Thread by @somehotelguy

I’ve owed you all the next benchmarking thread for a while… here we go!

Now that we’ve been through benchmarking, let’s look at a “live” example of a hotel deal – how would I use this to see if a deal is worth chasing?  Thanks to a member of the #ReTwit crew for offering up a hotel – I’ve anonymized so it shouldn’t be recognizable.

First let’s take a look at performance in 2019 and 2020. Worth noting – the hotel underwent an addition in 2019, so it’s a particularly tough historical data set to use! Also, some funky project-specific things we’ll ignore for now (e.g., no property taxes) to protect anonymity

Now, to operating comps. In an analysis like this I’d typically use comps from my portfolio; these are based on real hotels, but not real hotels. Now I can get a good idea of how my operating team should do. I like to list each comp and to blend them – there’s times I’d use each

Let’s go! Time to answer the Q, “how should we do if we buy it?”. For now, 0 capital value add (e.g., no renovation), just change in mgmt. Also, I’m using a stabilized year here – coming out of COVID, we’re still looking at a couple year ramp to prior levels, so I’m assuming 2024

Here’s how that looks:

Now to the “why”

We’ll do an entire thread on comping Occupancy and ADR, so let’s just say for now, “my revenue management and marketing is better, so I can do better”.

F+B Revenue – Comps 2 and 3 are in similar types of markets with similar sized banquet facilities. Parking – Generally will do what it’s done, but I’ve built a better mousetrap of monetizing parking… may be underselling it here. Other & Misc – it’s small, who cares at this point

Expenses! As we discussed, Rooms is variable per occupied room & heavy labor. Comp 2 (non-union in similar labor market) is the best bet here. F+B is complicated, & I’m not yet to the point where I’ll do detailed by outlet, so we’ll blend Comps 2 & 3 (what we used for revenues)

Other – Again, who cares. Gets us to our departmental profit – 56.8% vs historical 56.7%. Hm. Not a ton of margin improvement! But, $16.9MM vs $13.1MM is a pretty material change. Driving revenue really does matter!

Overhead! Admin & General historically has been quite lean – I’ll likely add some cost here to help drive performance. The cost varies by room count, not occupancy, and so we’ll use Comp 2 (non-union labor) but decrease per key to account for economies of scale

Info & Telecom is also a per-key basis, and I’ve got a method of delivering these services more inexpensively than most, because I can buy across a larger portfolio. Using an internal comp closest to the same size

Sales & Marketing. Similar to A&G, historically lean. I’ll add dollars here for more staff – and likely redeploy existing spend – to improve top line. A pretty profitable trade if done correctly. Franchise Fees I’ll just use the Franchise Disclosure Document to get actuals

Property Ops & Maintenance has historically been way underfunded, but that’s because a renovation was happening and then COVID hit. Need to get this to a more normalized amount

Utilities are hyper local to market and building, so I tend to use historicals. Because keys were added, I’ve added a touch of efficiency

Base Management Fees and Reserve Fund Contributions are normalized, and Property Taxes / Insurance / Other are per historicals – for now

Looking at this, we think we can increase NOI from $5.6MM in 2019 to $7.4MM in 2024 through only management changes and room addition absorption. But which is it? Well, its both, and we know that because NOI / key is increasing from $15.9K to $18.4K

So, what does this mean for a potential investment? Seller is asking $215K per key, or $86MM. A 6.5% cap on 2019, but 2019’s a tough comparison year because of the renovation. At ask, my stabilized UYOC is ~8.5%, which is a bit low for me – I’m not BREIT

I’d like to be closer to a 9.5%, because I think I can sell for a 7% - 7.5%. That puts me at a $190K per key / $76MM number, which is also a 7.25% Cap on 2019… funny how those things work sometimes.