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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More from @somehotelguy

8 Jan
1/27 De-Risking Hotel Acquisitions Thread 4: Business Plan, B+C, Minibar, IRD, and Other Revenue

We’ve got a good one for you tonight folks! #SteveHarveyImpression
2/27 We’re going to start with Banquets + Catering (B+C) revenues, then hit on the small F+B sources – minibar and in-room dining (IRD) – and then move on to other revenues.
3/27 Since we’re trying to hit a bunch of things and I’ve been exceptionally long winded (2021 goal – learn how to edit writing for Twitter) I’ll try to be a bit more concise on each.

First, B+C.
Read 28 tweets
7 Jan
1/25 De-Risking Hotel Acquisitions Thread 3: Business Plan, F+B Outlets

Now that we’ve talked Occ + ADR, let’s talk about some of the more fun areas of a hotel – the F+B outlets. Full Disclosure – I’m not a “restaurant and bar guy” professionally.
2/25 I work closely with them on hotel acquisitions and developments, and have learned quite a bit about how they think about outlets, but I’m not an expert here (other than at the eating and drinking part – I’m seriously, seriously good at that).
3/25 Hopefully some actual experts step in to correct me where I’m wrong, and to fill in the inevitable gaps! Tomorrow, we’ll hit on banquets + catering, then the smaller departments (in-room dining / mini-bar) and other revenue opportunities.
Read 26 tweets
5 Jan
1/20 De-Risking Hotel Acquisitions Thread 2: Business Plan, Top-Line

We’ve already talked a bit about underwriting, both top-line and expenses, but here’s where we’ll try and connect the numbers to actual business planning.
2/20 Each potential acquisition presents a different turnaround story, and those stories are myriad and varied. For our purposes, we’ll try to hit on a wide variety of items that will help us find and confirm our turnaround story. This one will focus on Occ + Rate.
3/20 Once I’ve established where my post-renovation hotel should sit within its competitive set, I need to start finding the business to get there. What types of customers are in the market, and what drives them, are the first two questions I need to answer.
Read 21 tweets
4 Jan
1/17 De-Risking Hotel Acquisitions Thread 1:

First focus is on the value-add, and narrowing my risk profile there. The renovation is likely driven mostly by the new brand’s PIP and any material requirements of the new operator, along with any value add items my team identifies.
2/17 Before getting to anything specific process-wise, this is absolutely critical: TOUR THE HOTEL WITH AN ENGINEER. Take as much time as you want. See as much as you can. Take good notes. Take photos.
3/17 Do not rely on seller reps as to conditions, mechanicals, etc. Initially post-tour, I’ll generally price out the PIP as-is with a couple trusted purchasing agents, adding consultant fees, installation, contingency, and warehousing / tax / freight markups based on prior…
Read 18 tweets
4 Jan
1/8 On Due Diligence - a multi day thread:

When pursuing a new hotel acquisition with a capital partner, I do my best to identify and box in risks as part of a rigorous due diligence process.
2/8 I don’t believe I can ever truly de-risk, but by identifying the unknowns and having a plan to address, I can ensure a higher likelihood of success.
3/8 It also affords me the opportunity to present a capital partner a thoughtful plan and to be open and forthright about the risks. I find it helps me answer the partner’s questions, even the ones I hadn’t anticipated.
Read 8 tweets
29 Dec 20

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.
Read 21 tweets

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