A new hotel investment performance metric is introduced. Starting with this issue, we will apply our new economic value added (EVA) indicator as a barometer of hotel investment performance. Complete details of how to use this benchmark and why it is superior to evaluating cap rates relative to 10-year Treasury rates can be found in the recent publication from the Center for Hospitality Research and Center for Real Estate and Finance entitled “Using Economic Value Added (EVA) as a Barometer of Hotel Investment Performance,” by Matthew J. Clayton and Crocker H. Liu. Essentially, the hotel EVA spread tells us whether the current hotel yield (cap rate) exceeds the total borrowing cost (weighted average cost of capital; also includes the cost of equity financing) for doing a typical deal. Intuitively, if an investor finances a hotel project using 7-percent financing, the current yield on the project should exceed the 7-percent borrowing cost. Exhibit 1 (next page) shows that the EVA spread for hotels was positive until the first quarter of 2008. Subsequent to this period, the EVA spread has been either negative or near zero except for the second quarter of 2012 when it was positive. A negative EVA spread indicates that any return for hotel investors must come at the back end of the project. The expectation is that they will make their money when they sell the hotel due to price appreciation rather than making their money immediately.
Liu, C. H., Nowak, A. D., & White, R. M. (2014). Flight to quality: Big trumps small [Electronic article]. Center for Real Estate and Finance Reports Hotel Indices, 3(1), 1-14.