A Wyndham hotel in Chapter 11: when the real value may lie in the land, not the rooms

A 138-key hotel, still operating under an international brand, has been brought to market as part of a bankruptcy process.

At first glance, it may appear to be one of the many US opportunities aimed at investors specialising in distressed real estate. In reality, the case of the Baymont by Wyndham Lubbock – Downtown Civic Center, in Texas, offers a much broader lesson that can be applied directly to the Italian hotel market.

When a hotel enters financial distress, the primary question should not be:

How much is the property worth?

The correct question is:

What is the investor actually acquiring?

There are at least four possibilities:

• an operating hotel business to be continued;

• a company requiring restructuring;

• a property to be repositioned;

• a site to be redeveloped for an alternative use.

Failing to distinguish between these dimensions means building the investment case around the wrong component of the transaction.

This is the approach adopted by InvestimentiAlberghieri.it: looking beyond the asking price, room count and brand name to separate the real estate value, income-generating capacity, contractual obligations, total capital requirement and alternative-use potential.

The asset: 138 rooms, a Wyndham flag and a Chapter 11 process

Hilco Real Estate has invited bids for the Baymont by Wyndham located at 601 Avenue Q, in downtown Lubbock.

The property comprises:

• 138 guest rooms;

• two storeys;

• approximately 4,700 square metres of built area;

• more than 12,500 square metres of land;

• an adjacent restaurant;

• an outdoor swimming pool;

• a business centre;

• 99 parking spaces;

• a building originally constructed in 1976;

• affiliation with the Baymont by Wyndham brand.

The sale forms part of the Chapter 11 proceedings involving Sai Bhole-Nath Hotels Inc. and remains subject to approval by the relevant Bankruptcy Court.

This is therefore not the conventional sale of a stabilised hotel.

A court-supervised sale may give the buyer access to attractive pricing and a more clearly defined legal perimeter, but it does not automatically resolve the asset’s underlying problems.

The procedure may transfer ownership.

It does not transfer a ready-made solution to the operational, technical, commercial and reputational issues affecting the hotel.

An international brand does not automatically protect value

The property continues to trade under the Baymont by Wyndham flag.

This may initially reassure a less experienced investor. Wyndham provides international recognition, access to distribution systems, loyalty programmes and defined brand standards.

But a brand cannot indefinitely compensate for a deteriorating product.

At the time of the analysis, the official Wyndham website displayed an exceptionally weak guest rating for the hotel. Reviews highlighted problems involving:

• cleanliness;

• maintenance;

• room facilities;

• service quality;

• perceived safety;

• the overall condition of the property.

This is not merely an online reputation problem.

A severely damaged reputation has immediate financial consequences:

• it suppresses ADR;

• reduces direct demand;

• increases dependence on online travel agencies;

• weakens the customer mix;

• limits access to corporate demand;

• reduces the hotel’s ability to benefit from major events;

• extends the time required to complete a successful turnaround.

The buyer would not therefore be acquiring a 138-room hotel immediately capable of capturing the full potential of its destination.

The buyer would be acquiring a real estate, operational and reputational turnaround.

The first rule: verify the sales memorandum

The marketing materials place considerable emphasis on the demand generated by the city of Lubbock, its university, healthcare system and events calendar.

The principal demand generator is Texas Tech University, which has more than 42,000 students and produces accommodation demand from families, academics, researchers, suppliers, sports events and institutional activities.

The university is undoubtedly a positive market driver.

It does not, however, prove the sustainability of the investment plan.

A large university does not automatically guarantee:

• consistently high year-round occupancy;

• profitable room rates;

• stable corporate demand;

• sufficient demand to absorb 138 rooms;

• operational profitability;

• a successful repositioning strategy.

An investor must determine which properties currently capture the highest-quality demand, when compression periods occur, how the market performs outside major events and what market share the hotel could realistically secure following refurbishment.

The marketing materials also contain a particularly instructive point.

The sales presentation appears to attribute approximately 2.86 million annual visitors and $297 million in direct expenditure to Lubbock.

The original Visit Lubbock source presents the figures differently. It describes them as the cumulative results, since 2004, of events and conventions secured or supported by the organisation: 2.86 million visitors in total, 943,570 room nights and $297 million in direct economic impact.

The distinction is material.

A figure accumulated over more than two decades cannot be presented as though it represented the destination’s annual visitor volume.

This does not necessarily mean that Lubbock is a weak market.

It means that an investor should never treat the sales memorandum as the sole source supporting an acquisition decision.

Due diligence begins when promotional claims are tested against the original source.

The value may not be in the rooms

The hotel has 138 rooms, but its built footprint is relatively small compared with the overall site.

Approximately 4,700 square metres of buildings occupy more than 12,500 square metres of land.

That relationship potentially supports several strategies:

1. continuation of the existing hotel operation;

2. refurbishment and rebranding;

3. conversion to extended-stay accommodation;

4. student housing;

5. multifamily residential;

6. demolition and mixed-use redevelopment.

The transaction therefore involves more than the acquisition of a hotel.

It gives the buyer the opportunity to determine which use can generate the greatest value after taking account of investment requirements, planning approvals, delivery times and execution risk.

The same principle applies directly to Italy.

Many Italian hotels built between the 1960s and the 1980s occupy sites that may now have a different value from the one generated by the existing hospitality operation. This does not mean, however, that conversion is always the most attractive strategy.

An apparently more profitable alternative use may become economically unviable once the following factors are considered:

• change-of-use approvals;

• planning standards;

• parking requirements;

• demolition costs;

• structural upgrading;

• environmental remediation;

• the length of the approval process;

• financing costs during development;

• the loss of hotel income;

• final market and leasing risk.

Value does not correspond to the use that appears theoretically most profitable.

It corresponds to the use capable of producing the highest risk-adjusted net present value after capital requirements and delivery times have been considered.

The four valuations an investor needs

Applying a simple price-per-room metric to the Baymont in Lubbock would produce a result of limited relevance.

At least four parallel valuations are required.

1. The property’s value in its current condition

The first analysis must consider the land, built area, physical condition, plant and machinery, permits and legal compliance of the property.

The investigation should cover:

• deferred maintenance;

• guest-room condition;

• roofs and façades;

• electrical and plumbing systems;

• heating, ventilation and air-conditioning;

• water penetration;

• fire and life-safety compliance;

• accessibility;

• potentially hazardous materials;

• environmental liabilities;

• demolition costs.

A refurbishment reportedly completed in 2021 does not prove that the hotel was comprehensively renovated.

The works may have been partial, cosmetic or confined to selected areas. The property’s condition as subsequently described by guests makes it essential to verify precisely what work was completed.

2. The hotel’s value as a going concern

The second valuation must determine the profitability the hotel could generate under normalised, competent management.

Historic results cannot simply be accepted at face value, because they may reflect inefficient operations.

At the same time, it would be equally dangerous to prepare an aggressive budget based on the assumption that every problem can be resolved quickly.

The investor must reconstruct:

• stabilised occupancy;

• sustainable ADR;

• RevPAR;

• ancillary revenue;

• payroll costs;

• distribution costs;

• energy expenditure;

• maintenance costs;

• franchise fees;

• replacement reserves;

• GOP;

• EBITDA;

• working-capital requirements.

The hotel’s value should be based on the income a capable operator can realistically generate, not on theoretical revenue calculated by multiplying the number of rooms by an assumed rate.

3. The hotel’s value after the turnaround

The third analysis concerns the hotel’s value after a comprehensive turnaround plan has been executed.

This is the type of transaction addressed by Investhotel Capital Partners: acquisitions and advisory mandates in which changing ownership is not enough. The business must be reorganised, costs corrected, the product redefined and the asset prepared for value creation.

The plan should include:

• refurbishment capital expenditure;

• any Property Improvement Plan imposed by the franchisor;

• rebranding costs;

• furniture, fixtures and equipment;

• full or partial closure during the works;

• operating losses during refurbishment;

• working capital;

• staff training or replacement;

• a revised pricing strategy;

• commercial repositioning;

• reputation recovery;

• ramp-up time.

The maximum acquisition price is not calculated simply by subtracting capital expenditure from the stabilised value.

The investor must also deduct:

• the cost of capital;

• financing costs;

• initial operating losses;

• contingency reserves;

• the cost of time;

• an execution-risk premium.

4. The value of alternative uses

The fourth valuation should assess student housing, residential accommodation, serviced apartments, senior living or mixed-use redevelopment.

These options may generate a higher value, but only after several questions have been answered:

• Is a change of use legally achievable?

• How much saleable or lettable area can be developed?

• Can the existing rooms be converted?

• Can the building services be adapted?

• How much parking is required?

• Is demolition necessary?

• How long will the approval process take?

• What is the expected cost per square metre?

• What final value is supportable?

• What return will the market require?

A conversion should not be treated as a simple extension of the hotel business plan.

It is a separate real estate development project requiring different capabilities and involving different risks.

Why the case is relevant to Italy

The US Chapter 11 framework cannot be automatically compared with the procedures available under Italian law.

The legal structure, treatment of contracts, role of the courts and methods used to sell assets are different.

The underlying economic principle is nevertheless the same.

In Italy, a hotel may also be brought to market through:

• negotiated crisis settlement proceedings;

• restructuring agreements;

• preventive composition proceedings;

• judicial liquidation;

• bank-led disposals;

• sales of UTP or NPL exposures;

• voluntary disposals triggered by financial pressure;

• debt restructuring;

• the entry of a new investor.

Yet distressed Italian hotels are still too often marketed as straightforward property opportunities.

The information disclosed usually includes:

• location;

• star category;

• number of rooms;

• gross floor area;

• asking price.

The decisive issues frequently remain hidden:

• actual profitability;

• debt position;

• tax and social-security liabilities;

• disputes and litigation;

• employment contracts;

• management and franchise agreements;

• deferred maintenance;

• planning compliance;

• working-capital requirements;

• online reputation;

• commercial positioning;

• the cost of the turnaround;

• alternative-use value.

A low price is not an investment thesis.

It is only the starting point of the analysis.

The equivalent Italian case

A comparable Italian opportunity could involve a hotel built between the 1960s and the 1980s, with between 80 and 150 rooms, located in a university city, healthcare hub, exhibition destination or conference market.

The property could exhibit:

• common ownership of the real estate and operating company;

• unsustainable debt;

• an outdated product;

• a weak reputation;

• excessive payroll costs;

• deferred maintenance;

• an ineffective brand;

• still-significant revenue;

• insufficient margins;

• potential demand for student housing, serviced apartments or residential conversion.

An inexperienced investor might apply an average price per room and conclude that the acquisition is automatically attractive.

A professional investor should instead construct at least three scenarios.

Conservative hotel scenario

Continuation of the hotel operation with limited capital expenditure, operational improvement and tighter cost control.

Repositioning scenario

Full refurbishment, new market positioning, rebranding, organisational restructuring and professional management.

Real estate scenario

Partial or complete conversion to an alternative use.

The decision should not be driven by the buyer’s initial preference.

It should be determined by the net value produced by each scenario.

Management comes before the brand

The Lubbock case also demonstrates that an international brand cannot indefinitely compensate for weak management.

A brand can provide:

• distribution;

• recognition;

• loyalty programmes;

• operating standards;

• commercial support.

It cannot replace:

• maintenance;

• cost control;

• cleanliness;

• staff quality;

• operating procedures;

• safety;

• revenue management;

• reputation management;

• control of the guest experience.

Management capability must therefore be assessed before acquiring a distressed hotel.

An operating platform such as Necci Hotels can translate the business plan into execution: departmental organisation, cost control, pricing policies, procedures, service quality and the restoration of profitability.

Without an operator capable of delivering the plan, even a hotel acquired at an apparently attractive price can become a value-destructive investment.

The real price is the total capital required

The correct question is not:

How much does it cost to buy the hotel?

The correct question is:

How much capital will be required before the hotel becomes competitive, profitable and financeable again?

The total capital requirement includes:

• acquisition price;

• taxes and transaction costs;

• capital expenditure;

• furniture, fixtures and equipment;

• franchise costs;

• rebranding;

• working capital;

• initial operating losses;

• professional fees;

• financing costs;

• regulatory approvals;

• contingency reserves;

• demolition, where required;

• conversion costs.

A hotel acquired for €5 million may require another €5 million before reaching stabilisation.

A hotel acquired for €8 million, but already refurbished and profitable, may represent a lower-risk investment.

For this reason, price per room, when used in isolation, can become one of the most misleading metrics in the hospitality sector.

Checklist: what to request before submitting an offer

Before making an offer for a distressed hotel, an investor should obtain at least the following information.

Corporate and financial documentation

• financial statements for the previous five years;

• up-to-date management accounts;

• detailed revenue by segment;

• bank exposure;

• tax and social-security liabilities;

• overdue trade payables;

• disputes and litigation;

• cash-flow statements;

• working-capital requirements.

Hotel operating documentation

• occupancy, ADR and RevPAR history;

• monthly production reports;

• customer segmentation;

• distribution-channel mix;

• OTA commissions;

• online reputation data;

• corporate contracts;

• events calendar;

• competitive benchmarking.

Property and technical documentation

• title documents;

• land-registry and cadastral plans;

• planning and cadastral compliance;

• certificates of occupancy;

• statutory certifications;

• condition of building services;

• maintenance records;

• deferred capital expenditure;

• technical reports;

• any environmental liabilities.

Contractual documentation

• franchise agreement;

• Property Improvement Plan;

• hotel management agreement;

• lease or business-lease agreement;

• strategic supplier contracts;

• equipment leases;

• employment contracts;

• collective agreements;

• software and distribution-system licences.

Alternative-use analysis

• planning designation;

• change-of-use potential;

• development capacity;

• parking requirements;

• demolition costs;

• approval timelines;

• alternative real estate values;

• demand for student housing, residential accommodation or serviced apartments.

Without these elements, an offer is not an investment decision.

It is a wager.

The first return is created during due diligence

In distressed hospitality, returns are not generated solely by acquiring an asset at a discount.

They are generated by identifying, before competing investors do, which part of the asset can create value and which part is likely to consume capital.

Due diligence must integrate:

• property analysis;

• hotel-market analysis;

• financial analysis;

• contractual analysis;

• technical analysis;

• planning analysis;

• operational analysis;

• reputation analysis;

• alternative-use analysis.

This is also the approach developed on RobertoNecci.it, where hotel valuation is not reduced to a property appraisal but considers the business, contracts, management, positioning and risk as interconnected components.

The most dangerous mistake is to commission separate assessments from different professionals without appointing anyone to combine them into a single investment decision.

The engineer assesses the building.

The accountant reviews the financial statements.

The lawyer examines the contracts.

The operator prepares the budget.

The real estate adviser estimates the price.

But the investor must determine whether the transaction as a whole creates or destroys value.

Conclusion: the hotel is not always the most valuable part of the hotel

The Baymont by Wyndham in Lubbock can be interpreted in four different ways:

• as an economy hotel to be rescued;

• as a turnaround opportunity;

• as a property requiring repositioning;

• as a development site for an alternative use.

Without access to the data room, financial statements, debt position, Property Improvement Plan, technical survey, planning analysis and comparative business plans, it is impossible to determine which strategy is genuinely the most attractive.

The central lesson is nevertheless already clear.

A distressed hotel should not be acquired merely because it appears inexpensive. It should be acquired when the recoverable value exceeds the total amount of capital required to recover it.

The rule applies in the United States and in Italy.

Before submitting an offer, an investor must establish whether the transaction involves the acquisition of a hotel, a business, a property or a development project.

Confusing these four dimensions means building the expected return around the wrong component.

Hotel Management Group supports investors, owners, financial institutions and hotel operators in the integrated assessment of hospitality transactions, including due diligence, valuation, business planning, contractual analysis, turnaround management, management control and hotel operations.

In distressed hospitality, returns are not created when the asset is eventually sold.

They are created before the acquisition, by understanding what should be preserved, what must be repaired and what should instead be transformed.

Roberto Necci - r.necci@robertonecci.it