Scope: Financial Analysis, Investment Analysis

Issue: CHMGS’ public sector clients require a reasonable rate-of-return range for all investment analysis.

Process/Outcome: In an effort to continue to provide the most accurate and reliable investment analyses possible, and to provide a basis for public sector client recommendations, CHMGS completed a study of fair and reasonable rates of return expected for capital investment in hospitality and recreation operations. Our approach benchmarks expected rates of return for companies operating in the private sector, with a focus on those companies we deemed comparable to those holding public sector concessions contracts.

The standard of “fair and reasonable” requires a comparison to expected returns prevailing in the capital markets for opportunities entailing a similar degree of risk. An opportunity is considered “fair and reasonable” if the expected return equals or exceeds the expected return the prospective concessioner could earn on an alternative opportunity of comparable risk. In order to achieve a comparison of expected returns for an alternative investment, CHMGS analyzed:

The “risk free rate,” represented by Treasury Note yields; and,
Corporate shares traded in capital markets in the form of stock returns of publicly traded hospitality and/or tourism companies, which entail a similar degree of risk to the types of enterprises operated on public sector lands.

CHMGS utilized the Capital Asset Pricing Model (CAPM), which holds that an asset more exposed to risk will expect higher returns, and, inversely, an asset with lower exposure to systematic risk will expect lower returns. In general, commercial enterprises operating on public lands experience less risk than those operating on the open market. We adjusted data collected from our market survey to accommodate our unlevered, after-tax analysis.

Using this approach, CHMGS developed our overall range of return expectations for the primary types of hospitality, retail, and recreation operations found on public lands.