What Is RML REALLY Worth If We Sell It?

Below is the detailed analysis I completed for presentation at the RML Committee meeting on February 10, 2007.  It shows the underlying moving parts that are important to estimating the value of RML as seen through the eyes of an existing, local, professional property management company in the Gatlinburg, Knoxville, Pigeon Forge, Sevierville area. 

For such a company, they already have all of their fixed costs for being in business covered by the 200-400 units or more that they already manage.  This gives them an immense economic and strategic benefit from acquiring RML since they will be able to operate Deer Ridge rental program for a LOT lower cost factor than RML can as a stand alone company with our puny 71 units currently under management.

A lot of the analysis I did is based on my fifteen plus years as CEO of a $100 million real estate investment and property management company managing over 44,000 units.  As a consequence of this extensive, applicable experience, and that gained from successfully selling my own property management company operation, I feel that I have a pretty good insight into what is involved in both valuing and in selling RML.

Response to the Larry Ohm Letter Regarding Valuation of RML

One of the other members of the Committee, who was not in attendance at the meeting, questioned some of the analysis I had completed on the sale of RML.  Below is my response to his points of issues.

•  We now show the real average rental rates by night along with the real economic occupancy numbers.  These numbers are net of all of the Hotels.com, etc. discounts.
•  We finally have a breakout from Joe as to the "Other Income" of $176k per year and the associated direct costs of $118k.  This is from golf packages, amusement tickets, firewood, vending, tape rentals, etc.  Right now, the spread of $63.5k goes completely to RML.  I am showing that the new management company would only get 40% of this with the HOA now receiving the new benefit of $38,000 a year.  Right now, the HOA gets zero.
•  In reviewing the letter from Larry Ohm, he questions why the new company could manage the property for less and what we as owners would have to discontinue.  The key point that I think Larry overlooked was the economies of scale that an existing management company could enjoy by adding our paltry 71 units to a base of 200 to 400 or more units they may already be managing.  In this case, the new company would not have to add more staff or technology to handle our reservations and accounting, for example.  As Larry rightly points out, "the most realistic method to project value is to take historical and adjust with realistic changes that the new owner would realize."  That is exactly the approach of the attached valuation.  Again, the key difference that Larry overlooked is the incremental cost approach to a company already in the business and what would be the net revenue stream and the durability of that income stream.
•  As Larry points out, "The basic premise of business valuation is that the new owner is paying for the assets and/or the ability to make a return on investment."  Since assets owned by RML are insignificant, it is really a return on investment opportunity we offer.  If the attached analysis is correct, then a buyer could see a 22% annual return on investment if it were unleveraged and a cash on cash return of 49% if they finance 70% of the purchase price.  Most would consider these very good ROI figures.  
•  Larry also asks, "If RML has so much potential, maybe we should keep it?"  The problem is that with our 71 units, we will never have the economy of scale mentioned above...unless we go buy companies like RML ourselves so we can get to 200 to 400 total units under management.  Since the owners would probably never approve a special allocation to go buy these companies, RML will always be too small to make economic sense.
•  Larry also questions whether we want to give up the control of "of such a significant part of the ownership of our property."  Control was one of the major themes during the meeting.  One major thing to consider is that there are two kinds of management involved here and two different aspects of Deer Ridge that are impacted, control wise:  the rental property management that would be assumed by the new company and the property management and maintenance.  As I recommended in the meeting, we should separate out these functions and have a General Manager of Deer Ridge that is not tied to the property management so we don't have the rampant conflicts of interest we have now with Joe and RML.  To maintain better control, we could also hire own common area maintenance folks or contract these out so our General Manager made sure that the level of maintenance and the "friendliness" of Deer Ridge was maintained.  That way, Larry's concern that the "level of maintenance would be reduced by a non-owning entity" would, in fact, not be an issue since we would control all of this with our own General Manager.  Also, the HOA's General Manager would be overseeing the new management company's actions to ensure things were being done in accordance with the management agreement.  This would give the HOA daily control over the performance of the new management company...which probably gives us MORE control than we actually have now with Joe wearing ALL hats.
•  The economic benefits of us selling RML for $1.2 million include as much as $12,000 being distributed to each owner and still keeping $192,000 in the HOA bank account for reserves.  Additionally, those in the rental pool see their management fee charges drop from 50% to 40%.  This additional 10% of total annual rents goes into the pockets of the owners and not the management company.