Thread by @somehotelguy

1/20 EXPENSE UNDERWRITING PART II:

If a deal passes muster with a purely ratio based analysis, I move on to a more detailed expense underwrite.

2/20 Here I staff out each department on an FTE (full time equivalent) basis, calculate expenses that can be easily calculated (e.g. travel agent commissions, credit card commissions, etc.), and then a POR / PAR accounting for the remaining portions of each department.

3/20 Since staffing expenses can constitute as much as 70% of operating expenses, this gets you to a much higher level of confidence in your expense model.

4/20 Unfortunately, there really is no good way to do this besides having compos / understanding operations… there is no @STR_Data report for staffing that I’m aware of.

5/20 Projecting FTEs, I think about two types of jobs - management / oversight and fixed / variable shift coverage.

6/20 Management / oversight positions I generally think about “do I need a [role] at this hotel?” Here’s an area where understanding the business is critical, and having an existing local / regional operation (with which you can complex certain positions) can provide…

7/20 …material benefit.

8/20 You’ll need to understand whether you need a General Manager, a Director of Operations, a Housekeeping Manager, etc. Whether you need these roles – and other roles like these – is dependent on hotel size, service level, amenity offerings, and whether you have the ability…

9/20 …to complex. For fixed / variable coverage, you want to think through shift coverage - e.g. “how many front desk agents do I need per shift?” While some of this is a fixed minimum, for now we’ll only focus on annual averages.

10/20 The second thing you’ll need to think through here is 7 day actual weeks vs 5 day work weeks. As an example, let’s talk front desk. Three 8 hour shifts per day, and we need 2 agents in the AM shift, 2 in the PM shift, and 1 overnight.

11/20 That’s 7 employees / day, but we need them 7 days / week. We need to cover 7 shifts / day, 7 days / week, which is 392 hours. A FTE only works 40 hours / week (8 hour days / 5 day weeks). We can divide 392 by 40 to get the number of FTEs we need for full coverage - 9.8.

12/20 For housekeeping, I typically calculate on a credit basis. 1 credit = the amount of time to clean a standard room. Assign credits to each room type, and figure out your average credits / room.

13/20 You then need to understand how long one credit takes to complete (a standard estimate is 30 mins, but you’ll want to chase this down heavily).

14/20 You can then figure out how many credits for “dead time” (travel between rooms, loading / unloading carts, lunch, break, etc.) to get the number of credits a housekeeper can complete in a day.

15/20 Multiply your daily average occupied room count by your average credits per key and divide by credits per housekeeper to get the number of housekeepers per day, then gross up for 7 days / week need vs 5 days / week workweek, and you’ve got your housekeepers (but not HK…

16/20 …supervisors / managers, housepersons, laundry, etc.). This level of underwriting is usually what gets me thru an acquisition / development – if the margins are still so thin I need to go to the next level to be even more certain, it’s a deal I know I should pass on.

17/20 If I’m in a particularly seasonal market, or working on a new development that needs to ramp, I’ll do monthly projections so I can figure out how much debt service I need to keep in reserve.

18/20 There are some key items to keep an eye out for in DD phase on an acquisition that will assist with this exercise.

19/20 I try to get a detailed, departmental-level P+L showing expense categories for each department (e.g. Rooms, A+G, etc.). I also request (but usually only get late in the game) a full list of FT + PT employees by position, with salaries and benefit costs (albeit without…

20/20 …names). Also, any productivity reports and as many of the reports as are available for the previous 3 – 5 years as possible. Information is critical to getting this right!

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