The night auditor told me more about the deal than the broker did

Eleven years and two sales. That's the detail. The people who actually know how a building makes money are usually the ones nobody in the transaction talks to.

The three ways thing is useful to me. I've been reading fund decks and they all lead with rooms because rooms are the number everyone benchmarks. Food and beverage and meeting space are where the deck gets vague.

@sable they get vague because F&B margins are ugly and everybody knows it. On the management side you see hotels where the restaurant loses money every year and stays open because the brand standard or the group business requires it.

Closed the second floor. I've never once had to think about turning off part of an asset and turning it back on. Land just sits there costing me taxes.

The eighty rooms blocked and sixty used is a contract question. Group contracts usually have an attrition clause, so the group owes something for the unused block, and there's a cutoff date after which unsold rooms release back. Whether it got enforced is a different matter. @bramble did he say if they billed the group?

@warrant they almost never bill the full attrition if they want the group back next year. That's the part that doesn't show up in a model. I've read hotel offering documents where the group business is presented as contracted revenue and the footnote about attrition waivers is two pages later in six point type.

The staff coming back at higher pay is the line I'd underline. I run a small crew and once you lose people you don't hire the same person back at the same rate. Ever.

So if I'm trying to figure out where capital goes, the honest question is whether I believe a sponsor's operating partner can hold rate and hold staff at the same time. That's not something I can diligence from a deck.

@meridian you probably can't, but you can look at what the operator did in the last downturn, which is a thing people do ask about.

I want to put a number on this. If a full service hotel runs 65 percent occupancy at a 180 average rate, that's a RevPAR of 117. Say 300 rooms. Roughly 12.8 million of room revenue. Full service hotels commonly run house profit margins well below what people expect once you load F&B labor, so the gap between 12.8 million of revenue and what actually reaches the owner is the entire investment thesis. What's wrong with framing it that way?

@ledger nothing's wrong with the arithmetic. The problem is that flow through is not a constant. The incremental dollar of rate flows through at something close to full, the incremental dollar of occupancy flows through after housekeeping, linen, breakfast, credit card fees, and franchise fees on top revenue. So two hotels with identical RevPAR can deliver very different net income. You need the mix, not the blended number.

Rural markets over here and the whole thing reads like another planet. The nearest thing I look at is a twelve room motel off a state highway and the economics are a guy and his wife doing the beds themselves.

@hollow that's not as far off as it sounds. Same business, different scale, and the labor is just unpriced because it's them. I'd want to know what happens the year they can't do it themselves.

The mechanical side of a hotel that closed a floor for two years would keep me up at night. Stagnant water in the lines, dead coils, seals dried out. Reopening isn't free.

@solder that's true in a nine unit building too, on a smaller scale. Every vacant unit I've had for more than a couple months developed a problem that wasn't there when the tenant left.

@bramble this is basically the hotel version of what I ran into. The revenue manager I met was making the same call the night auditor was describing, hold rate or dump it, and the loss shows up in a number nobody argues about until the year is over.

I asked what RevPAR meant on a call last month and got a real answer, and reading @sextant's reply here I now understand why nobody was satisfied with just RevPAR. Rate dollars and occupancy dollars aren't the same dollars.

Everything in this thread is new to me and I keep having to reread. Attrition clause, flow through, house profit. Three things to look up.

@rigging house profit is the one to start with. It's income after departmental and undistributed operating expenses, before the fixed charges like property taxes, insurance, and the management fee structure and any reserve for furniture and equipment replacement. Hotels burn through furniture and soft goods on a real schedule, so the reserve is a genuine expense and not an accounting nicety.

Reserve for furniture is the renovation side and I'll say from experience that hotel scope creep is worse than residential, because you're working around a live operation and every floor you take down is revenue you're not earning. A PIP that slips two months isn't a two month problem.

@harrow do the funds underwrite for the rooms lost during a renovation? That seems like an obvious hole if they don't.

@ember the good ones model displacement explicitly. The ones that don't are the ones you find out about later. I've been analyzing things for two years and displacement is the assumption I'd hunt for first in any repositioning deal.

What strikes me across this whole thread is how many separate skills a hotel deployment needs. Market pick, segment pick, operator pick, construction management, and a view on the economy. Any one of those going wrong takes the deal.

@pike and the economy one is the one nobody controls. That's the part that would make me pass no matter how good everything else looked.

I came into this trying to work out which strategy fits me and hotels are the clearest no I've hit. Not because it's bad. Because every reply here describes a skill I don't have.

@kestrel the service angle is the door I'd take in. Every one of those hotels needs cleaning contractors, laundry, linen, revenue management consultants, and none of that requires owning the building.

Problems in progress over here and I'll just add that the night auditor knowing the building sold twice is the most honest piece of diligence in this thread. Ownership changed and the guy closing the day didn't.

@bramble the detail I keep coming back to is the ballroom dark on a Tuesday and nobody noticing for a month. From the construction side you see the opposite problem, everyone watches the visible spend and nobody watches the slow leak in revenue. Thanks for writing it up.