Distributions stopped in year three and the top line hit 97% of plan

Flow-through wasn't a term I knew until this thread. If I've got it right, it's what share of a new dollar of revenue survives the cost of serving it? That's the same shape as my rental, where the rent went up 4% and the insurance and turnover ate all of it and then some. Just with far more zeros.

verity, 55 cents was probably never real at that segment. Flow-through depends almost entirely on where the revenue comes from. A dollar from rate on a room you were already selling flows through at 80 or 90 cents, because nobody adds a housekeeper for it. A dollar from occupancy costs you the clean, the linen, the amenities, and the commission if it came through an OTA. Your occupancy beat plan and your rate missed at the airport pair, which is exactly the mix that produces a 30 cent number. Did the deck ever split the RevPAR growth into rate and occupancy, or was it one line?

The insurance line is the one I'd have missed too. Coastal hospitality renewals have moved hard enough that I've seen it swing an underwriting by a full point of margin on its own, and the sponsor's model probably had it growing at 3% a year like it was payroll taxes.

Dumb question since I'm new here. GOP is gross operating profit, which is before debt and before the management fee? Trying to work out where in the stack verity's money disappeared.

Contract housekeeping at a premium is the tell. When I've bid work through an agency the loaded rate runs 40 to 60% over what the same person costs in house, and that's before you count the fact that the crew turns over constantly and the rooms take longer. It's not a line item you fix in a quarter.

Base fee on gross revenue is normal, verity, that's how nearly every management agreement I've seen is written. The alignment is supposed to live in the incentive fee. What was the incentive threshold in yours? If it was struck off GOP with no debt service test, then the operator could miss your distributions entirely and still earn it, which happens more than people expect.

I'd put most of this on the debt, honestly. Flow-through missed by 25 cents on the dollar, which hurts. A cap struck above the market for a whole hold is a straight cash burn with zero protection, and floating paper on an asset that reprices nightly is the thing that turns a bad year into a suspended distribution. The operating miss made it worse. The capital structure decided it.

Running a crew of nine has taught me that when the market rate moves you either pay it or you run short and the work quality collapses. There is no third option and no clever scheduling fix. Whoever built that model has never made a Sunday morning staffing call.

The term extension is the part I'd be sitting with. A one year extension in a soft market usually means the sponsor has decided selling now crystallizes something they'd rather not print. Sometimes that's the right call for you as an LP. Sometimes it just extends the fee stream on a fund that isn't working.

This is exactly why I stay in boring buildings with leases. 97% of the revenue and none of the income is a sentence I'd have trouble explaining to myself later.

verity, I'm stealing both of your closing questions for my own list. I'd add a third one I got burned on in a different sector: what is the base fee calculated on, and does anything in the waterfall actually reduce it when the property underperforms? Usually the answer is no, and people find that out at the worst time.

Insurance renewals at scale are their own event now. On my little portfolio I get one bad quote and I shop it. On a fund asset the placement is often bundled across properties, and you inherit whatever the coastal one does to the program. Did the sponsor break out insurance by asset in the reporting, or just at the fund level?

The agency premium is the single most predictable line in my P&L, and I've watched it for five years running a service business. If your model has labor growing at CPI you've already lost the argument.

Adding "cost to terminate the operator" to my list. I'd genuinely never thought of it as a number with a size.

Reading this three times. Still on the first read, so I'll shut up and keep going.

What I take from this is that hotels aren't a passive position dressed up, even at LP level. You're buying an operating business and an operator, and the operator can be swapped at your expense. That's a different risk than I thought I was evaluating.

So here's what I couldn't figure out on my own: how did you actually work out that flow-through was 30 cents? Was that in the quarterly letter or did you have to build it from the operating statements yourself? I don't know whether the reporting I'd get would even let me do that math.

Between this and the operator termination number, I'd want the management agreement in the data room before subscribing, not after.

A NAV markdown of 22% means the sponsor's own estimate of what your share is worth dropped by that much, right? It isn't a realized loss until they sell? I want to be sure I'm reading verity's last paragraph correctly before I draw a lesson from it.

The $410k re-badging piece is interesting from the service side. Brand transitions generate a lot of small paid work for outside vendors, signage, uniforms, systems training, and none of it is optional once the flag decides. Owners underestimate it every time.

verity, what was the FF&E reserve funded at during those three years? If distributions were being defended by underfunding the reserve, the loss is bigger than the NAV mark shows, because the deferred work is sitting there waiting for whoever buys it.

The $410k across two assets is the number I'll remember. That's roughly a full year of distributions on a lot of these deals, spent on nothing a guest ever sees.

Every thread in this room makes me more curious about the operator side and less curious about the LP side.

orchard's point about the extension is the one I keep circling. My whole holding strategy assumes I control the timing. In a fund you don't, and the clause that takes it away from you reads like boilerplate until the day it matters.

Hit the top line, missed the income, extended the fund. That's the hotel story in one line and it's why I only touch them as a contractor. No shade at verity, the questions asked were better than most people ask.

For scale, my small multifamily runs about 45% expense ratio and I think of that as high. Full service hotels can run past 70% before debt. Every point of top-line miss lands on a much thinner base, so a 3% revenue shortfall isn't a 3% income shortfall, it's several times that.

Out where I look the small independents trade at prices that assume the owner is also the manager. The moment you pay a third party to run it the math stops working, which I think is the same problem verity hit, just at a different size.

How does an operator search even work at that scale? Did the fund shop it, or did the lender and the brand have approval rights over who came in next? I'd assume the flag has a say and that narrows the field a lot.

What I'm taking from this: I need to see the case where the flow-through assumption is cut roughly in half, and if the sponsor won't run it, that itself is the answer. Thanks for posting the actual numbers, verity, most people don't.