Thread by @somehotelguy

1/24 De-Risking Hotel Acquisitions: Thread 5 – Expenses (our denouement)

We’ve talked along the way about expenses obliquely – shifting business mix to bring down reservations costs, slimming down or eliminating room service, considering meal periods, outsourcing parking, etc.

2/24 , but now it’s time to focus fully on the expense side of the ledger. Again, each project is different and there is only so much one can do to identify, understand, and “box in” the risks, but here are some of the areas I focus on and what I look for.

3/24 Staffing. Staffing expenses are massive at hotels – upwards of 70% of your OpEx is staffing.

4/24 When approaching renovation work, I always have operational efficiency in mind… “How hard is this new millwork piece to clean?” “Will a standard vacuum fit between the bed and the wall?” “Does using a pebbled tile in the bathroom lead to more maintenance?”… which annoys…

5/24 …the heck out of my interior designers but is awfully important – with most line-level positions your best bet for keeping staffing under control is efficiency.

6/24 With 200 guestrooms to clean, an extra 3 minutes spent on something in a guestroom is more than 10 hours of additional labor per day. The other area I spend a good deal of time is understanding the existing in-place line level staffing at the hotel.

7/24 I may not get all the info I need early in the DD process, but at a minimum before I make a hard-$$ deposit I’ll want to have seen: (i) staff roster listing people (ideally without names) by position with PT/FT status, salary, benefits cost, and tenure; (ii) a common…

8/24 …week’s shift schedule; and, (iii) a list of what executive-level functions are performed by the operator off-property or complexed.

9/24 Goal here is to understand if there are any upside opportunities (e.g. complexing ops w/ new operator) or downside risks (e.g. understaffed to start).

10/24 While I will have built my staffing model from scratch, I’ll need to adapt to conditions on the ground to some degree – can’t just fire everyone or hire all new people Day 1.

11/24 Also, If my staffing model and the actual staffing are very different from one other that tells me something’s wrong and I need to dig in further. Complexing operations is definitely a risk/reward play.

12/24 Using an Area GM or Area Sales team (over multiple local properties) can provide great efficiencies, but also risks individual hotels not getting needed focus / attention.

13/24 This is where alignment with your new operator is most critical – you want to understand: (a) their experience with and perspective on complexing in your market; (b) how many hotels fall under these arrangements; (c) how time is allocated among hotels; (d) how costs are…

14/24 …allocated among hotels; (e) how much say you – as owner – will have over the people in those roles; (f) what happens if you – as owner – want to unwind your complexing; (g) what happens if other hotels in the complex leave (will your costs increase?

15/24 your services decrease?); and (h) all kinds of other questions.

Other OpEx. Here I’m looking at a few buckets, with varying levels of intensity.

16/24 I try to focus on as many brand-related fees as are calculable, including royalty (franchise) fee, program fee (brand sales + brand marketing), loyalty program fee, any required brand services (e.g. centralized revenue management), and areas like that.

17/24 Goal is to make sure that any of these variable fees are accurately reflected in my model and to highlight areas where we’ll see savings for storytelling purposes. Next I’ll look at consumables, particularly in the rooms department.

18/24 If they’re in line with my comps I’ll ignore, if not, dig in. In the undistributed departments, I’ll focus on: (i) A&G – contract labor, credit card commissions; (ii) S&M – T&E, FAM costs, dues & subs; (iii) POM – outside trades.

19/24 Again, goal is to see if things are in-line with expectations or to dig in on differences. Any differences will really inform questions I ask of the broker, the GM, the Chief Engineer, etc., as I’ll not likely find answers in spreadsheets.

20/24 Other Costs. I’ll always look at Property Tax comps in market, to make sure I’m not way out-of-whack and to see how property taxes have changed over time.

21/24 Getting cute with the Reserve Fund is a bad idea – your lender will mandate how much you set aside and will have some controls on the account, and even if you could lower it, you’d just be setting yourself up for capital calls sooner rather than later.

22/24 Insurance is its own specialty – I honestly couldn’t tell you much… I generally lean on the experts there.

So, that’s a high-level run through my DD process on a hotel acquisition.

23/24 Each of these items can end up being a thread that gets pulled and pulled and pulled, which is what you want in DD. My goal is to discover as many of the problems as possible and at least understand them.

24/24 Over the next week, I’ll see if I can present a few interesting case studies from deals I’ve done (though I’ll have to anonymize – sorry!).

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