What a night auditor's numbers reveal that a hotel fund deck usually leaves out

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 framing is useful. Hotel fund decks almost all lead with rooms because rooms are the number everyone benchmarks. Food and beverage and meeting space are where the deck gets vague.

@chriswalton8 they get vague because F&B margins are ugly and everybody in the business knows it. On the management side it is common to see a hotel where the restaurant loses money every year and stays open because the brand standard or the group business requires it.

Closed the second floor. That is the detail worth sitting with. Almost no other asset lets an operator switch off part of the building and switch it back on with demand. A land parcel just sits there costing its owner 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 is a cutoff date after which unsold rooms release back. Whether it got enforced is a different matter. @devon_pierce did he say if they billed the group?

@dmitri_248 they almost never bill the full attrition if they want the group back next year. That is the part that does not show up in a model. Hotel offering documents routinely present the group business as contracted revenue while the footnote about attrition waivers sits two pages later in six point type.

The staff coming back at higher pay is the line to underline. Anyone who has run a crew knows that once you lose people you do not 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.

@stephen_ok9 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.

Put a number on this. If a full service hotel runs 65 percent occupancy at a 180 average rate, that is 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 F&B labor is loaded in, so the gap between 12.8 million of revenue and what actually reaches the owner is the entire investment thesis. What is wrong with framing it that way?

@hannah_west29 nothing is 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, while the incremental dollar of occupancy flows through only after housekeeping, linen, breakfast, credit card fees and franchise fees on top line revenue. So two hotels with identical RevPAR can deliver very different net income. The mix is what you need, and the blended number hides it.

Read from a rural market, the whole thing looks like another planet. The nearest thing on offer out there is a twelve room motel off a state highway, and the economics of that are an owner and a spouse doing the beds themselves.

@laurenkim53 that is not as far off as it sounds. Same business, different scale, and the labor is simply unpriced because it is them. The question worth asking is what happens the year they cannot 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.

That's true in a nine unit building too, @mitchell_ray4, on a smaller scale. A unit that sits vacant for more than a couple of months almost always develops a problem that wasn't there when the tenant left.

@devon_pierce 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 @dpatel_re'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.

@megan_doyle15 House profit is the one to start with. It is income after departmental and undistributed operating expenses, before the fixed charges like property taxes and insurance, the management fee, 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 rather than 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.

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

@bmoreno23 the good ones model displacement explicitly. The ones that do not are the ones you find out about later. Displacement is the assumption to hunt for first in any repositioning deal, because it is the one most often left out of the deck.

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.

@jordan_ellis2 and the economy one is the one nobody controls. That is the factor that justifies passing no matter how good everything else looks.

For anyone using this thread to work out which strategy fits them, hotels are the clearest no. That is no comment on the asset class. Every reply here describes an operating skill a residential investor does not have.

@aaron_fitz10 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.

The night auditor knowing the building sold twice is the most honest piece of diligence in this thread. Ownership changed and the person closing the day did not.

@devon_pierce the detail worth sitting with is the ballroom dark on a Tuesday and nobody noticing for a month. From the construction side the opposite problem shows up, everyone watches the visible spend and nobody watches the slow leak in revenue. Good write-up.