01 Jul 2020
Words
Glenn Millar
Conversations On The Couch: How are valuers dealing with management rights businesses?
Glenn Millar:
I'm Glenn Millar from ResortBrokers and I would like to welcome you to the second of our conversations. We’re looking at COVID-19 and how that's affected the sector, and today's conversation is with Chris McKillop and Stacey Sager from Herron Todd White. Welcome. Can you give us a bit of an overview on yourselves and your company and how you fit into the management rights industry?
Chris McKillop:
Certainly. I'll start. I'm director of Herron Todd White on the Sunshine Coast. I started with Herron Todd White here in 1999, was registered in 2001 and have been valuing management rights that whole time. The director I learned under, Peter Degotardi, did management rights valuations and because there are a really big report often, he happily gave them over to me once I got registered.
Stacey Sager:
I guess your story kind of falls into my story a bit, because I've been with Herron Todd White for five years, registered since 2017. Same thing, I was Chris' assistant, he did management rights, he didn't want to write the report, he gave it to me.
Glenn Millar:
So, just to let us know, what have the changes been in the valuation process, since the start of COVID-19?
Chris McKillop:
I think the main impact around the management rights industry is it's really brought into focus the fact that they are typically bought and sold on 12 months worth of figures. At the moment, if you did 12 months from the end of April onwards, you've got April, which had average occupancy across the coast of about 7%.
We saw that coming out in the STR global statistics yesterday. So, that really impacts on the net profit for the last 12 months. So, I think that's really brought back to the fore that as a going concern business, it's pretty much the only business that we value that's bought and sold on the last 12 months’ figures.
Typically, caravan parks, motels, hotels, everything else that we do is done on ... you typically get a minimum of three years’ worth of trading figures, some give us longer. And then, we do a projection going forward on what's a net maintainable profit. And that's probably been the biggest impact that I think it will show that management rights, you need far more information to decipher where the property really sits in the market in terms of being able to maintain its net profit.
Glenn Millar:
Great. So, that's three years figures. Projections, would you do the projections or would you expect the seller to have his accountant do the projections?
Chris McKillop:
When we do other accommodation properties, we do the projections. Accountants’ projections are great. They typically have a deeper dive into the business than what we can. But, with a lot of other properties that we do, we get forward bookings, those sorts of things. We have all that information in front of us when we're doing them. And so, that's what we get. In the past, we've always asked for three years’ worth of information. We typically don't get three years’ worth of profit and loss statements.
But, we typically get three years’ worth of occupancy, three years’ worth of the marketing report, because that gives us our average daily rates over the last three years. And, we typically chase all that extra information anyway. And we would then reverse engineer profit and loss statements for the last three years. So, we haven't always relied wholly and solely on the accountants report.
Glenn Millar:
Let me throw a curly one at you - multipliers. How's it going to affect the multipliers going forward in terms of, for example, a property pre-COVID with a 5.9 multiplier. Figures have been solid, we've got three years. What are your thoughts on maybe where that might sit now?
Chris McKillop:
Stacey and I were talking about this coming up. Going, "I wonder if we get asked that question where we land”. The hard part is really the lack of precedent for this, I've been talking to a lot of people about the difference between the GFC and COVID-19. rime client to get funding, you know?
For a management rights, for example, you had to basically come along, you had to have ... only borrowing 50%, you were willing to pay P&I on your loan, straight off the bat.
All these sorts of things, you were willing to do to get a management rights deal across the line, sort of for that first 18 months. They were really hard to get done. You had to be a really good client. You had to be willing to do all those things, to get a deal across the line.
At the moment, there's liquidity in the market. You can go to the bank and get a loan. I've seen commercial loans getting done with a two at the front of their repayments interest rates, like 2.9%. So, it's not so much a lack of liquidity, it's a lack of confidence around someone going to the bank and saying, "hey, I want a two million dollar loan to buy management rights”. So, it's the lack of confidence around the income. And where that income is going to be over the next 18 months, 2 years.
Glenn Millar:
And how quickly it's going to bounce back, I guess.
Chris McKillop:
It's just a case by case. So some are selling as listed, no discounting. Some are heavily discounting based upon, usually if the tenant's trading, what's happening with the tenant, what's happening with the cash flow. And then too, what the vendor wants and what the purchaser wants. They just come to an agreement based on everyone's unique circumstances.
Glenn Millar:
And how are you evaluating permanent complexes at the moment?
Chris McKillop:
Again, case by case. A lot of our permanent complexes are located in and around Kawana. The tenants there typically aren't as impacted in terms of loss of job and those sorts of things. A lot of the tenants in and around there are tenants associated with the hospital and those sorts of things.
Where we have seen some impact, not so much on permanents, but just in rent rolls, talking to rent roll operators and things like that. Noosa has had a fairly big impact. A couple of the larger rent rolls up here are seeing 10 to 15% of their tenants getting rental relief, which isn't happening through the Kawana stretch.
I've been trying to contact a few people out and around the university who have got a lot of the university students and trying to find out what's been happening there. I haven't had any call backs yet, but I am still on the case there to try and find out what the impact has been through there. So again, just case by case, there's no blanket approach.
We're not saying, "we want this and we want vacancies at this rate”, and those sorts of things to an accountant or anything. We're really just looking at it case by case, give us your history, give us your trade data.
Glenn Millar:
Still three years’ figures at the minute?
Chris McKillop:
Three years’ figures. We want three years’ figures. We want three years’ worth of data around your occupancy, your vacancy rates. All those sorts of things. With your permanents we'll want your arrears, where it currently sits. Those sorts of things. Also, information around any tenants that have asked for relief.
Any negotiations going on around that. And really working through that. It's probably going to be a longer discussion with the operator around what's happening with their business.
Glenn Millar:
Great. I know a lot of vendors have got quite proactive now and are documenting all of that. We've been very active in preparing forms for our clients to document everything that's happening along that way, so that can be handed on if and when they want to sell.
Chris McKillop:
And they have to be because it's better to be ... the more information you have, sometimes doing a lot of other complexes, such as a hotel or a large caravan park or something. The $3 million caravan park is often harder to value than the $20 million caravan park, because the $20 million caravan park has got great systems in the background.
They've got awesome figures, great information. You ask for things, you get 5 to 10 years’ worth of figures. You can just see such a great pattern in the business. And the more information that we have, the more comfortable we feel and we can be more succinct with how we represent that property in a document.
Glenn Millar:
How are the banks influencing your decisions? Are they asking for more information?
Chris McKillop:
No, not so much. Most of the banks have let valuers decipher the market. We're sending out market updates to them and things like that to give them constant feedback on where we see the market. And that's really based around constant discussions with people at the coalface, such as yourselves, commercial agents, operators, things like that.
Banks haven't changed their requirements around their standing instructions of what's required for a valuation to be accepted by them. But some of the banks already ... which isn't well known in the management rights industry … some of the banks already ask for three years figures when doing a management rights valuation. And so when you don't get them, you're sort of having to, as I said, we reverse engineer that.
Glenn Millar:
Last but not least. If you had a seller wanting to sell at the moment, would you recommend they get a valuation upfront?
Chris McKillop:
Definitely for the unit. Definitely for the unit.
Stacey Sager:
Yeah, I think, yeah. We've been doing a lot of unit ones.
Glenn Millar:
Okay, what about the business?
Chris McKillop:
The business, it would. I mean, it's more business for us, so yeah, happy to do that. But definitely we could get involved in that and do a valuation for them. It'd be important for them to work to see how we do it, in terms of any loss of income at the moment.
Basically, say if you were a $700,000 business now, and all of a sudden you're a $500,000 business at the end of April or end of May. That's not representative of what we're adding the multiplier to. And again, we're assessing what we consider to be the net maintainable profits. So, if we've got 3 to 5 years or longer of trade data saying that this is a $700,000 net profit business year in, year out.
It's got a stable letting pool, it's got a stable occupancy, the average daily rate increases slightly, their cost base is increasing slightly in line with that, but the profit margins are staying the same. Then we've got that and we can really paint the picture that once things improve, this is a $700,000 business.
The only impact will be in the next 3 months, 6 months, 12 months, depending on the restrictions. And that is then a below the line adjustment. So, you're doing your calculation based on a $700,000 net profit, adopting a multiplier, and then you've got a reduction from that value based on the loss of income over the next 3, 6, 12 months that you think is appropriate as a valuer.
Glenn Millar:
So, would you suggest people hang on, if they're looking to sell at the moment? And how long would you anticipate they would have to hang on to get back into, I guess, pre-COVID multiplier levels? To me that's, "how long is a piece of string?" But ... Chris McKillop: Again, individual decision.
Stacey Sager:
Yep, case by case.
Chris McKillop:
If you want to sell because you want to move on, or it's an opportunity cost to you that you're willing to take to sell now to move on to something else, then that's an individual's decision on that. But if you didn't have to sell and you're still motivated and you're still loving your job and those sorts of things. And you're doing a good job, and there's no issues with body corporate or anything like that. You've got good, solid top-ups available, you would hang on if you're in a good financial position, got a good relationship with your bank.
There's a lot of factors that will be impacting managers at the moment, that they will have to weigh up all those things for their own decisions around that. And we can help provide where we see the property sits in the market at the moment, from that point of view, as a conduit between where the buyer sees it, where we see it, and where the bank ultimately will lend. So we're happy to provide that sort of information as well.
Glenn Millar:
Great, thanks for your valuable insights Chris and Stacey.
Glenn Millar
0412 277 804
