Amara Holdings

[johnnydash]

I am well aware of what you posted. I have already said which method is the norm that analysts use. Even the article said 80% of investors use method 2, which does not include capex. This is in agreement to my knowledge in how analysts use NOI and from there the cap rate is implied/ derived. From one transaction and then aggregating for the industry. If you want to use NOI with capex, you must adjust your cap rate taking into consideration market conditions. I am not sure how you can do that. Yes there can be more than one way to derive cap rate, but what was the method that analysts use when they derived the industry cap rate by studying past transactions? You can use your own value sure, but then you will get Boon's cap rate and not market cap rate, and Boon's willingness to pay for a hotel and not the market value of hotels. Like i said don't confuse target value with market value.

I really have nothing more to say if you insist that you are right. Lets just agree to disagree. But know that if i remain silent, its not because you are right.

[Boon]

I am well aware of what you posted. I have already said which method is the norm that analysts use. Even the article said 80% of investors use method 2, which does not include capex. This is in agreement to my knowledge in how analysts use NOI and from there the cap rate is implied/ derived. From one transaction and then aggregating for the industry. If you want to use NOI with capex, you must adjust your cap rate taking into consideration market conditions. I am not sure how you can do that. Yes there can be more than one way to derive cap rate, but what was the method that analysts use when they derived the industry cap rate by studying past transactions? You can use your own value sure, but then you will get Boon's cap rate and not market cap rate, and Boon's willingness to pay for a hotel and not the market value of hotels. Like i said don't confuse target value with market value.

I really have nothing more to say if you insist that you are right. Lets just agree to disagree. But know that if i remain silent, its not because you are right.

The article also said:

“So which method is right? Since 80% of investors use Method 2, capitalizing NOI before reserves, TIs, and leasing commissions, shouldn’t that be the method commercial property appraisers use?

No, not necessarily. This isn’t the type of situation where “majority rules.” There are good reasons for applying any one of the three methods. For example, appraisers almost routinely consider replacement reserves in their reconstructed income statements, which equates to Method 1. This is because the direct capitalization method is premised on the assumption that the single year’s stabilized income reflects its potential earnings, now and in perpetuity. Therefore, an allowance for replacements is charged against NOI on the premise that periodic replacements have to be made of short-lived items such as water heaters, heating units, roofs, paving, parking lots, landscaping, exterior finishes, etc., to maintain the optimum rental status of the property and to reduce the escalation of maintenance and other operating expenses that may result from the deferral of necessary capital expenditures.”

So could one consider Method 1 to be “wrong” ?

With or without capex, if you give a same NOI to the following property consultants/valuers
1) CBRE
2) JLL
3) KF
4) Colliers
5) Savills

and ask them to do a “market valuation” using cap rate on Amara hotel – do you expect them to come out with same market value ?

The answer is yes if they all used the same cap rate.

In reality each consultant would have its own set of cap rate database and may differ in views as to what is the “appropriate comparable cap rate” to use – hence arriving at different market value – if the difference in cap rate is up to 1% point – the value difference could be significant.

Can you then say that the consultant with the “lowest market value” is trying to confuse you with its “target value” ?

Agreeing with me does not necessarily mean we are both right – as we both could be wrong……………

I have never insisted that I am right. - As I have always said, an analysis is only as good as its underlying assumptions.

VB, to me, is not about “right” or “wrong” – it is about sharing, learning, diversity of views, exploring, expose and subject your views/analysis to be scrutinized by others – challenging underlying assumptions – playing devil's advocate - thinking out of the box - to confuse or convince – to be convinced or confused – it is all part of the learning process…….

I would rather be “wrong” in the virtual world of VB and be “right” in the real world than the other way round…………………to be wrong in both world would be the worst…………….

It is your right to remain silent – but it is not going to change anything IMO………………

(not vested)

[johnnydash]

The context is important. If I am a buyer, I can use a cap rate and noi any way I like as long as the method reflects my willingness to pay for something. Like I said if you use your non conventional type of noi to arrive at a figure of about 200 plus million, that is what you are willing to pay for the hotel. But then, thats a very strange way to determine how much you are willing to pay for a hotel. I can assure you that there are other ways in which investors use to determine how much they should pay for a hotel to get their required rate of return.

If you want market value, you must know the basis on which the cap rate was derived. Cap rate is an estimation of the yield/required return that investors on the whole demand on an asset class. So transactions were done (in which buyers have their own financial models), and post-transactions, analysts impute NOI, and transaction value to calculate the cap rate, which is an estimation of the required return of investors. The analysts may then use the derived cap rate, and NOI of a comparable hotel, to estimate what is the likely price at which this hotel will sell for in the market: - the market value.

Now the derived cap rate was based on a certain methodology(formula for NOI). So he cant use any other form of NOI that he wants in the subsequent calculations. The formula of the NOI used must be the same as that from the derived cap rate.


In general agreement with your latter points but the basis must be that there must be an open mind, a receptivity to ideas and a willingness to change one's mind when faced with new information. And perhaps underlying all this is an unbiased basis on which to form judgement.

We are here to learn, but we strive towards the truth, or correctness, and distinguish between right or wrong. Some things are fundamentally wrong, some things fall within the grey area. For instance what is fundamentally wrong will be an analyst who use his own unique iteration of NOI to calculate market value of a property. What is grey area is an analyst who decide to use a higher than industry cap rate to estimate market value of a particular hotel because he thinks that this particular hotel suffers from some shortcomings that will result in the hotel being less attractive than the "average" industry hotels to potential buyers.

[solomonng]

Hi all,

I am new here and new in buying stocks.

I read with interest this thread and the thread on St******.

I believe that both are good stocks but which one of these is a better one.

St****** is paying more dividend but I believe that Amara had a higher chance of spinning off as a reit.

What do you guys think?

[Boon]

The context is important. If I am a buyer, I can use a cap rate and noi any way I like as long as the method reflects my willingness to pay for something. Like I said if you use your non conventional type of noi to arrive at a figure of about 200 plus million, that is what you are willing to pay for the hotel. But then, thats a very strange way to determine how much you are willing to pay for a hotel. I can assure you that there are other ways in which investors use to determine how much they should pay for a hotel to get their required rate of return.

If you want market value, you must know the basis on which the cap rate was derived. Cap rate is an estimation of the yield/required return that investors on the whole demand on an asset class. So transactions were done (in which buyers have their own financial models), and post-transactions, analysts impute NOI, and transaction value to calculate the cap rate, which is an estimation of the required return of investors. The analysts may then use the derived cap rate, and NOI of a comparable hotel, to estimate what is the likely price at which this hotel will sell for in the market: - the market value.

Now the derived cap rate was based on a certain methodology(formula for NOI). So he cant use any other form of NOI that he wants in the subsequent calculations. The formula of the NOI used must be the same as that from the derived cap rate.


In general agreement with your latter points but the basis must be that there must be an open mind, a receptivity to ideas and a willingness to change one's mind when faced with new information. And perhaps underlying all this is an unbiased basis on which to form judgement.

We are here to learn, but we strive towards the truth, or correctness, and distinguish between right or wrong. Some things are fundamentally wrong, some things fall within the grey area. For instance what is fundamentally wrong will be an analyst who use his own unique iteration of NOI to calculate market value of a property. What is grey area is an analyst who decide to use a higher than industry cap rate to estimate market value of a particular hotel because he thinks that this particular hotel suffers from some shortcomings that will result in the hotel being less attractive than the "average" industry hotels to potential buyers.

When in doubt, it is always a good idea to go back to the basic - and this is how I understand it from the basic principle.

Assume:
H1 = Hotel 1
H2 = Hotel 2
H1 and H2 are comparable hotels in the same vicinity.
H1 was recently sold for a sales price of k

Cap Rate (H1) = NOI(H1) / k => representative of market cap rate of comparable properties

MV(H2) = Market Value of Hotel 2
MCR (H2) = Market Cap rate of H2 = market cap rate = Cap Rate (H1), assumed so, since both are comparable properties

MV(H2) = NOI (H2) / Market Cap Rate (H1) = k x NOI(H2) / NOI(H1)

Value is a concept.

Cap Rate is conceptualized to measure Market Value (MV) and not Target Value (TV) or Target Price (TP)

If we try to make a market value estimate of hotel 2 using market cap rate derived from the transaction of hotel 1, it can be seen that basically

MV(H2) = K x NOI(H2) / NOI(H1)

Essentially, the market only provided k (the actual transaction price - a constant) – meaning, market value estimate actually boils down to NOI estimate – hence, the accuracy of market value estimate is entirely dependent on the accuracy of NOI estimate.

In reality, NOI may not be readily available - analysts, appraisers, investors may have to derive it from the financial statements of the sellers - hence different analysts may end up with different NOI estimate.

Since there are different definition or version of NOI (such as before or after adjustment for maintenance capex; trailing or future NOI; projected stabilized NOI etc), one would get different cap rate estimate and hence different market value estimate based on different version of NOI inputs.

Hence, we could have
NOI(A) = NOI after maintenance capex has been deducted => Method A
NOI(B) = NOI before maintenance capex has been deducted => method B
NOI© =……………………………etc

Regardless of which definition/version of NOI is being used, IMO, all are conceptually correct - the key is consistency in its application and no mismatching of different version of NOI

Who knows as to which version of NOI or method is more robust and would give a better and reliable market cap rate estimate (and hence market value estimate) – but as the number of comparable transaction increases, and the number of analysts increases, a range of estimate would be resulted from them.

The fact that two analysts (using same or different method) could arrive at estimates which could differ significantly doesn’t mean that the analyst with the lower estimate is trying to do a target price estimate instead – in fact both are trying to measure market value.

Target value or target price estimate is a totally different ball game all together, when financing, tax, investment holding period, expected return, risk appetite - all of which are unique to each investor are taken into consideration.

Direct Capitalization of NOI is one of the many tools for performing market value estimate and should not be used as the only sole tool.

Yes, cap rate could be used to compare return on investment (cash on cash return) between different asset class but which method (A or B) offers a better measure? Method-a, IMO.

My estimate of 200 over million may be on the low end of the range but it was never meant to be a target value estimate - it is not my final estimate - until further value estimate with other method has been carried out - it only remains as a rough estimate.

I don’t think there is anything magical about cap rate computation – the basic building block is still centred on the fundamental relationship of cap rate = NOI / Value

Can one deviate from it?

(not vested)

[johnnydash]

So if i understand you correctly, in arriving at your valuation you have applied the NOI consistently. Therefore you obtained a cap rate of 6% by using a hotel transaction that occured, and you calculated the cap rate by taking noi considering capex divided by the transaction?

If so that will certainly clear things up.

The context is important. If I am a buyer, I can use a cap rate and noi any way I like as long as the method reflects my willingness to pay for something. Like I said if you use your non conventional type of noi to arrive at a figure of about 200 plus million, that is what you are willing to pay for the hotel. But then, thats a very strange way to determine how much you are willing to pay for a hotel. I can assure you that there are other ways in which investors use to determine how much they should pay for a hotel to get their required rate of return.

If you want market value, you must know the basis on which the cap rate was derived. Cap rate is an estimation of the yield/required return that investors on the whole demand on an asset class. So transactions were done (in which buyers have their own financial models), and post-transactions, analysts impute NOI, and transaction value to calculate the cap rate, which is an estimation of the required return of investors. The analysts may then use the derived cap rate, and NOI of a comparable hotel, to estimate what is the likely price at which this hotel will sell for in the market: - the market value.

Now the derived cap rate was based on a certain methodology(formula for NOI). So he cant use any other form of NOI that he wants in the subsequent calculations. The formula of the NOI used must be the same as that from the derived cap rate.


In general agreement with your latter points but the basis must be that there must be an open mind, a receptivity to ideas and a willingness to change one's mind when faced with new information. And perhaps underlying all this is an unbiased basis on which to form judgement.

We are here to learn, but we strive towards the truth, or correctness, and distinguish between right or wrong. Some things are fundamentally wrong, some things fall within the grey area. For instance what is fundamentally wrong will be an analyst who use his own unique iteration of NOI to calculate market value of a property. What is grey area is an analyst who decide to use a higher than industry cap rate to estimate market value of a particular hotel because he thinks that this particular hotel suffers from some shortcomings that will result in the hotel being less attractive than the "average" industry hotels to potential buyers.

When in doubt, it is always a good idea to go back to the basic - and this is how I understand it from the basic principle.

Assume:
H1 = Hotel 1
H2 = Hotel 2
H1 and H2 are comparable hotels in the same vicinity.
H1 was recently sold for a sales price of k

Cap Rate (H1) = NOI(H1) / k => representative of market cap rate of comparable properties

MV(H2) = Market Value of Hotel 2
MCR (H2) = Market Cap rate of H2 = market cap rate = Cap Rate (H1), assumed so, since both are comparable properties

MV(H2) = NOI (H2) / Market Cap Rate (H1) = k x NOI(H2) / NOI(H1)

Value is a concept.

Cap Rate is conceptualized to measure Market Value (MV) and not Target Value (TV) or Target Price (TP)

If we try to make a market value estimate of hotel 2 using market cap rate derived from the transaction of hotel 1, it can be seen that basically

MV(H2) = K x NOI(H2) / NOI(H1)

Essentially, the market only provided k (the actual transaction price - a constant) – meaning, market value estimate actually boils down to NOI estimate – hence, the accuracy of market value estimate is entirely dependent on the accuracy of NOI estimate.

In reality, NOI may not be readily available - analysts, appraisers, investors may have to derive it from the financial statements of the sellers - hence different analysts may end up with different NOI estimate.

Since there are different definition or version of NOI (such as before or after adjustment for maintenance capex; trailing or future NOI; projected stabilized NOI etc), one would get different cap rate estimate and hence different market value estimate based on different version of NOI inputs.

Hence, we could have
NOI(A) = NOI after maintenance capex has been deducted => Method A
NOI(B) = NOI before maintenance capex has been deducted => method B
NOI© =……………………………etc

Regardless of which definition/version of NOI is being used, IMO, all are conceptually correct - the key is consistency in its application and no mismatching of different version of NOI

Who knows as to which version of NOI or method is more robust and would give a better and reliable market cap rate estimate (and hence market value estimate) – but as the number of comparable transaction increases, and the number of analysts increases, a range of estimate would be resulted from them.

The fact that two analysts (using same or different method) could arrive at estimates which could differ significantly doesn’t mean that the analyst with the lower estimate is trying to do a target price estimate instead – in fact both are trying to measure market value.

Target value or target price estimate is a totally different ball game all together, when financing, tax, investment holding period, expected return, risk appetite - all of which are unique to each investor are taken into consideration.

Direct Capitalization of NOI is one of the many tools for performing market value estimate and should not be used as the only sole tool.

Yes, cap rate could be used to compare return on investment (cash on cash return) between different asset class but which method (A or B) offers a better measure? Method-a, IMO.

My estimate of 200 over million may be on the low end of the range but it was never meant to be a target value estimate - it is not my final estimate - until further value estimate with other method has been carried out - it only remains as a rough estimate.

I don’t think there is anything magical about cap rate computation – the basic building block is still centred on the fundamental relationship of cap rate = NOI / Value

Can one deviate from it?

(not vested)

[CityFarmer]

Moderation log:

I would like to thank Boon and johnnydash for a very constructive debate here, even though "spark" was observed. VB welcomes "truth-seekers". Truth-seekers are looking for ways to clarify with facts, and numbers, and focusing on the topic, rather on the person(s).

Thank you Boon and johnnydash

Regards
Moderator CF

[safetyfirst]

I thought Tiggerbee made a very good point about comparing amara holdings to many of the listed hospitality shares in hongkong. Many of the hospitality shares in hongkong are trading very cheaply no matter what valuation you use. They have better branding than amara, many of them with balance sheet net cash and they are more international than Amara. An example i can think of will be great eagle holdings (0041), much better and cheap than amara holdings

[Boon]

I thought Tiggerbee made a very good point about comparing amara holdings to many of the listed hospitality shares in hongkong. Many of the hospitality shares in hongkong are trading very cheaply no matter what valuation you use. They have better branding than amara, many of them with balance sheet net cash and they are more international than Amara. An example i can think of will be great eagle holdings (0041), much better and cheap than amara holdings

Dorsett, Eagle Brand Holdings and many other HK listed hospitality related counters may be trading at a bigger discount to Amara, as pointed out by Tiggerbee - presumably I guess these are based on their CURRENT earning capacities without taking into consideration of “growth factor”, am I not right?

The point johnnydash has been trying to make is the potential “incremental earning contribution” from Amara’s new Bangkok/Shanghai projects when fully completed and stabilized.

Hotel:
Current capacity = 388 (Amara Singapore) + 140 (Amara Sanctuary) = 528 keys
New capacity = 250 (Amara Bangkok) + 336 (Amara Shanghai) = 586 keys

Office:
Current capacity = 100 am = 42,755 sqft (NLA)
New capacity = Amara Shanghai = ????

Retail:
Current capacity = 100 am = 126,431 sqft(NLA)
New capacity = Amara Shanghai = ????

The number of key for the hotels would be slightly more than doubled. The company does not give the new GFA or NLA on its retail/office project in Shanghai – my road side source indicates the combined office + retail space in Shanghai is about the same size as 100 am (office + retail) - the mix may be different - so roughly, we are talking about doubling of “space capacity”

Would doubling of space capacity translate into doubling of earning capacity?

No doubt, the operating environment in Bangkok and Shanghai is very different compared to Singapore – but even if earning boost of 50%, if not 100%, could be achieved, it would still be significant.

The opening of Amara Bangkok (the smaller new earning contributor) doesn’t seem too far away but it would still be a year or two or who knows even three before the Shanghai project (the bigger new earning contributor) would be fully completed and stabilized.

Questions, which we are trying to work out, remain:
1) How significant would the contributions from these new projects be compared to its current base? 10%, 20%,….50%..........100%,………?
2) What is the cost of these new projects and how much of it have already been paid for to date?

In addition to being "cheaper", if any of the HK listed hospitality companies is also in a similar situation as Amara - i.e. doubling of space capacity within the next two or even three years - we should seriously look into it, I reckon.............

(not vested)

[Tiggerbee]

I thought Tiggerbee made a very good point about comparing amara holdings to many of the listed hospitality shares in hongkong. Many of the hospitality shares in hongkong are trading very cheaply no matter what valuation you use. They have better branding than amara, many of them with balance sheet net cash and they are more international than Amara. An example i can think of will be great eagle holdings (0041), much better and cheap than amara holdings

Dorsett, Eagle Brand Holdings and many other HK listed hospitality related counters may be trading at a bigger discount to Amara, as pointed out by Tiggerbee - presumably I guess these are based on their CURRENT earning capacities without taking into consideration of “growth factor”, am I not right?

The point johnnydash has been trying to make is the potential “incremental earning contribution” from Amara’s new Bangkok/Shanghai projects when fully completed and stabilized.

(not vested)

As of end June 2014, Dorsett manage and operate 23 hotels with 6,599 rooms globally, of which 92% of the rooms are owned.

8 hotels with 2,088 rooms are currently under various stages of planning & development. 218 rooms will be added in 2H 2015, 1210 rooms will be added in 2016 and 660 rooms to be added in 2017. 49.2% of the rooms are owned.

NAV at cost is $1.98, $7.2 if including valuation surplus. From time to time, company will sell some hotels to realize its asset value, with special dividends paid out during those years. Of course, this unlocking of value can only be achieved in good times.

http://www.dorsett.com/investor-relation...esentation