[MUSIC] Welcome back. Before we look at exit structures within the asset cycle as discussed in the previous session, it's important to focus on the valuation of the property. Contrary to popular belief, the bricks and mortar of a hotel and everything that's in it, are worthless. Of course, they are on the balance sheet and they're properly accounted for and depreciated. However, the real valuation of a hotel is based on its trading results, in particular the NOI. An exception to this are the so-called trophy assets that can get significantly more than a multiplication of it's NOI, as wealthy individuals want to be associated with a particular hotel. So, here you see two ways of looking at value. You've got the market value, which is what someone is willing to pay at a given time for any asset. And you have a mathematical value based on some sort of valuation model. Let's get some basics right on the valuation model. Value is in essence, about cash flow. The easiest way is to consider cash in your pocket or not. On one hand the cash is coming in through the operation, and control of working capital, chasing debts aggressively, whilst not paying your suppliers. On the other hand cash is going out through all the operational cost, Cap Ex, FF&E reserves, and financing costs. By forecasting the results and cash flow of a hotel over a period of time, we get a good idea of its value. But we also need to consider, there are calculations based on a discount rate. Which takes into account not just the time value of money, as one euro today does not have the value as one euro in the future. But also the risk and uncertainty of future cash flows. The capitalization or cap rate, which is the rate of return on a real estate investment property based on the income that the property is expected to generate. This rate is different based on a location and a variety of other factors. The lower the rate, the better it is. Apart from the future cash flow, we need to consider any growth factor that we can think of in order to realistically boost evaluation. Increased revenues, decreased costs, better market conditions, reduced risks, and a smarter Capex or investment schedule. This is not the place to go into complex mathematical formulas. And there are great tools inside of spreadsheets to help simple people like myself, but the essence is that value. Equals discounted cash flow plus expected future growth. Now, let's get a few examples going of what can impact the growth of our cash flow. Let's consider this hotel scenario. The NOI $2.5 million and the capitalization rate, as explained before, for the city of this hotel is 7%. 7% is the equivalent of the multiplier of the hundred divided seven which equals 14.3. So that times the NOI gives a rough value of 35.2 million. So far so good? Now we move to example one behind me where we will change the occupancy of the hotel and grow it with 5% but everything else will remain the same. Variable cost will increase accordingly as volume is growing but NOI grows by .3 of million. And, as a result, the valuation increases by about 4 million. In example two we will change the average rate of the hotel and grow it by 5%, whilst everything else remains the same. Variable costs are not affected, as the volume remains the same. So the revenue growth only affects revenue-related fees, and flow through will be well over 90%. The NOI grows by 0.4 of 1 million. As a result, the valuation increase by about 6.4 million euros. Now, in example three, let's look at RevPAR growth of 5%, whereby half is rate driven and the other half is volume driven. As expected, you see that this one is slotting in in between the previous two examples as variable costs are impacted. Here we're looking at a value increase of about five million. Finally, in example four, we look at cost control. Usually the first knee jerk reaction when things are going not as good as expected and a hotel needs to drive NOI. A 1% cost reduction across the board is a big exercise and will affect quality while certain costs are and remain fixed. And labor related changes can take a long time and cost to action. This 1% cost control will add a bit more than two millions to the valuation. So it's clear that driving revenues should always be the first option. If we compare these results, it's obvious the driving rates will always be the winner, followed by rev par, then volume, and then cost control. So value creation is achieved through optimization of cash flows from operation, as we just saw, combined with smart investments and FF&E expenditure. When looking at returns from CAPICs, you must only look at the incremental revenues, cost, and NOI, and compare that to the money that you have invested. Reduced business risk is a bonus. So in closing, please consider the following, many initiatives for increased revenues and or reduction of course included investments or one of course it is important to have the ROI approach in any of these business decisions. And increase in NOI should be related to the cost in order to get the proper return. Is value created or not? It is all about converting to the bottom line. Now that we have covered this, we can cover exit strategies and this will happen in the next session.