimated to

be EUR 100 per night, with a 2% annual increase. For corporate clients,

the average room rate is expected to be EUR 150 per night, with a 2%

annual increase.

• F&B Revenues:

o Year 1: EUR 500,000

o Annual Increase: 3%

Operating Expenses (per year) • Room Expenses:

• Cleaning and Maintenance: EUR 50,000

• Utilities: EUR 30,000

• Amenities: EUR 20,000

• Other Operating Expenses: EUR 10,000

• Annual Increase: 3% (Applied to all expenses)

• F&B Expenses:

• Cost of Goods Sold (COGS):

o Restaurant: 30% of F&B revenue

o Bar: 25% of F&B revenue

• Labor Costs:

o Restaurant: EUR 150,000

o Bar: EUR 100,000

o Annual Increase: 3% (Applied to all expenses)

• Other F&B Expenses:

o Restaurant: EUR 50,000

o Bar: EUR 30,000

o Annual Increase: 3% (Applied to all expenses)

Fixed Expenses (per year) • Salaries and Benefits: EUR 300,000

• Marketing and Advertising: EUR 100,000

• Utilities: EUR 150,000

• Maintenance and Repairs: EUR 50,000

• Annual Increase: 3% (Applied to all expenses)

Interest Expenses (per year) • EUR 20,000

• Annual Increase: 3.5%

Tax Rate • Tax Rate: 30%

Exit Value • Assume that the investor will sell the Hotel after 10 years for EUR

23,000,000

Les Roches Hospitality Group has requested a 10-year analysis of the investment proposal,

including the following financial metrics:

1. Gross Operating Income

2. Net Operating Income

3. Internal Rate of Return (IRR)

You are tasked with performing the financial analysis based on the provided data. Your

analysis will help Les Roches Hospitality Group assess the financial feasibility of the hotel

investment and make an informed decision.

Required:

a) Prepare a 10-year analysis of the investment proposal using the given

information.

b) Calculate the GOP and NOP of this private Hotel.

c) What is the IRR of the project?

d) If the required rate of return is 42%, would you proceed with this investment?

Good Luck 😊😊