A study from the Cornell School of Hotel Administration demonstrates the use of economic value added (EVA) as a measurement of hotels' investment performance.

"EVA is a well known investment tool, and it works very effectively 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 the School 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 the EVA 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.

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.

About The Center for Hospitality Research
 A unit of the Cornell School of Hotel Administration, The Center for Hospitality Research (CHR) sponsors research designed to improve practices in the hospitality industry. Under the lead of the center's corporate affiliates, experienced scholars work closely with business executives to discover new insights into strategic, managerial and operating practices. To learn more about the center and its projects, visit www.chr.cornell.edu.