What explains differing holding periods across hotel investments? A hazard rate framework. (August 2020)

• Record Type: Journal Article
• Authors: Poretti, Cédric; Das, Prashant
• Is Part Of: International journal of hospitality management. Volume 89(2020)
• Publication Date: 2020-08
• Subjects: Holding period -- Hotel -- Sale decision -- REIT -- Hazard models; Hotel management -- Periodicals; Restaurant management -- Periodicals; Food service management -- Periodicals; Hôtels -- Gestion -- Périodiques; Restaurants -- Gestion -- Périodiques; Services alimentaires -- Gestion -- Périodiques; Food service management; Hotel management; Restaurant management; Periodicals; 647.94
• DOI: 10.1016/j.ijhm.2020.102564
• Languages: English
• ISSNs: 0278-4319

Abstract

Highlights: Hotel valuation is sensitive to the choice of holding period (HP). We show that HP varies with the owner type, capital expenditure and hotel characteristics. We present a predictive model for HP and show how industry practitioners could apply the model. We present a simple method of discount rate adjustment based on a selected HP. Abstract: We explain the variation in hotel holding periods (HP) based on liquidity needs, owner type, acquisition conditions and timing of hotel renovation. Contrary to popular belief, properties owned by listed companies tend to have longer HPs due to lower liquidity constraints. REITs sell heterogeneous hotels sooner to strengthen their focus whereas REOCs keep such assets longer for diversification benefits. Moreover, we document that higher quality hotels tend to have longer HPs, and that capital expenditure employed in renovating an acquired asset prolongs the HP whereas assets renovated before acquisition experience shorter HPs. Finally, we show how our model can be used in practice to predict the median HP based on a given hotel characteristics, and present a method to adjust the DCF discount rate according to the selected holding period.