Project Drumlin — Lodging Asset-Level Valuation
A 2-hour Real Estate & Lodging / Strategic Alternatives case study with a complete model answer
Modeled After
Morgan Stanley
Strategic alternatives materials for a hotel C-corp: an asset-by-asset DCF with forward cap-rate valuation grids per property, paired hotel C-corp and hotel REIT comp universes each with its own credit statistics page, levered and unlevered DCFs run in parallel because the assets are mortgage-encumbered, the net operating loss valued as a standalone component, and a monthly liquidity analysis tied to mortgage covenant tests
Structure and exhibit set are modeled after Morgan Stanley. The company, the financials and every figure in this case are entirely our own.
The Situation
Drumlin Hotels & Resorts, Inc. (Nasdaq: DRML) owns three full-service hotels and runs a third-party management and franchise business alongside them.
Drumlin Hotels & Resorts, Inc.
- Sector
- Real estate and lodging — three owned full-service hotels and resorts, plus a capital-light third-party management and franchise business, held in a taxable C-corporation
- Size
- Geography
- United States — three domestic submarkets with materially different supply pipelines, and a US-dollar mortgage stack that matures inside two years
- Ownership
- Situation
The Prompt
95 per share in cash. Value the company.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 120 minutes.
PART 1
RevPAR, built from its two drivers
PART 2
The property operating model, and the income basis
PART 3
The decomposition, in RevPAR and in EBITDA
PART 4
Flow-through, both measures of it
PART 5
The submarket supply pipeline
PART 6
The asset discounted cash flow, and two cross-checks
PART 7
The levered run, and the mark on the mortgages
PART 8
The fee business, the overhead and the loss
PART 9
Two comparable universes, and two transaction sets
PART 10
The clock, and the recommendation
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished answer deck and Excel model are in the solution set below.
- 01
Decide what you are valuing before you value it
- 02
Write hotel EBITDA out before you forecast anything
- 03
Quote the right measure of the flow-through difference
- 04
Treat the supply pipeline as the denominator, not a footnote
- 05
Be explicit about what every capitalization rate is struck on
- 06
Cross-check the asset values, and explain the gap rather than averaging it
- 07
Know what the levered run is evidence of
- 08
Separate the timing argument from the price argument
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
RevPAR, and why occupancy and rate are not interchangeable
RevPAR is revenue per available room, and it is occupancy multiplied by average daily rate. The same RevPAR can be produced by a full hotel at a low rate or a half-empty one at a high rate, and the two are worth different amounts because the cost structure underneath them is different. Selling the same rooms for more money adds revenue and almost no cost. Selling more rooms adds revenue and the cost of cleaning, supplying and serving each one. So a RevPAR forecast that does not say which driver is doing the work has not said enough to be valued, and the first thing to do with any lodging forecast is take it apart.
Flow-through, and the two ways to measure it
Flow-through is incremental EBITDA over incremental revenue. On rate it is one minus the costs that scale with rooms revenue — commissions, interchange, channel fees — and it is the same at every hotel in a portfolio because nothing inside a building varies with the price of a room. On occupancy it is the contribution per occupied room over the rate plus the ancillary revenue that room brings, which is property-specific and materially lower. But there is a second measure: EBITDA per dollar of RevPAR. That one puts the two deliveries on the same footing, and the gap it shows is far smaller, because the occupancy dollar brings ancillary revenue with it that never enters the rate dollar's denominator. Both measures are correct and they answer different questions, which is why quoting one without naming it is a real error.
Net operating income, the FF&E reserve and the capitalization basis
Hotels consume their own fixtures. Carpets, soft goods, case goods and equipment have to be replaced on a cycle, and the reserve for that replacement — usually a percentage of total revenue, and usually escrowed under a mortgage — is a real recurring cost. Net operating income in lodging is stated after it, and every capitalization rate quoted in the market is struck on that basis. Applying a market cap rate to hotel EBITDA before the reserve inflates value by the whole capitalized reserve, which on a full-service hotel is a large number. The related discipline is that a discrete renovation is not a reserve: it is deducted separately, in the years it is spent.
A forward capitalization rate
A going-in cap rate is applied to the income of the year you buy. A forward, or exit, cap rate is applied to the income of the year after the holding period, because that is what a buyer standing at the exit date is underwriting. The distinction matters more in lodging than in most real estate, because income is volatile and a single year can be depressed by a renovation or inflated by a one-off event. Quoting a value without the rate it was struck on, and the income basis and the year that rate was applied to, leaves a reader unable to check anything.
Rooms out of service, and why a renovation does not move RevPAR
Occupancy and average daily rate are struck on the rooms a hotel can actually sell, so rooms taken out of service for a renovation leave the available room-night count entirely. A renovation reduces revenue substantially and leaves RevPAR unchanged. Fixed cost does not fall with the displaced rooms, so displacement lands almost entirely on net operating income — and it usually lands in the years a lender required the work, which is exactly when a coverage covenant is being tested.
Value per key against replacement cost
Value per key is the sanity check that keeps a capitalization rate honest, and replacement cost is the sanity check on that. If a portfolio trades well below what it would cost to build the same rooms, a buyer is better off buying than building, and the usual inference is that no new supply is coming. That inference is not safe. Hotel rooms also arrive as conversions of obsolete office buildings and as components of mixed-use towers, and both carry a basis far below ground-up replacement cost. The pipeline has to be looked at directly, and it will sometimes contradict the replacement-cost argument in exactly the submarket where it mattered.
Why a levered discounted cash flow is not a check on an unlevered one
When mortgages travel with the assets it is natural to run the cash flow twice, once to the asset and once to the equity. The trap is treating the second as confirmation of the first. The equity value a levered run produces depends entirely on the required return chosen for it, and if that return is below the one the capital structure implies, the levered analysis will always produce the larger number. The implied return is a closed form — the unlevered rate, plus the spread of that rate over the cost of debt, times debt over equity — and the useful comparison is between what it implies and what a buyer would actually underwrite. Where the implied return is one nobody would accept, the asset cannot be sold with its financing in place.
Section 382 and a net operating loss as a valuation component
A large carryforward looks like a large asset and usually is not. Section 382 limits the annual use of a pre-change loss to the equity value of the loss corporation multiplied by the long-term tax-exempt rate, and the ownership change that triggers the limitation is the very transaction being priced. So the buyer's own offer sets the cap, a low equity value makes the loss almost unusable, and the honest valuation is the present value of the shield the limitation actually permits over a horizon in which there is taxable income to absorb it. The gap between that number and the face value of the carryforward is usually most of it.
Hotel C-corporations against lodging REITs
They own the same buildings and are not the same security. A trust pays no entity-level tax, carries a fraction of the corporate function, owns no management or franchise business and distributes its income. A corporation pays tax, carries a full corporate function and usually runs a fee business beside the real estate. A turn of EV / EBITDA therefore does not mean the same thing in the two cohorts, and averaging them into one median is the commonest error in the sector's comparable work. The statistic that does cross them is value per key — and for a corporation the fee business has to come out of enterprise value first, or the figure is a real estate number contaminated by a contract stream.
A premium to price against a discount to net asset value
They are the same transaction seen from two ends, and the arithmetic linking them is exact: one plus the premium equals one plus the discount paid, divided by one plus the discount the stock was trading at. Deriving the premium that way rather than quoting it makes the two yardsticks commensurable and dissolves an argument that otherwise looks unresolvable. A company already trading at a wide discount to its assets can be bought at a perfectly ordinary premium to its price and still be bought cheap; and reaching a normal discount to net asset value from a wide starting discount requires an above-normal premium. Neither of those is visible in a premium table alone.
A covenant tests earnings; a maturity tests money
Lodging cash flow is violently seasonal and lodging covenants are tested on a trailing twelve months, so an annual forecast cannot answer the question a board with a near maturity is actually asking. A monthly build with a seasonality index can. It also separates two things that are easy to conflate: a coverage covenant is a test of earnings and can be passed comfortably while the company runs out of cash, and a maturity is a test of money that no amount of earnings cures. A cash-trap trigger is a third thing again — it sweeps a property's cash flow rather than accelerating the debt, and it is not symmetric, because a shortfall still has to be funded by the borrower.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: answer deck and Excel model, built the way a banker would actually build them. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Asset-by-asset DCF with forward cap rate grids
- —RevPAR, ADR and occupancy build
- —Hotel C-corp versus hotel REIT comp universes
- —Levered and unlevered DCF
- —Net operating loss as a sum-of-the-parts component
- —Monthly liquidity against mortgage covenants
Answer Deck
Full model answer, banker-formatted
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the answer deck, the Excel model and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and PowerPoint Deck and Answer Deck (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Drumlin — Lodging Asset-Level Valuation
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is a lodging net asset value case study in an investment banking interview?
It is a real estate and lodging case in which a hotel owner is valued asset by asset rather than off a consolidated multiple. You build each hotel's net operating income from occupancy and average daily rate, capitalize or discount it at a rate specific to that building and submarket, cross-check the result against value per key and replacement cost, and then bridge to equity through the fee business, any tax attributes, corporate overhead and net debt. It appears in real estate, lodging and gaming coverage groups and in real estate private equity processes, and it tests whether you can value a portfolio of buildings on the terms the asset class actually trades on rather than importing a corporate valuation framework.
What is RevPAR, and why does it matter how it grows?
RevPAR is revenue per available room, and it equals occupancy multiplied by average daily rate. It matters how it grows because the two drivers carry different costs. Selling the same rooms at a higher rate adds revenue and almost no cost, so it drops to the bottom line at close to one hundred percent less the commissions and card fees charged on rooms revenue. Selling more rooms adds the cost of cleaning, supplying and serving each one, so it flows through at a materially lower rate — though it also brings food, beverage and other ancillary revenue that the rate dollar does not. The practical consequence is that two hotels can post identical RevPAR growth and produce quite different EBITDA, and that any RevPAR forecast has to be decomposed before it can be valued.
What is flow-through in a hotel model?
Flow-through is incremental EBITDA divided by incremental revenue, and it is how the sector talks about operating leverage. A hotel carries a large fixed cost base — property taxes, insurance, base payroll, utilities — so a small change in revenue produces a large change in profit. The number to be careful with is what the percentage is a percentage of. Measured against total revenue, occupancy-driven growth flows through far below rate-driven growth, because the extra occupied rooms carry variable cost. Measured per dollar of RevPAR the gap narrows sharply, because the occupancy dollar also brings ancillary revenue that never enters the rate dollar's denominator. Both figures are correct; a candidate should compute both and say which one supports the claim being made.
Why is net operating income stated after an FF&E reserve, and what happens if you forget?
Hotels consume their own furniture, fixtures and equipment, and replacing them is a recurring cost rather than a discretionary one — usually four to five percent of total revenue, and usually escrowed under the mortgage. Market capitalization rates are quoted on net operating income after that reserve, so applying one of those rates to hotel EBITDA before the reserve overstates value by the entire capitalized reserve. On a full-service hotel that is a very large number. The related discipline is that a discrete renovation is not a reserve: a property improvement plan is deducted separately in the years it is spent, because running it through the reserve capitalizes a one-time cost into perpetuity.
How do you value a hotel with a forward capitalization rate?
You project net operating income after the FF&E reserve, deduct discrete renovation capital in the years it is spent, discount the resulting free cash flow at a property-level rate, and then value the exit by applying a capitalization rate to the net operating income of the year after the holding period — grown once — rather than to the last projected year. That is what makes the rate forward: a buyer standing at the exit date is underwriting next year's income, not last year's. Selling costs come off the gross proceeds. Because the exit is typically most of the value on a five-year hold, the honest presentation is a grid across the exit rate and the discount rate rather than a single number.
Why does a net operating loss carryforward end up worth so little?
Because section 382 caps how fast a buyer can use it. On an ownership change, the annual use of a pre-change loss is limited to the equity value of the loss corporation multiplied by the long-term tax-exempt rate, and the ownership change in question is the transaction being priced. A company with a small equity value therefore has a small annual limitation, and a large carryforward can take decades to absorb. The valuation that follows is the present value of the tax shield the limitation actually permits over a horizon in which there is taxable income to use it, which is routinely a fraction of the face value of the loss. It is a genuine sum-of-the-parts component, but it has to be sized rather than assumed.
Why can't you put hotel C-corporations and lodging REITs in one comparable set?
Because they are different securities that happen to own similar buildings. A real estate investment trust pays no entity-level tax, carries a fraction of the corporate function, owns no management or franchise business and distributes its income; a corporation pays tax, carries a full corporate function and usually runs a fee business alongside the real estate. Those differences move EV / EBITDA by turns for reasons that have nothing to do with the hotels, so one blended median is measuring a mixture rather than a market. Run two universes with two medians. The statistic that crosses them is value per key, and for a corporation the fee business has to be stripped out of enterprise value first, or you are dividing a contract stream by a room count.
How should you allocate 120 minutes across this case?
A working budget that sums to 120: about 20 minutes reading the prompt and the raw extract and deciding which companies and which transactions survive your screens before you type anything; about 75 minutes at the keyboard, split across the RevPAR build and the operating model, the decomposition and both flow-through measures, the asset discounted cash flow and its grid, the levered run, the fee business and the loss, the two universes and the two transaction sets, the monthly liquidity, and the bridge; and about 25 minutes on the deck, which is the second deliverable. The template measures 1,321 cells to fill, which collapse to 300 distinct formulas once the fill-right and copied-block repetitions are counted properly — most of the workbook is one formula filled right across six periods and copied down three property blocks. That arithmetic only works because two of the thirteen tabs are handed over complete.
About This Real Estate & Lodging / Strategic Alternatives Case Study
Real Estate & Lodging / Strategic Alternatives case study for investment banking interviews. 120-minute format covering asset-by-asset dcf with forward cap rate grids, revpar, adr and occupancy build, hotel c-corp versus hotel reit comp universes. Includes the full prompt, a model answer deck, a tied-out Excel model and an audio walkthrough.
This case study sits in Investment Banking, under Real Assets & Infrastructure. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
120-Minute Format
The time limit a real assessment would give you
Answer Deck
Included in the model answer
Excel Model
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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