Thread by @somehotelguy

1/35 Ok, so by popular request, a quick desktop look at this potential hotel redevelopment found by @harrisonfinberg. I'm skipping some steps that either don't lend themselves to narrative or are the artistic flourish of underwriting.

https://twitter.com/harrisonfinberg/status/1409330089033097218

2/ As Justice Stewart said, you'll know 'em when you see 'em.

Let’s start with market then think through post-renovation performance. We can then back into a renovation budget and take a guess as to whether or not it’s remotely feasible given the budget.

3/ AC is, to say the least, a challenging market. Much of the supply in town belongs to the Casino Hotels, and their pricing and inventory management are done with maximization of gambling revenues – not maximization of rooms profit – in mind.

4/ Further, it’s an INCREDIBLY seasonal market – Occupancy peaks in July and August, has some support in May and September, and is pretty much “fall off a cliff” in the winter. Even when the convention center has something going, the city has WAY too much supply out of season.

5/ What does that seasonality look like? Without ordering a STR report (and spending hundreds of $$s), I’ll have to take some educated guesses.

6/ Having looked at a few hotels in the area in past jobs, and assuming a property of quality (but not too high end), you’re likely seeing Occupancy something like the following: Jan & Feb – 20%, Mar – 40%; Apr – 45%; May – 65%; June – 70%; Jul & Aug – 95%; Sept – 70%; Oct –…

7/ …50%; Nov – 40%; Dec – 30%. And this feels pretty optimistic to me. What does this tell me? We’ll probably want to chop off 3 months of the year, and close Dec, Jan, & Feb.

The location here is… meh.

8/ Surrounded by parking (I’m assuming this doesn’t come with the parking… it’d be a lot cooler if it did *mcconaughey.gif*). Nearest casino is the Trop which, while it brings back fond memories of underaged gambling in college, is ROUGH.

9/ Other proximate hotels are economy scale and likely used as transitory housing as much as true transient lodging. This also represents essentially the end of the AC boardwalk, with much of the action further east.

10/ Overall, for a boutique hotel I’d call it a C+ location in-market.

Now rates. Let’s get a couple of comps, and we’ll do some rate shopping (again, in absence of a STR report). Comps are tough here!

11/ Immediately proximate hotels are either Economy or Casino – neither what we’re looking to do. The Claridge is probably the closest thing to us – non-casino, historic renovation. It’s a Radisson, and I promise any hotel I build will be better designed, but it’s something.

12/ We can also look to nearby towns’ upscale select service hotels for comps – I’m going to peak at the Residence Inn and Homewood Suites in Egg Harbor Township, just inland. They’ll be my rate ceilings.

13/ With these comps in mind and a bit of @somehotelguy magic (combo of checking public prices and checking in with friends; would be solved by a STR report), we’ll assume our wonderful little boutique can achieve a $150 Average Daily Rate (ADR) in 9 months of operations with…

14/ …48 keys.

OK! Removing Dec – Feb, we’re at ~63% Occ and $150 ADR for 9 months of annual operation, or $1,247,400 in Rooms Revenue. The restaurant is a whole other kettle of fish, so we’re going to pretend it doesn’t exist.

15/ We’ll probably have another sliver of non-rooms revenue which gets us to ~1.313M in total rev. Given the seasonality, we should probably underwrite operations monthly. That comes after the “sniff test” though, and we’re not through that yet. Let’s staff this baby up!

16/ Let’s start w/ Rooms Department. Front Desk will probably need to be staffed 24/7 for security purposes. Min 1 person per shift, 3 shifts per day. Overnight shift is also night audit, and one day shift is Front Office Manager.

17/ We’ll likely end up with a swing shift during busy check-in / check-out that the GM covers. So, call it 3 bodies per day. Assume they work 5 day weeks but you have to staff 7 days, you’re at ~5 FTEs.

18/ Salary here averages maybe $12 / hour (FOM + Night Audit more, Desk Agents less). Would need to shop the local job posting boards to confirm. Payroll Taxes + Employee Benefits is probably around 25% of wages. So, for 5 FTEs, 9 months, we’re at ~$98K in payroll expenses.

19/ When we look at Housekeeping, we’ll assume HK can clean 1 room every 30 mins, work 8 hour days, and have 30 mins for “general stuff” (clocking out for lunch). So, they’re cleaning 14.5 rooms / day.

20/ Our average day has 30.25 occupied rooms, so we’ll need just over 2 HK per day. Again on the 7 day week vs 5 day work week, we’re at call it 3 FTEs in HK. Same wage, PTEB, etc., and we’re at $70K in payroll expenses.

21/ Now we need someone to clean public areas, someone to get HK all set up, someone to send & receive linen, etc. We’ll assume laundry is done off-site (thank goodness). You’ll likely need another 2 bodies / day for this – 1 for public areas, 1 for HK set up / linens.

22/ Same round up, wages, etc., and you’re at another $65.5K in payroll. Total rooms dept. payroll is looking like ~$233.5K.

23/ Then we have cleaning supplies, linen costs, guest supplies, reservations costs, etc., etc., etc. At a small independent boutique this is typically ~50% of payroll. We’ll assume 40% here (its AC, we can probably skimp a bit) for another $93.5K in rooms expense. Congrats!

24/ On our $1.25M in rooms rev we’re achieving a profit of ~74%!

Now other expenses. Our ~65.6K in other revenue is from things like attrition, parking commissions, telecommunications, etc. Commissions and attrition are expense free others are not. 50% margin feels good.

25/ $32.8K in expenses, so another $32.8K in departmental profit!

Before we get to undistributed expenses, we’re now at $953K in departmental profit, or a 73% margin.

Undistributed Expenses! Admin & General first.

26/ Big expenses here will be payroll (GM, likely $75K + 15% bonus + PTEB = $108K), accounting (outside accountants, maybe $30K?), credit card commission (3%), and other general expenses ($30K?). HUGE chunk of your profit, gone - $207K in expenses there.

27/ Your IT costs will probably be ~$60K (super hard to gauge w/o comps). Your Sales + Marketing costs will probably be about $100K, with the $ spent on promotions / activations / paid search / etc, all run by the GM (who’s doing 1,001 things).

28/ Maintenance you’ll try to keep under $100K, so lets aim for $75K. Utilities are tough w/o comps, but you’re probably paying $10 per occupied room ($83K). Total Undistributed Expenses are $525K / 40%.

29/ This is killer – this is the expense bucket where size (e.g., more keys) and revenue (e.g., higher ADR) drive material margin improvement. So, after undistributeds you’re at ~$428K in profit. Insurance in AC will be expensive b/c of flood risk, so let’s call it $75K.

30/ Now you’ve got property taxes – currently $16K / year, but assume 3x upon completion of renovation, so $48K. You’ll have to carry a reserve for replacement, and it’s usually 4% of revenues, or $52.5K.

Net Operating Income = $252K / 19%. Ouch.

31/ If you’re the GM, you’re taking home a good bit more though, so arguably this one’s a labor of love.

Hotels like this rarely trade on cap rates, so let’s be generous and assume 2x Gross Revenues for value. Wow – it’s worth $2.6M at stabilization! With our NOI, that’s a 9.

32/ 6% Cap Rate, which feels… aggressive… but that’s why it’s not the measure for these types of assets. Need to leave myself some “entrepreneurial incentive” (profit), so I probably want to be all-in for ~$1.8M. Ask is $725K, assume you can get it for $650K (really, less).

33/ Leaves you $1.18M for the renovation. Can you turn this thing into something special for $25K / key? Depends on the bones! If all the mechanical systems and bathrooms are all OK and you’re just doing cosmetic work on small guestrooms and public space, maybe.

34/ The minute you need to fix an elevator, replace a chiller, or redo a bathroom? There goes the budget.

Moral of the story? This is a @RaphaelKahan $1 special unless you can create a PROFITABLE restaurant operation or actually pull a $150 RevPAR (Occ x ADR).

35/