A management rights business stable cash flows makes valuation simple. The common market practise in Queensland is to apply the previous year’s actual net operating income (NOI) multiplied by a valuation multiple.
Note: Unlike hotel NOI, the market practise in this particular industry is NOT to net manager’s wages from the NOI to derive price. However otheritems such as equipment purchase, accounting fees, legal fees, license fees, software fees are included. This is a legacy “rule” since traditionally many management rights operators were family operations and assumed investors were also the operator. As such, wages were not deducted from NOI. However, when wecalculate overall ROIC we include cost assumptions such as caretaker and property managers’ wages etc for calculations as well as interest expense, taxexpense.
The range of valuation multiples in the industry isbetween 4-7(there are outliers below 4 and above 7). i.e. Direct cap rates are between 14%-25%. However, in the majority of cases, investing in a management rights there is an additional mandatory purchase of the non-income producing real estate component (the managers unit). We consider it non incoming producing for ease of interpretation, as usually, the premise is allotted as the residence of the on-site manager.
Here we run an analysis of data on the theonsitemanager.com.au of all currently listed projects in the market within 2m-5m range. That’s 32 projects. The average business multiple is 5.7, translating to a cap rate of 17.53%. Including the managers unit, the average valuation multiple is 7.87, so a cap rate of 12.71%. In the industry, we usually only refer to the business multiple. The minimum of these projects being 4.13 and the maximum being 8+. Anything above 7 is extremely rare. Discounting the outlier, the next highest multiple we have is 6.9. We can assume it is most probably a fresh 25 year contract business close to the inner city with large income (above 400,000+) and a high ratio of fixed management fee as to leasing income.
There is also an analysis report from resortbrokers.com.au with the average multiples from 2017-2021 for different income bucket ranges. I’ve included it here for reference. As expected, the higher the income for an individual project, the higher the multiple as wages and labour is more efficient and optimized. I shall share further analysis of this with regards to wage efficiency ratios in the future.
Currently with high inflation, instead of using the previous year’s revenue to derive the business price, it is quite common for the seller to project the management fee of the following year using current YoY CPI increase. This is because most agreements lock in the inflation increase to the management fee increase. Thus, it is very appropriate for the seller to use the projected (basically guaranteed) increase in management fee as a factor to derive the business value.
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