Cornell Study Finds that Economic Value Added (EVA) Opens a Window into Hotel Investments
economic value added (EVA) as a measurement of hotels' investment performance. The study, "Using Economic Value Added (EVA) as a Barometer of Hotel Investment Performance," by Matthew J. Clayton and Crocker H. Liu, is available at no charge from the Cornell Center for Hospitality Research (CHR). The report is issued in conjunction with the Center for Real Estate and Finance (CREF) at the School of Hotel Administration.
"EVA is a well known investment tool, and it works veryeffectively as a barometer of investment performance for hotels," said Clayton, who is an associate professor and Stone Family Faculty Fellow at the Cornell School of Hotel Administration. "For most hotel deals, analysts look at the cap rate spread, and that's a useful measurement, but EVA goes beyond cap rates to include investors' risk premium and the cost of equity financing."
Added Liu, who is a professor at theSchool of Hotel Administration: "We document the EVA spread on hotels during the real- estate boom of ten years ago and the following bust. So, right after hotels reached the peak of value in 2007, the EVA spread turned negative in the second quarter of 2008 as hotel values had already started to decline."
Clayton and Liu found that theEVA remains generally negative at the moment, a figure that coincides with continued economic and property sector weakness. They conclude that this negative EVA spread suggests that investors may be buying properties either to reposition them for stronger cash flow or to realize their profit from the deal when they sell their repositioned property.
About the Center for Hospitality Research
The purpose of the Center for Hospitality Research is to enable and conduct research of significance to the global hospitality and related service industries. CHR also works to improve the connections between academe and industry, continuing the School of Hotel Administration's long-standing tradition of service to the hospitality industry. Founded in 1992, CHR remains the industry's foremost creator and distributor of timely research, all of which is posted at no charge for all to use. In addition to its industry advisory board, CHR convenes several industry roundtables each year for the purpose of identifying new issues affecting the hospitality industry.
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