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Is the Tourism Industry Bouncing Back?

Monday, November 9, 2020 · 0 Comments


 

Australians love to travel. Our country  is dotted with hotel and motel  businesses that range from 10 rooms  to multi-storey CBD locations. In  response to the Covid pandemic many  businesses faced government enforced  restrictions. With a freeze on overseas  travel, the number of tourists and  business travellers entering the country  dwindled. Conferences, weddings and  events basically halted with a limit on  people at gatherings. The enforced  fines made most businesses in the  hospitality and tourism sector freeze  and rethink their operations.  

We spoke with Matt Davidson from  Tourism Property based in Wollongong  NSW. A specialist business broker  focused on hotel and motel businesses valued from $5m to $25m. With 25  years of experience in the tourism  industry he has a wealth of knowledge  that is valuable to business owners,  investors and prospective buyers.  

Vanessa: So Matt, tell me a bit about  your background. You started out on  a resort in Dunk Island, what is it that  attracted you to the tourism industry? 

Matt: Yes, Dunk Island, that’s right. To  be honest, I was more attracted to the  water skiing than the tourism industry.  

I actually started there as Kids Club  Supervisor, however in my four years  on the island I set about learning the  trade and very quickly found a love  for the service and hospitality side of  things. It was an amazing lifestyle, I worked really hard to learn everything  there was to know about hospitality. 

That was 1996, so we’re going on 25  years now. That was the start of my  career, I’d found what I was supposed  to be doing and I’ve just built from  there. I also met my wife Kellie on the  island (ok, I employed her) and we  moved to Wollongong after the 2000  Olympics to start a family. 

I then worked at Best Western for three  years and that was what really pushed  me out into the regions to gain a real  understanding of regional tourism. I  headed up the Brand Development  team and we onboarded over 100  motels into the Best Western group in  that time. That’s certainly where I cut my teeth in terms of sales processes  and deal brokering. Before Best  Western I was much more familiar with  corporate, larger hotels and resorts,  but there’s a burgeoning regional  tourism industry out there with the  smaller accommodation businesses that  are quite valuable in their own right. 

Vanessa: So you worked in hotel  management then transitioned to  be a business broker? 

Matt: My first company, “2T” was a  startup in 2005 with Craig Hardy, also  ex Best Western. Over the course of  10 years we consulted to developers  who were building hotels. It was really  successful and we ended up with, I  think, 14 hotels under management  and various forms of consultancy  - in the 50 to 150 room space. We  employed a heap of staff and were  racing around the country. My role was  to keep expanding the company, so  we were constantly out there looking  at deals, looking at what was for sale,  who was selling and how it was done.  I became really interested in the hotel  broking process and felt there was a  gap there to improve service in that  same sort of motel - that 30 plus room  motel and the rest is history. 

Vanessa: So you specialize in  tourism. Do you think it is important  for a broker who is in a specialized  field, to have that history?  

Matt: Absolutely! That’s really how I’ve  built the business - on credibility. We  generally don’t sell businesses below  $4m, so you’re working with a vendor  who often has considerable business  and investing experience - they’re  savvy and they pick if you don’t know  what you’re on about. With Graeme  Sutherland and myself, between  us we have over 50 years of hotel  management experience. That in itself  is not enough to be a great broker,  although it’s certainly helpful. 

Vanessa: Do you mainly focus in New  South Wales? 

Matt: We’re licensed in NSW and ACT.  We are in that middle regional market,  the $3m to $25m. We add a lot of  value to that, say $10m asset. You can’t  sell an asset like that on hopes and  dreams - there’s a lot more substantial  understanding required and buyers  expect that too. We generally deal with  a very sophisticated buyer – moteliers  and hoteliers are often not interested  

in other types of investments, so we  really have to be on the ball. 

Vanessa: Let’s say someone is new to  the industry. Is there anything that  they should do before buying that  business? 

Matt: Great question. Yes, there is  training that’s necessary but not all  that readily available. Motel businesses  as a leasehold are the cheapest way  to be in the industry, but it’s far more  expensive to purchase than say a cafe  or a hairdresser business. What I’ve  found since my Best Western days  back in 2002, is there are a lot of new  participants in the tourism industry,  some of whom probably underestimate  what it takes to actually run a motel. If  you’re in a small business, a “mum and  dad” operation, you will find yourself  doing an awful lot of work. Buyers for  this type of motel might sell their house  in Sydney for example, and might move  to a regional town to buy a leasehold  motel which comes with a residence,  but what we found is that training and  support is difficult. I’m a big fan of  branding, which comes with those type  of services. If there’s been a year that  business owners needed more support,  education and training, it’s certainly  been 2020. 

Vanessa: What is the difference  between buying leasehold or buying  management rights? 

Matt: Management rights is a very  common structure in Queensland, less  so in New South Wales and the other  states. Management rights is probably  more focused on a leisure product  where you might be on the beach,  managing a series of apartments in  your building. Management rights is  often a one-person business with a  team of housekeepers, although there  are hybrid models out there with  more substantial operations in food,  beverage and conferencing. There are  also management rights businesses for  permanent residential buildings. 

In terms of leasehold motels, you are  generally in regional towns and cities.  Leasehold motels generally have 20 to  30 rooms, rarely more than 50 rooms,  and are fairly manageable with a small  number of staff. So there are some  similarities in terms of value, but return  on investment is much higher in a  motel leasehold. 

Vanessa: Are there any kind of hidden elements that a buyer needs  to look out for when they’re buying,  say a leasehold motel? 

Matt: I guess one of the things that  a new motel buyer needs to get their  head around is the way the industry  calculates value. Living on site creates  some grey areas with business versus  personal expenses and these can be  substantial. A lot of these businesses  are turning over millions of dollars,  so accounting-wise, we have a  bit of a standard that takes some  understanding from buyers and that’s  certainly something that brokers assist  with. To the outsider it looks a bit  weird - you start saying, well, here’s a  business that’s making a nett loss, but  in actual fact, when we start adding  back hundreds of thousands of dollars,  the normalized profit is quite healthy  and genuine. 

So, there’s some learning to do on that  but it’s also understanding the way the  business operates. You may have one  staff member, or you may have 10. Like  most businesses, the directors or the  owners don’t necessarily take a wage  and to calculate value, so we take that  back out. Understanding how to read  financial reports or asking for advice  from qualified parties helps too. 

Vanessa: Is it worth a buyer to  engage with a specialist broker or  accountant to help them navigate  through the sale?  

Matt: Yes, for sure. I mean, from the  buyers side, there’s not a lot of brokers  who specialize as buyer’s agents in  our sector. Quite often a bigger player,  a listed company for example, might  appoint a broker to handle a hotel  acquisition, but most buyers generally  do not use buyer’s agents for motels. 

So as motel and hotel brokers, we  are engaged by the vendors. It’s an  interesting one as buyers tend to rely  on us to learn about what they’re  getting themselves into. There are no  deals without buyers, however make  no mistake that the broker is working  for the vendor. 

We recommend if a buyer hasn’t got an  accountant that’s familiar with those  processes to get one. 

Vanessa: Who do you find are the  most common buyers in your sector,  who are buying those $5m - $10m  plus businesses? 

Matt: That’s a really interesting  question. I mean right now we’re in a  super low interest rate environment  which creates these low yields. What  we’re finding is, there’s new industry  participants all the time. Folks who  would never have considered owning  a motel or a hotel are now looking  at these assets in the chase for yield.  The share market is all over the shop,  there’s a huge amount of risk there.  Yields on all classes of property and  investments are very, very low. So,  what we’re finding is people who are  looking for an 8% yield are scratching  their heads saying well that’s about 10  times what the bank wants to give me,  what could I invest in? Honestly, we see  more and more folks considering an investment in the tourism sector. 

Other than that, there are long standing traditional moteliers who  understand what they’re doing and  they’ve had motel after motel, or  there’s a number of small groups that  have emerged with five or six properties  each, which is quite substantial, I mean  five or six properties, that’s $10m  - $15m each. It’s a huge amount of  investment which requires a level of risk  management as well. 

Vanessa: Are these new buyers  choosing to work within the  business with management or is it  purely an investment? 

Matt: Yes, great question. It’s really  interesting, let’s say for example,  you’ve got $5m dollars to invest, you’re  probably not going to sit behind the  front desk and check people into  a motel. So there is quite often a  management structure in place, or  this is where motels get “split” into  leasehold and freehold investment. 

There’s a question of scale, a small  motel in a small regional town that  may be worth $3m to $5m is a tough  gig. How do we find someone who has  access to that much money, AND wants  to move to that location, AND wants to  do that type of work? Is there enough  scale for the new owner to replace  their efforts with a management team? 

So, there’s a tricky area in this price  range. Of course, $5m doesn’t get you  an awful lot in the capital cities, so the  problem is amplified. 

A freehold motel normally carries a  fairly substantial land value and often  has potential for redevelopment or re creation of those assets into something  else that is attractive for motel buyers.  Clearly, that doesn’t apply with leasing  but by the same token, management  structures can often be replaced  by leasehold structures as well. So  investors often buy a freehold asset  and lease it to a tenant using a 30  year lease, which is a long-standing  structure in Australia & New Zealand. 

Vanessa: Let’s say a seller is sitting  on a $5m freehold hotel and it’s a  bit run down. What would be your  advice to these business owners?  

Matt: The answer is renovations take  time to pay off. You can have the  prettiest looking motel that’s got a really  rubbish business and the value will  predominantly reflect the latter. We’re  yet to meet a buyer who’s prepared  to pay for business potential. What  we suggest to owners is, if you are  embarking on a program of capital  expenditure, you need to have a long term view – back it up with one to two  years of improved trading performance  to achieve a value upswing. Motels are  always valued as a going concern, so  the value is all about profit first and  condition and appearance second.  Renovations certainly will unlock better  profit, but that value upswing also relies  on marketing and management skill. 

Vanessa: Should people invest in  renovations? 

Matt: Broadly I’d say that Australia  is full of 1970s motels and very few  have actually been updated to today’s  standards. So, it’s a huge risk for the  industry there. I’d hate to see 50% of  motels knocked down and converted  into townhouses in towns and cities  around the country. But, who really  wants to stay in an old motel if it hasn’t  had its bathrooms fixed for 40 years? 

So we really encourage people who  have long-term views for their assets to  invest in them. Quality accommodation  drives strong room rates and occupancy and therefore profit, so  certainly will add value to the business. 

I think there has been a chronic under-investment in regional motels  for a long time and what we often  see is the one or two properties who  have invested can really dominate the  market. You’ll see huge discrepancies in  towns that have multiple motels, from  the $90 a night stuff through to $300  a night. Corporate travel (which will  come back one day), expects a level of  comfort and quality and will pay for it.  I really would love to see the industry,  government and funders get their  heads around reinvestment, and not  just hope that someone’s going to buy  up the old motels to bulldoze them one  day. 

Vanessa: When valuing businesses,  obviously hotel and motel businesses are quite complex. How  do you go about valuing them? 

Matt: We would say obviously that a  motel broker is the only person that  can properly value a motel. We would  suggest that if you want to sell a motel,  you work with a motel broker and  the main reason for that other than  getting proper advice, is that motel  buyers hang around motel brokers. So,  we’ve got the right people ready to buy  the right assets – it’s a very targeted  process. 

For a leasehold business, ultimately  the valuation is about profit, the rest  is secondary. The term of the lease is  important – a cafe might have a 5 plus  5 lease term, but motels are generally  a full 30 years at commencement. So,  if you’ve only got 10 years remaining  on a motel lease, that has a huge effect  on the overall value. The terms of lease  and rent ratio are also very important  in motels - leaseholders can be paying  as much as $500,000 a year in rent, so  this needs to be sustainable against  repeatable income. 

Valuation methods are fairly standard  across the industry, the yields on offer  in a motel lease range from 25% to  35%. I’ve got to say, this year those  numbers have crept up for all sorts  of reasons. I guess the other one for  a leasehold motel is location and  liveability. If one was to have a motel  with a nice ocean view, a premium  location, you would probably expect to  see a lower yield / higher price to live in  that location. There is a bit of a saying,  about “coast for show and country for  dough”, so the further west you go, the  more cash you would expect to make. 

With freehold property you’ve got to factor in underlying land value and  potential for alternative uses.  

Quite often motels are surrounded by  residential development and zoned  the same. Here in Wollongong there’s a  number of motels around the CBD that  are exceptionally valuable because of  zoning and height limits. If you can build  a 40-storey commercial or residential  building, your 2-Star motel in its own  right can never be anywhere near as  valuable as the land that it sits on.  

Vanessa: What is the biggest mistake  vendors make when they have that  initial thought of selling their Motel  or Hotel? 

Matt: I guess vendors can become very  emotionally attached to their assets.  We might have an Airbnb that’s got six  rooms and it’s on the beach or it’s got  50 acres and it’s been their labour of  love for decades. So, for us to come  along and be realistic about what the  value actually is, those conversations  are hard but necessary. It’s hard to call  someone’s baby ugly - we tend not to  use those words of course. Vendors  should be having those conversations  with expert brokers about what market  value really means. In theory, a valuer,  or a broker, or a bank, or your next  door neighbour can tell you what they  think your asset is ‘probably’ worth.  But the truth is, an achieved price in an  open market is effectively the only true  market price.  

Quite a few folks have unrealistic  expectations and that applies to all  businesses. If you’ve got a trustworthy  broker who has genuinely marketed  the asset, then we quite often see  offers in excess of expectations  as well. We prefer to have honest  conversations upfront, rather than tell  vendors what they want to hear and try  to change their mind when the market  delivers market value. 

Vanessa: How long does it take to  list, sell and settle? And what kind of  factors can stretch that out?  

Matt: It’s a great question. You can  spend a year marketing a motel, to  get the right buyer, but if things are properly priced and the market is  normal (which I’m not sure it is at  the moment), you should be able to  transact the motel in two to three  months. Beyond that you start getting  a bit stale and the buyers who should  be looking at the property would have probably seen it by then. So, if you’ve  got a good broker who’s actually  going to be in front of proper motel  buyers, and has done the right sort of  marketing and nothing’s happening,  then the price has got to be wrong  or there’s some other fundamental  problem. 

Vanessa: For business owners,  within the tourism industry who  have been hit hard by the COVID  pandemic, what advice do you have  for those who are panicking? 

Matt: There’s never been a year with  more fear I guess. What we’re seeing in  the last two months is this emergence  of a “Tale of Two Cities”. We’re seeing  anything within a three-hour drive  of Sydney is doing really well. I’ll  emphasize that by saying only in leisure  travel. There’s a lot of media about the  South Coast locations, Central Coast,  Blue Mountains. They’re all doing fine  seems to be the rhetoric, but you  know, those markets quite often only  rely on weekend travel anyway, and  that business has come back strongly.  Australians want to get out and support  the industry and they desperately want  to travel domestically. So, that’s great. 

The other side of the coin is of course  your capital cities, your major cities  that rely on conferences, events,  international travel, corporate and  government travel and none of that  is happening any time soon. So, the  majority of our industry across the  country is made up of those major  hotels in major cities and they are  struggling, there’s no doubt about  it. So, I find it quite amazing that the  rhetoric seems to be that everything’s  okay. Many tourism businesses are worth as much today as they were 12  months ago. Selling in a hurry is always  going to result in a less than perfect  outcome. All business owners have an  exit strategy, if it’s changed this year  then talk to an expert motel broker  about your options. 

Vanessa: Is the government offering  any sort of support outside of say,  JobKeeper? 

Matt: To be honest, no. There’s a lot of  calls from the industry, who are starting  to co-operate better. We are now  six months in and we are reviewing  business performance, and in many  cases there is six months of real pain.  In some cases, that’s come back fairly  quickly to previous levels. Anywhere  near the borders that are closed, they  are struggling but you know, if things  improve quickly, I think we’ll just look at  this as a blip. Valuers and financiers are  prepared to be realistic about the value  of an asset when we can normalize and  review six months in the context of the  past 10 years, but if six months goes  to 18 months, then we’ve got a real  challenge on valuations. 

Vanessa: Do you think increasing the  number in group settings is going to  help some of these CBD based bigger  hotels with function centres? 

Matt: Yes, no doubt, and I know that  lots of those operators are really keen  on reopening, but there’s a lot of  misunderstanding about what those  rules are. There is now the potential  to have 300 people at a wedding,  but the asterisk is, you need to have  a 1,200 square metre venue, which  hardly anyone has. So, everyone  wants to do a 300-person wedding  but you are probably more likely to  be able to do a 100 person wedding.  So, it helps but you know, in terms  of the tourism economy, we need to  get the convention centres back open  and it’s going to be a long time before  we see international flights starting  to fill up those major hotel rooms in  capital cities again, which filters out. If  inbound travellers come into Sydney  or Melbourne or Brisbane, then, they  filter out, travel up the coast, down the  coast, into the Blue Mountains, so it  helps everybody. Hopefully we’re on  the back end of this thing. 

Vanessa: Do you think if the borders  reopen there will be more interstate  travel? 

Matt: Without a doubt. It will have to  and I know there’s been a lot of calls  from folks to reopen borders and we’re  not getting into the safety and health  stuff, but it’s really hurt the tourism  sector without doubt. 

The industry is resilient and I’ve seen  things like hospitality, food, and  restaurants pivoting into deliveries and  pop-up food trucks and doing whatever  is possible to keep themselves going  and keep folks employed. JobKeeper  is running out in just a few months  and that is going to have a massive  impact as well. I would hope that we’ve  got some further recovery before that  happens. The next challenge will be  that the currently strong domestic  leisure travel will be at risk when  Australians can again travel overseas. 

Vanessa: Hopefully, the borders  open at least. It’ll be very interesting  if things don’t start to turn around.  What happens to the whole industry? 

Matt: I think we’re at a tipping point.  As I said before it’s critical that folks  understand that things aren’t okay  for the tourism industry. If you talk  to the person in the street, the media  seems to be saying the tourism  industry is booming and you quite  often see words like that being used  about regional tourism. I just don’t  see it myself. I see an absolute strong  performance in surrounding areas of  capital cities without a doubt. Are they  doing as well as last year or better?  Yes, perhaps they are. But if you in a  metropolitan area, or are more than 3  hours drive from a capital city, I doubt  things are going to improve in the short  term. 

 

Matt Davidson Director - Tourism Property

P. 0400 200 139

E. matt@tourismproperty.com.au

www.tourismproperty.com.au 

 

ABOUT THE AUTHOR 


 

Vanessa Lovie 

Vanessa is the CEO of Bsale Australia. She has been the managing director for the past 9 years. With extensive knowledge in online marketing and the business for sale industry. Vanessa is a huge supporter and advocate for small business in Australia.  

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