Seasonality is defined as variations that appear at regular times throughout the year. It may show up in expenses, like with utility cost fluctuations. However, most seasonality appears on the revenue lines, which reflect demand variation throughout the year.
Regular patterns are at the heart of spotting seasonal differences.
At a minimum, you will need two years of operating statements to identify a consistent seasonal pattern. Still, three years or more would be most beneficial. A longer comparison period allows you to pick out inconsistencies caused by special, one-time events. Natural disasters and sporting events are the most common occasional events that will trick you.
In all cases, you need monthly data to get the level of clarity you need to identify seasonality in a hotel’s operation.
Detailed Financial Statements
Detailed financial statements offer an in-depth view of the subject property’s seasonality. Any institutionally managed property probably has a high level of granularity in their financial statements. However, less sophisticated operations should provide an annual roll-up at best.
Many small operators use a non-standard chart of accounts in QuickBooks. This sometimes makes sophisticated analysis a bit more complicated. At the very least, request monthly financial statements to identify month-to-month differences.
A month-by-month financial statement over two or more years will show how demand in each line item changes throughout the year.
Look for occupancy peaks and valleys to highlight opportunities to raise rates in high-demand periods. This gives your sales team the ability to strategically sell into peak months, which drives up rental rates. This perspective also helps you prepare appropriately for a valley.
Detailed financial statements also give you a good picture of expenses throughout the year.
Early-stage deal evaluation is meant to uncover and produce good questions for the seller. Look for expenses that are unusually high or low compared to previous months or years. They could be one-time anomalies or an indication of a consistent pattern.
Special Events vs. Consistent Seasons
Consistency is critical when looking for seasonality, whether in revenue or expenses.
An examination for seasonality may be as simple as reviewing year-over-year percent change and moving on. However, there are times when the percent change is so significant that it requires additional explanation.
Revenue and expense increases of 8% or more in any month are worth looking into. Anything less than 8% can just be a great sales effort on the revenue side or an uncommonly hot summer in expenses. Anything above 8% may result from special, one-time events in the market or property.
External factors that significantly influence demand tend to leave a paper trail. As mentioned, major conventions, sporting events, elections, or natural disasters are prime suspects. In many cases, they’ll be easy to find by quickly searching the news from that time. You may even want to consider the atypical timing of federal or religious holidays.
You may be thinking, “why don’t I just ask the seller?”
That’s a good point, and you can save time by directing questions like this to the seller. Still, you should also be looking for an unfair advantage. A sophisticated analysis includes a hard look at market and hotel seasonality. Many buyers don’t put in the time, though.
Go to the seller as the last resort. There’s always a possibility that the seller or broker would alert other buyers of the anomaly.
Use a Monthly Model
Regardless of how you identify and measure seasonality, you need a way to deal with it in your financial model. For this, I always turn to a monthly cash flow model.
Monthly cash flows provide a level of detail in your pro forma that more easily mimics real-life than annual figures. Most of the logic that you use to build an annual or quarterly model can be easily translated into monthly numbers.
Start by building annual projections and expand those using the right distribution for each line item. For example, lines that are more aligned with occupancy can multiply the annual per square foot (unit/room) figures multiplied by occupied square feet (unit/room). You can just divide fixed expenses, like taxes and insurance, by twelve.
It may take some time to set this up initially, but it’s easily transportable once you have it in proper working order for one model.
Remember, you can always roll up to annual or quarterly summary figures. It’s more difficult to go the other way. Best to start on the right foot.