Getting up to speed on Hospitality as an asset

Here's how we typically look at and discuss hotel deals:

Qualitative Aspects:

1. Who will be operating/managing the hotel? A good, experienced operator can significantly improve a P&L, while the opposite can have you hurting to cover debt service. What’s their track record? Is there anything funny in the management agreement? How much term is left on the agreement? Can you terminate the agreement if you can benefit from installing a better operator?

2. Is the hotel “flagged” (i.e. is it a boutique hotel or is it part of a chain). To be clear, boutiques can also be brands with several locations. The key distinction here is that flagged brands benefit from extensive marketing, affiliations with loyalty programs, credits cards etc., which greatly increases the exposure of the hotel. This is costly and will show up as franchise fees on the P&L which can be as high as 10% of gross revenues depending on the chain. On the other end of the spectrum, the boutique brand would need to have an exceptional marketing team and strong concept/story that fits the location and target demographic.

3. If dealing with a flagged hotel, how much term is left on the agreement? If you are buying to hold, the last thing you want is to be left with an unflagged hotel, unless it’s part of your value-add plan to rebrand. All flags also require PIPs (property improvement plans) as part of the agreement. The owner must follow the pip renovation plans and guidelines closely, so it's important to make sure they are up to date and not in violation of these as this can void the agreement and cause other issues.

4. Make sure you understand the target demographic(s) of the hotel and assess whether its location and strategy make sense. Visitors are usually split into leisure/business/transient travelers, which HVS can give you a detailed explanation of. If the hotel is targeting convention business, is it located near the airport or in the CBD surrounded by office towers? If it’s geared toward leisure travelers is it near points of interest, attractions, public transportation etc.? In general, you want your hotel to be visible, easily accessible from airports and major thoroughfares, and close to as many demand generators as possible (office towers, universities, medical centers, tourist attractions, major venues etc).

5. If you are looking at a hotel with food and beverage components, who is operating these outlets? Ideally, you want a top local restaurateur or bar operator. This can be fleeting income if you have a poor partner. Also, if the F&B is a major component of your revenue (>25%), prepare for a nightmare and potential disappointment on the financing front. Lenders hate seeing this on the pro forma and will ding you for it. If you have a few years of historicals, it’s a different story. Either way, this component should always be scrutinized to make sure the business plan is realistic and demand will be sufficient.

6. Is the hotel on a ground lease? Just throw the deal in the trash.

The Numbers:

1. What’s your RoC look like (both stabilized and going-in)? Even most of the nicest hotels trade at 6%+ caps, so if your stabilized RoC is below an 8…what’s the deal?

2. How does the basis compare to other hotels in the area? If you’re looking at a deal with a basis of $300,000/key and the comps are trading at $150,000/key, is there anything that justifies this massive premium? Obviously, mixed-use (i.e. hotel + condo) this metric becomes a lot murkier as you need to breakdown and value the parts (usually more art than science).

3. Make sure the three key hotel metrics look good. Where do the ADR, Occupancy and RevPAR fall in terms of your comp set (penetration)? This will all be shown on the STR report. If the current owner or GP partner doesn’t have an STR report, run for the hills. No excuses here, any owner or operator worth a damn in the hotel industry will have this readily available, including for development projects (“aspirational” comp set).

4. Make sure the comp set makes sense. For instance, if the STR report shows that the hotel is only penetrating the comp set RevPAR at 60%, you’d think there is a great value-add opportunity…but then you see that the comp set for your Hampton Inn in the suburbs includes the Four Seasons and the St. Regis in the middle of the CBD.

5. When looking at a P&L, it’s important to take a quick look at a few key indicators: the largest component in your revenues should be room revenue (well over 50%), unless you have a very prominent F&B component (think: famous rooftop bar). Room revenue should also have the highest margins (>75% profit) while F&B is the opposite (25% profit). If either are far out of this range, it warrants a very close investigation. There could also be any number of ancillary income (parking, conferences, weddings, spa, film etc.) that will vary greatly by hotel. Management fees are typically 4% and your FF&E reserve (for replacing outdated furniture, minor renovations etc) should be 4% of revenues. The bottom line for most flagged hotels should fall in the 25-40% range and boutiques should be in the 20-30% range – as with all other classes this is highly deal dependent and outliers exist.

Hope this helps, let me know if you have any questions on the specifics.

Some good pointers for self-storage can be found the thread below, where you can also find some more of my run on sentences.

http://www.wallstreetoasis.com/forums/self-storage-questions