Buy-Side Transaction Management
matheson valuation know that effective targeted due diligence is critical to the success of completing a hotel acquisition in the Caribbean.
We provide Transaction Management services to acquisitive hotel investors, as they attempt to navigate the opaque and treacherous waters of the Caribbean markets.
When considering a hotel acquisition in the Caribbean investors need to be prepared for the low-information and opaque nature of the business environment, the un-professional and at-times frustrating levels of service delivery, and to ensure they validate their key assumptions about any transaction.
matheson valuation employs a systematic approach to our acquisition target and investment analysis, along with a bespoke enhanced due diligence process, which we will scale and tailor to each transaction, enabling our Clients to be more efficient in their decision-making. We aim to enable our Clients to understand and manage the depth of information available, all while while working within tight deadlines.
Typically our agreed Terms of Engagement will contain a trigger for the Client to make an earned retainer fee payment to matheson valuation on acceptance of a successful offer to purchase an acquisition target. We consider this best practice, when dealing with out-of-region Client’s, that we all have some skin in the game at this stage of the deal process. Potentially a significant amount of time, money, resources, and even reputation, will have been utilised in bringing the transaction to the stage of having an offer to purchase accepted.
We are ideally positioned to be your local partner & Caribbean Transaction Manager, assisting with sourcing and locating the ideal target hotel investment that best suits your specific investment criteria & mandate. We guide and navigate the transaction through the numerous challenges, & risks . We aim to expose risks and potential liabilities through our enhanced due diligence processes, allowing us to analyse and derive the true value of the investment to our Client.
Investment & Acquisition
The rationale for wanting to own a hotel can vary greatly; from active ownership through to passive investment, some owners position strategically for the short-term, while others take a longer view.
At matheson valuation, we understand that the investment decision criteria will be unique to each Client, which is why we take our time to fully understand what the Core Values are for our Clients, what are the rules of the game for our target search, and what their concept for a succesful outcome will look like, prior to initiating our search.
We also ensure that these Client strategic goals, their stated values, and the purpose of the investment, are being integrated into and are at the forefront of each decision and developing stages of the transaction.
Our Criteria for Deciding a Purchase:
Location
Property type
Size of property
Cost
Current and potential cash flow yield
Potential appreciation in asset value
Risk and stability of earnings
Upside potential from repositioning, including renovation, redevelopment, expansion and/or management changes
Ability for new competition to enter market
Ability to replace management and/or franchise affiliation
Strengths of the buyer in renovation, asset management and/or hotel management.
2. Identifying the Target
Hotel acquisition targets can be off-market opportunities, be listed with international or local brokerages, be subject to receivership, auction, or may come to our attention through various other channels.
We are uniquely positioned in the region, having established an extensive network of contacts across the hospitality, real estate and financial sectors within the Caribbean region. Once potential acquisition opportunities have been identified that meet our Client’s investment criteria, it is important to act quickly, and initiate the first phase of preliminary investigations.
We will actively pursue the required information to confirm that any selection of this data will be made available by the Vendor or real estate brokerage in an Offering Memorandum.
Assemble & Required Data:
Memorandum, investment memorandum or summary
Physical description of the hotel – legal tenure, pictures, plans, room count, meeting space, F&B venues, beach access/frontage, land lot, etc.
Is the hotel encumbered by existing management contract or leases, franchise, flag or branding. does it benefit from tax concessions, do they carry with the property, do licenses for gaming or entertainment facilities carry with the property, active employee Union, potential long service severance liabilities, and will it continue after acquisition?
Summary of historic operating performance
Rationale for Vendor selling the asset
Pricing expectations
On receipt of this information, matheson valuation, will determine whether to recommend the Client continue to pursue the acquisition, and incur the expense of further resources and time, or to pass over and look for the next opportunity.
3. Evaluate Targets:
We expect that numerous properties will be cast aside during the initial screening process, based primarily on the review of offering & information packages, our own knowledge or familiarity with the property or target's market, and most importantly, whether the deal meets our Clients agreed acquisition & investment criteria.
For those properties that pass this initial stage of screening, the next recommended step is to conduct a site visit & property inspection. This allows for a confirmation of the findings being summarised in the due diligence report, and is where another “go/no-go” decision will be made.
4. Offer & Negotiation
We understand that when it comes to trading properties like Hotels, often the key element in the calculation of a bid price or purchase offer, is the analysis of the potential earnings from the hotel - ‘’what kind of EBITDA will it be throwing off?”. We benefit from our growing database of comparable hotel sales and operational trading data, which we leverage to build the assumptions as to the impact of the likely future market conditions and the hotel’s performance within the selected target market. Most often we will use these assumptions to guide and underpin the projections used in any discounted cash flow or stabilisation of operations analysis.
To effectively assess the acquisition price, a preliminary business plan which reflects strategic assumptions as to expected physical facilities & condition, management structure, brand affiliation and marketing position, along with other property specific factors, must be developed in order to assess the potential acquisition realistically. We strongly recommend that the business plan be realistic, both in scope, and in what is achievable in the Caribbean Market. We have seen too many investors fail to achieve their investment goals because they fell short in developing an effective strategically focused business plan, which should always be in line with achieving the investors core investment strategy and target of reaching their abundantly successful targeted outcome. We can help assess and advise on realistic expectations as to the amount, scope and timing of renovations to a hotel, and their expected impact on short- and long-term operating results.
If we are looking to plan a repositioning of the target hotel, then we will look to identify and then set out in detail the strategy to achieve this; what actions need to be taken to bring about the shift, and the time that will be required.
The bid or offer to purchase price will be largely driven by the calculation and forecasting of anticipated revenues and expenses. An effective due diligence process is critical in validating or gaining comfort with the assumptions being made in the cash flow analyses, which should evidence and further support the investment case for the target, and help avoid unnecessary surprises post completion.
Prospective purchasers may have to compete during successive offering rounds or may go straight to negotiating an Agreement of Purchase & Sale. Irrespective of the process, it is important that our Client has a clear understanding of their strategic vision for the asset, how these intersect and fit with their investment parameters, and which should ultimately drive the offer price for the target..
As the negotiation advances, changes to the offer price and covenants will impact the overall investment underwriting. Having completed a thorough investment analysis using the information obtained in Stage 1, and building a dynamic model of the hotel investment’s future operations, allows our Clients to confidently make adjustments to their operating projections and investment analysis.
Once a potential acquisition opportunity has been selected, we will progress to seeking additional information on the physical asset and key aspects of the operation and hotel investment. The availability of information will vary in each situation – sometimes an abundance is offered prior to making an offer, or it may be on hold until an Agreement for Purchase & Sale (“APS”) has been executed.
Requested information:
1. Detailed description of hotel physical attributes;
2. Detailed historic operating results for the past 5 years and current operating budget;
3. Competitive hotel analysis, including market ADR and occupancy benchmarking & penetration analysis;
4. Summary of historic and planned capital projects and deferred maintenance;
5. Hotel brand PIP (property improvement plan) requirements;
6. Copy or summary of major agreements – hotel management, hotel brand franchise, major leases, etc.
7. Property condition survey;
8. Other details related to the asset – excess land, zoning, development approvals, easements, etc.
Where the hotel is listed with a major hotel broker, typically there will be an online Data Room available, after registration of interest, and executing a non-disclosure agreement (“NDA”). For off-market deals or listings with smaller brokerages, the information will need to be requsted & gathered to the extent available. some of the desired information may not be offered until a Letter of Intent or APS has been executed. In either case, it is very important to request the data early in the process, if it is not already being provided.
On reviewing the available information, if the hotel has met the investment criteria, satisfied the initial DD review, and is being considered an acquisition target, then we advise Client’s to visit the target hotel.
We will now move to understand the Vendor’s offering process/timeline, develop a future operational strategy for the hotel, create operating projections, obtain comparable hotel asset sale data, identify its competitive set and analyse market penetration to benchmark historic performance. This allows us to prepare a preliminary valuation analysis, along with Investment Case which will identify how the proposed target hotel meets the Client’s Investment Strategy,
Depending on the complexity of the transaction, we are able to assist with assembling and recommending the appropriately qualified and experienced external service providers within the region to move the deal forward.
5. Due Diligence Period
In the executed Agreement of Purchase and Sale (“APS”), the Purchaser will typically have a 30-day to 45-day Due Diligence Period (“DDP”) as defined in the agreement – this time frame can vary depending on the complexity of the asset.
The basic goals during the DDP are to confirm the investment underwriting assumptions, investigate all operating and expense details, work through, review and identify all material financial/legal matters, and to identify any potential deal breakers.
matheson valuation utilise the DDP to spend significant time at the hotel, interviewing current ownership, management and operations teams (where possible), and taking a deep dive into all manner of contracts, financials and other aspects that will impact the hotel operations & long-term value of the asset. We manage the team of local advisors and consultants who will assist in reviewing the data and information being made available, so we can ensure timely delivery.
Due Diligence Requested List:
We design a bespoke comprehensive List to track the requesting and delivery of information, centralising the request and delivery process through single point of contact for the Vendor, allowing an audit trail of the process and ensuring all requests are captured and held within the DDP framework. The data is then analysed and compiled into the Due Diligence Report, that addresses the following target areas of focus:
1. Real Property – Property tenure, legal ownership and associated rights, covenants or easements which carry, ownership structure, site specifics, details of physical asset condition, capital expenditures & deferred maintenance, fire & hurricane safety, environmental, property taxes and assessment;
2. Market Dynamics – Local/regional economic conditions, demand/ & supply, position of the target with regard to competition, hotel brand landscape, capital markets;
3. Strategic Vision – How does the target satisfy & meet stated Client strategic vision; market positioning, repositioning opportunity, operational upside, maximize revenue/square foot, integration into portfolio/investment strategy, branding, public relations and reputation management;
4. Technical Financial Audit – General procedures, cash, revenue/accounts receivable, purchases/accounts payable, inventory, pre-paid expenses, related party transactions, deposits, capex sinking fund or renewal of FFFE provisioning;
5. Revenue Analysis – Rooms segmentation/mix, rooms rates, ADR, Occupancy and RevPar forward looking projections, blockages, concessions and loyalty programme participation, revenue management, penetration into competitive set, food & beverage, group/meetings/catering, lease or rental of income, other revenue lines or opportunities;
6. Operations Analysis – executive team & org chart, expense review, staffing and productivity, identification of owner remuneration for owner occupied hotels, family members as employees, owner take out, oversight & integration, offshoring of management expenses, working capital;
7. Capital Investment – historic capital expenditure, current capital plan/repositioning, hotel brand PIP requirements, ROI capital projects (revenue enhancement or defensive/required), requiring operating capital;
8. Investment Analysis, SWOT – cash flow, sources and uses of capital, debt financing terms/covenants, valuation, working capital, growth rates analysis, capital projects and accompanying sensitivity/ scenario analysis of IRR , hold period, and exit strategies;
9. Legal – Report on title and review of legal title, tenure and ownership, contractual agreements, defining of assets and obligations being assumed, covenants, escrow and schedules as required.
The time to renegotiate the purchase price and covenants, due to unforeseen issues uncovered during the DDP investigations is prior to the end, with our dynamic framework meaning that we will raise and flag to the Client any material or potentially critical issues as they arise, and as early on in the DD process as possible.
6. Closing Period
After waiving conditions in the APS (and negotiating any required price adjustments and Vendor obligations), we will begin preparing the Client to complete the critical final tasks prior to the Closing Date, which can include:
1. Finalise and execute debt financing agreements
2. Plan hand-over and integration of the target hotel’s operation into the client’s existing organisational structure;
3. Change in service and supplier contracts;
4. Employment contracts – terminate & rehire, assumption of accrued benefits, etc.;
5. Replacement and/or approvals as required with hotel management and branding;
6. Coordination of vendor and purchaser legal counsels, transfer of title, etc.;
8. Closing adjustments – inventory, cash, deposits/advanced bookings, etc.;
9. Plan for staff celebration and communication with customers and suppliers.