Case Study: Financial Analysis of a Modern Upper Upscale Hotel
- MMCG
- 31 minutes ago
- 12 min read
Property Overview
The subject property is the Embassy Suites by Hilton Wilmington Riverfront, an upscale all-suite hotel opened in late 2017 and located at 9 Estell Lee Place, Wilmington, NC. This 186-room, 8-story hotel is in the Upper Upscale class segment (Hilton’s Embassy Suites brand) and operates under a franchise agreement with Hilton. Notably, the property is physically connected to the Wilmington Convention Center, positioning it to capture significant group and convention demand. Key on-site amenities include ~5,000 square feet of meeting and event space (complementing the adjacent convention center), a rooftop bar and full-service restaurant, an indoor pool, and other upscale brand standards (e.g. free made-to-order breakfast and evening receptions). The hotel’s location on the downtown riverfront near restaurants, shops, and tourist attractions (like the USS North Carolina battleship) further enhances its appeal to both business and leisure travelers. The ownership and management are by Harmony Hospitality (the original developer), under a franchise license from Hilton. Overall, the property’s modern construction (built 2017), prime riverfront/convention center location, and all-suite, full-service offering make it a flagship Upper Upscale asset in the Wilmington market.
Financing Structure
The Embassy Suites Wilmington Riverfront was financed in October 2019 with a 10-year fixed-rate loan. The original loan amount was $40.4 million, roughly matching the hotel’s development cost (reported at ~$40 million). At origination, the appraised value was approximately $65 million, implying a conservative Loan-to-Value (LTV) of ~62%. Key loan terms include a fixed interest rate of 3.65%, with an initial interest-only period (partial-term IO) followed by amortization on a 30-year schedule, and a maturity date of October 1, 2029. The loan is balloon in nature (not fully amortizing by maturity), with monthly payments. As of early 2025, the loan’s current balance has amortized down to about $39.3 million, and it remains performing (no delinquencies). The debt service is approximately $1.6 million annually, yielding a strong coverage ratio given the hotel’s cash flows.
From an investor/lender perspective, the financing structure is attractive: a low fixed interest rate locked in before the recent interest rate hikes, and moderate leverage. Even after the pandemic disruptions, the Debt Service Coverage Ratio (DSCR) has remained solid. In 2021, when cash flow was still recovering, the NOI DSCR was ~1.9×, indicating the property produced nearly twice the NOI needed for debt service. By 2022, DSCR spiked to roughly 4.3× as earnings rebounded strongly, then normalized to about 2.6× in 2023 (on a NOI basis). On a net cash flow (NCF) basis (after capital reserves), coverage in 2023 was ~2.2× – still comfortably above typical loan covenant minimums (usually 1.30×–1.40×). The loan thus appears well secured by cash flow, and the LTV based on current performance also remains reasonable. Using the 2023 NOI ($4.24 M) and applying market cap rates around 8–9%, the implied asset value is on the order of $50–53 million. This suggests a current LTV in the ~75% range, somewhat higher than at origination but still providing a 25% equity cushion for the lender (market hospitality cap rates in Wilmington average ~8.6% as of 2025). With about 4.5 years remaining until loan maturity, a key consideration for lenders will be refinance risk – however, if performance remains stable, the substantial DSCR and the hotel’s strong competitive position should facilitate refinancing (albeit likely at a higher interest rate environment in 2029). Overall, the financing is structured with prudent leverage and has benefitted from the low-rate environment, positioning the asset to withstand short-term volatility in cash flows.
Financial Performance Analysis (2021–2023)
Revenue Trends: The hotel’s income recovered markedly from the pandemic trough, then plateaued. In calendar year 2021, the Embassy Suites generated roughly $12.99 million in Effective Gross Income (EGI) (total revenue). This grew to $16.54 million in 2022 (a 27% year-over-year increase) and was essentially flat at $16.79 million in 2023 (a modest +1.5% increase). The surge from 2021 to 2022 was driven by both occupancy and rate gains as travel rebounded. Room revenues rose from about $9.2 M in 2021 to $11.6 M in 2022, and held at $11.7 M in 2023. The hotel achieved an occupancy of ~70% in 2021 (reflecting ongoing COVID impact), which jumped to 81% in 2022 and nudged up to 82%in 2023, effectively reaching a stabilized high level. Concurrently, average daily rate (ADR) climbed from roughly $194 in 2021 to ~$212 in 2022 (benefiting from pent-up demand and inflationary pricing) and stayed around $211–212 in 2023. This combination led to RevPAR (revenue per available room) of approximately $136 in 2021, $171 in 2022, and $173 in 2023 – an overall RevPAR increase of ~27% from 2021 to 2023. Food & Beverage revenue (from the hotel’s restaurants, bars, banquets, and catered events) also grew significantly: about $2.9 M in 2021 to $3.9 M in 2022 (+35%), holding at $3.93 M in 2023. F&B consistently contributed ~22–24% of total revenues, reflecting the property’s robust onsite dining and event business (free breakfast offerings and rooftop bar/banquet events). Smaller revenue streams (like other departmental income) were on the order of $0.8–1.0 M annually. Overall, the strong rebound in 2022 brought the hotel’s revenues slightly above the original underwritten expectation (the 2019 underwriting had anticipated ~$14.3 M total revenue, which 2022/23 actuals exceeded by ~17%). 2023’s flat revenue suggests the property has stabilized near its capacity, with occupancy at ~82% (essentially full on peak nights) and ADR facing competitive limits.
Expense Trends: Operating expenses rose in tandem with the activity levels, and cost inflation put pressure on margins in 2023. In 2021 (a partial recovery year), total operating expenses were about $8.97 M, which was a high ~69–77% of revenue (depending on whether one includes certain fixed charges; 77% if all operating costs are counted). This reflected some inefficiencies at lower revenue levels. In 2022, expenses increased to roughly $10.11 M, but this was a much lower ~61% of revenue – demonstrating strong operating leverage as higher occupancy/revenue spread the fixed costs. By 2023, however, expenses jumped to ~$12.55 M (~75% of revenue), eroding profitability gains. Notably, 2023 saw certain cost items normalize or spike after being unusually low in 2022. For example, an “Other Expenses” line item (possibly an ownership or one-time expense category) was negligible in 2022 but around $1.75 M in 2021 and 2023 – this swing alone accounts for a significant part of 2023’s margin drop. Ignoring that anomaly, most departmental expenses scaled with the business: Rooms departmental costs were ~$1.95 M in 2021, $2.14 M in 2022, and $2.30 M in 2023 (increasing with more occupied rooms and wage growth). Food & Beverage departmental costs similarly rose from ~$1.56 M to $2.21 M to $2.32 M over 2021–2023. The hotel’s undistributed operating expenses also trended upward:
Property Tax: The annual property taxes were about $295k in 2021, rising to $337k in 2022 after a reassessment, then slightly easing to $333k in 2023. On a per-room basis this equates to roughly $1,600–$1,800/room, in line with local tax rates.
Property Insurance: Insurance costs spiked in 2022 to roughly $360k (about $1,938 per room) but then declined to ~$307k in 2023 (~$1,651/room). This could reflect a one-time premium increase in 2022 (or claims in the region driving premiums up, then a market adjustment in 2023).
Utilities: Utility expenses grew from approximately $337k in 2021 to $402k in 2022 and $432k in 2023. This was expected given higher occupancy (more usage) and rising energy rates; however, the hotel likely managed efficiency well since utility cost per occupied room remained relatively stable.
Repairs & Maintenance (R&M): R&M was ~$525k in 2021, climbing to $650k in 2022, and $663k in 2023. The jump in 2022 reflects catching up on maintenance as operations normalized, and 2023 remained elevated – consistent with an aging property (now ~6 years old) requiring more upkeep as well as inflation in labor/material costs for repairs. We expect R&M to continue trending upward modestly each year as the hotel approaches a cycle for soft refurbishment (typical for year 7–8 in an upscale hotel).
Franchise Fees: The franchise (royalty & system) fees paid to Hilton have run about 9–10% of room revenues. These were roughly $4,713 per room in 2021, $5,941 in 2022, and $6,020 in 2023 (approximately $875k, $1.106 M, $1.119 M total respectively). The increases align with the higher room sales; as a fixed percentage of rooms revenue, this expense scales directly with topline performance.
Management Fees: The hotel pays an arm’s-length management fee (to either an independent operator or an affiliated management company). This fee is around 3% of total revenue, totaling ~$480k in 2021, ~$660k in 2022, and ~$673k in 2023. The consistency at 3% of revenue indicates a standard base fee arrangement; there have been no incentive fees (which typically kick in above certain profit thresholds) reflected in these figures.
General & Administrative (G&A): G&A expenses (covering administrative staff, credit card fees, office, etc.) were ~$996k in 2021, dropped to $812k in 2022, then rose to $1.20 M in 2023. The dip in 2022 may be due to cost-containment efforts or lower corporate allocations during the pandemic rebound, while 2023’s increase could stem from reinstated corporate charges or inflation in administrative salaries and services.
Sales & Marketing: Similarly, marketing spend increased – about $716k in 2021, $952k in 2022, and $998k in 2023 – as the hotel ramped up advertising and sales efforts post-pandemic (especially to drive group and event business to the convention-center location). These costs stabilized in 2023, indicating a steady-state level of sales effort.
Overall, the hotel’s Operating Expense Ratio (OpEx as percentage of revenue) swung from the high 70% range in 2021 (when revenue was depressed) to a low of 61% in 2022 (when strong revenues outpaced costs), and then reverted to about 75% in 2023 as cost pressures and normalized expenses set in. This volatility underscores how economies of scalebenefited 2022 results, while 2023 saw cost inflation and certain one-off expense items cut into margins.
Profitability and Cash Flow: The fluctuations in revenue and expenses translated into a Net Operating Income (NOI)trajectory that first surged, then receded. In 2021, NOI (income after all operating expenses) was approximately $2.94 M– a slim profit by historical standards, but still positive (thanks in part to expense controls and the property’s breakeven being below 60% occupancy). In 2022, NOI jumped dramatically to about $6.43 M, reflecting the outstanding revenue rebound and efficient flow-through (an NOI margin of 39% on revenue). This far exceeded the original underwritten NOI ($5.3 M was projected for a stabilized year) and demonstrated the property’s earnings potential in a strong demand environment. However, by 2023 NOI fell back to roughly $4.24 M, as revenues plateaued and the cost base grew – yielding an NOI margin of ~25%. The sharp drop in 2023 NOI (–34% vs 2022) is largely explained by the aforementioned anomalous “Other” expense and general cost increases; absent those, the core operations remained healthy.
After accounting for capital reserves (the mandated set-aside for furniture, fixture, and equipment replacement, typically 4% of revenue), the Net Cash Flow (NCF) available for debt service was ~$2.43 M in 2021, $5.78 M in 2022, and $3.56 M in 2023. These cash flow levels comfortably covered the annual debt service of ~$1.6 M in all years. The DSCR on an NOI basis was approximately 1.97× in 2021, 4.31× in 2022, and 2.63× in 2023, as noted earlier. On an NCF (after reserve) basis, DSCR was ~1.6×, 3.9×, and 2.2× respectively. Even the lowest point (2021) was near 2× coverage, indicating that the property remained cash flow positive enough to meet its loan obligations despite the COVID downturn. By 2022, the excess cash was substantial (nearly 4× coverage), and 2023’s step-down still provided a solid cushion. From a lender’s perspective, these trends indicate low default risk throughout the period and point to the borrower’s ability to continue servicing debt and funding reserves. For investors (equity holders), 2022 was an exceptionally profitable year, whereas 2023’s results, while lower, may represent a new normal of more sustainable (but still respectable) cash flows as the hotel settles into a stabilized post-pandemic operation with full expenses.
Importantly, the cash flows have supported all operational needs and reserve contributions for future CapEx. The hotel has been setting aside roughly 4% of revenues for capital replacement ($0.57 M in 2021, $0.66 M in 2022, $0.67 M in 2023). With the property now seven years old, these reserves (and retained cash flow) will be vital for upcoming refresh cycles (such as soft goods renovation, likely due around 2024–2025, and a full renovation by ~2027 to meet brand standards at the 10-year mark). The ownership’s ability to fund these expenditures out of cash flow (as opposed to needing additional capital) will be a key aspect of maintaining the hotel’s competitiveness and preserving long-term value.
Market Performance Benchmarking
In order to evaluate the Embassy Suites’ performance in context, we compare its key metrics to the Wilmington Upper Upscale hotel submarket. Wilmington’s hospitality market overall has been recovering, but the upper-tier hotels have faced mixed trends. As of early 2025, the Luxury & Upper Upscale segment in Wilmington (approximately 1,320 rooms across a few hotels, including this Embassy Suites) achieved a 64.9% occupancy for 2023 and an average ADR of $215.32, equating to a RevPAR of $139.84. By contrast, the Embassy Suites significantly outperformed the market in occupancy, while slightly under-indexing in ADR. For calendar 2023, the subject property’s occupancy was about 82%, well above the mid-60s percent range for its competitive set (a ~17 percentage point premium). This continues a trend of exceptional occupancy – in 2022 the hotel was ~81% vs the market’s ~63.4% for Upper Upscale, and even in 2021 (70% vs market ~<60% in that segment) the Embassy Suites led its peers. This outperformance reflects the property’s strategic advantages: being the newest upper-upscale hotel in the market, with a prime location adjoining the convention center and offering a strong amenity package, it captures a large share of group business and attracts both corporate and leisure demand that fills rooms consistently.
On the other hand, the ADR at the Embassy Suites has been slightly below the Wilmington Upper Upscale average. In 2022, the hotel’s ADR ($212) trailed the segment average ADR ($236) by roughly 10%. In 2023, as the market ADR for upper-upscale dropped to ~$215 (a decline driven by increased competition and a shift in demand mix) the Embassy’s ADR held around $211, nearly on par with the market. The hotel’s strategy appears to prioritize occupancy (volume) over pushing rate to luxury levels – likely due to its heavy group business (which tends to have lower negotiated rates) and possibly a deliberate yield management choice to maximize RevPAR. This is evidenced by the property’s RevPAR index being very strong. In 2023, the Embassy’s RevPAR was about $173, substantially above the market’s $139.84 (+24% premium). Even in 2022, when competitors enjoyed a higher ADR spike, the Embassy’s RevPAR of ~$172 still exceeded the upper-upscale market average of ~$149 Essentially, the hotel gives up some room rate (ADR index <100) in exchange for much higher occupancy (occupancy index far >100), resulting in an overall RevPAR index leadership in its competitive set. This implies the property is the market share leader among Wilmington’s upscale hotels – a positive indicator of its operational strength and customer preference.
It’s also worth noting the broader market context: Wilmington’s hotel supply has been growing, which puts pressure on market occupancy. Over the last 12 months, roughly 310 new rooms opened in the market (a ~3-4% net supply increase) and about 360 rooms are under construction (another ~4% of inventory in the pipeline) Most of this new supply is in the Upscale/Upper Midscale segment (e.g., limited-service and extended-stay hotels)j, rather than direct Upper Upscale competitors – indeed, no new luxury/upper-upscale rooms were delivered in the past year. Nevertheless, new hotels increase competition for staff and for certain demand segments. Wilmington’s overall occupancy (all hotels) for 2023 was 64.5%, down slightly (–3% YoY) as demand growth lagged new supply. Against this backdrop, the Embassy Suites’ ability to maintain ~82% occupancy in 2023 is impressive and indicates it is capturing demand at the expense of other properties. However, the ADR decline in the upper-upscale segment (–8.7% in 2023) suggests that to achieve those occupancy gains, hotels (potentially including the Embassy Suites) had to be more aggressive on rate. This aligns with what we see: the Embassy kept rates flat or slightly down while others likely discounted more heavily (bringing the market ADR down). The net effect is that the Embassy Suites has strengthened its RevPAR outperformance – a sign of effective revenue management and a robust competitive position.
From an investor’s perspective, this benchmarking reveals a few key insights. First, the Embassy Suites benefits from high demand penetration in its market – it is the go-to hotel for convention attendees and many visitors, which bodes well for sustaining occupancy even if the market softens. Second, there may be upside in ADR for the property: as new supply gets absorbed and if the hotel can maintain its dominant occupancy, management could potentially push rate higher to narrow the ADR gap versus peers (especially if the convention center business allows for higher-yield events or if leisure travel strengthens). The risk, however, is that the Wilmington market is price-sensitive and the hotel’s heavy group base limits pricing power (group rates are typically contracted in advance). Third, the hotel’s RevPAR index leadership should translate into above-average profit performance, but only if costs are kept in check. We’ve seen that in 2023 some margin was lost; management will need to control expenses to fully capitalize on the revenue premium. Still, relative to competitors (some of which likely have lower occupancy and similar fixed cost structures), the Embassy’s superior volumes give it an advantage in spreading costs – a structural benefit in profitability.
In summary, the Embassy Suites Wilmington Riverfront is a strong performer in its submarket, with occupancy levels far exceeding market averages and a solid ADR for its positioning. It has effectively leveraged its location and brand to capture outsized market share, translating into RevPAR and NOI levels that generally beat expectations. The Wilmington market’s recent softening (lower occupancy and ADR growth) appears to be impacting the competitive set more than this hotel, though it has not been immune to margin pressures. Going forward, investors should monitor how the hotel balances occupancy vs. rate (especially as new upscale hotels enter the market), and ensure that expense growth (labor costs, etc.) doesn’t outpace revenue growth. That said, the property’s fundamentals – modern asset, prime demand location, diversified revenue (rooms and F&B), and strong brand affiliation – position it well to continue outperforming the market and delivering reliable cash flows. Both lenders and equity investors can take comfort in its historical resilience and current financial robustness. With a fixed low-rate loan in place and healthy DSCR, the asset is insulated from interest rate volatility in the near term, allowing the ownership to focus on operations and long-term value creation (such as planning for the eventual renovation to keep the property at its peak).
Overall, the Embassy Suites by Hilton at Wilmington Riverfront stands as a case study in a well-executed hotel investment: a quality asset in a growing submarket, managed to outperform peers, financed conservatively, and generates returns that justify investor confidence.
May 19, 2025, by Michal Mohelsky, J.D., principal of MMCG, Hotel feasibility study consultant,
Sources:
CMBS, MMCG database, New Hanover County, NC Assessor, wilmingtonbiz.com, hotelmanagement.net
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