In a first hotel LP position, which line deserves the most scrutiny

Question

On a typical select service or upper-midscale hospitality deck, several lines compete for the first stress test. RevPAR growth drives nearly everything above the line. It is the assumption most sensitive to the economy, and sponsors often model a growth curve smoother than any real market has ever delivered. Expense inflation, mostly labor, deserves equal scrutiny. Hotels are staffed operations, and payroll rarely falls as fast as revenue does in a downturn. A model showing 3% revenue growth alongside 3% expense growth is quietly claiming that margin never moves, which is a strong assumption to accept without question. The fee stack matters just as much and gets far less attention. Management fee off revenue, incentive fee off profit, franchise and marketing fees, an asset management fee to the sponsor, and the promote all sit between the property's performance and an investor's distribution, and none of them typically appear on the summary page. Capex and the FF&E reserve round out the list. Rooms wear out on a brand-enforced schedule, and an underfunded reserve tends to surface as a capital call at the worst point in the cycle. A reasonable starting point is the fee stack, since it is the one line an investor can verify from the document alone without needing to out-forecast the market, while RevPAR and expense assumptions require a view on the broader economy that is harder to control for.

joe_delgado5 · Answer

Fee stack, and it's not close for me. I can't tell you what RevPAR does in 2028 and neither can the sponsor. I can add up what comes off the top before I see a dollar, and on the two hospitality decks I've looked at that number was bigger than I expected once the marketing fee and the reserve were in there.

Thin margins are my whole world on the active side. When your spread is small the fixed drag decides whether the deal works, and fees are the one part of this you can actually read today.

aaron_fitz10 · Answer

@joe_delgado5, does that logic have a limit though? Fees are knowable and they are also mostly market standard. If every sponsor sits in roughly the same range, checking them tells you the deal is normal, which is a different thing from telling you the deal is good.

stephen_ok9 · Answer

@aaron_fitz10 that's the right pushback and I'd still start with expenses rather than either of them. A model where revenue and costs grow at the same rate has assumed away the entire thing that makes hotels risky. Margin is where the cycle actually shows up. If the sponsor grows revenue 4% and expenses 3% for five straight years, they've built compounding margin expansion into the exit value and probably didn't say so anywhere.

RevPAR I check second, because the growth curve is at least visible and people argue about it. The margin assumption tends to go unexamined.

nicole_adeyemi · Answer

Capex and the reserve, every time. The other three lines affect how much you make. That one affects whether you get asked for more money, and a capital call at the bottom of a travel cycle is how limited partners lose their position in a deal rather than simply losing some return.

marcus_hale41 · Answer

@nicoleadeyemi and @stephenok9 are picking the two I'd actually rank above the fee stack, and I want to name why the fee answer keeps winning polls anyway. It's the only one you can verify without an opinion. RevPAR curves and margin paths require you to have a view on a market you've probably never worked in, and most first-time LPs don't, so people gravitate to the checkable thing. The order I've landed on is reserve first, then margin, then RevPAR, then fees, on the theory that fees only matter if there's profit to take them from. But @joe_delgado5's point stands for a specific case. If the fee load is heavy enough, even the good scenario doesn't pay you much, and you can find that out in twenty minutes.

In a first hotel LP position, which line deserves the most scrutiny

5 replies