Hotel Underwriting - Acquisition Model Complexity
This is a question for those of you who have experience investing in full-service hotels. How complex are the models you are using? For rooms, are you doing detailed segmentation or a simple split between group and transient (or just total rooms)? For F&B are you doing average checks and total covers or just doing a simple POR? For expenses do you break out labor and controllables or just apply a % margin? Lastly, what metric do you focus on for returns?
For reference, we typically stay to simpler of the scenarios described above. Occasionally if we are bringing in a new operator, we will obviously have their budget/proforma that is much more detailed since they have direct knowledge on all the appropriate inputs. For total return, we look at levered and unlevered IRR as well as annual yield. Note, I work for a medium sized ownership group.
its not that hard brother.
My company owns/operates across all types of hotel types (full, select, extended, boutique, etc.). It honestly depends on the asset and what our partner focuses on. At the start, we almost always gut-check at a summary level and as the process progresses we dig deeper into various areas. Full-service / boutique hotels all have different items that make them tick and drive demand, so it's difficult to have a boiler plate template. Select service assets are much easier and have less levers.
We certainly review the segmentation in detail, but you could easily fall into some false precision trying to make room night and ADR assumptions on 20 different segments. We try to understand what we believe the market ADR/Occupancy is going to do, then apply an index-level for our subject property. We also pull market RevPAR comps and determine where we believe our subject should fall relative to those figures. Again, depending on the asset we will certainly dig deeper into certain aspects.
Once we're in DD we will pretty much always do a full P&L build-up, including staffing levels, which is generally the trickiest part, then comp non-labor to other hotels.
F&B is pretty tough to UW given how much turnover a single table can have in a given day. If it's just your typical 'ol hotel restaurant/bar, you can pretty much assume the historical POR with a bit of growth. If it's a brand new roof-top bar, I'd be trying to get as much info as possible on avg. checks/covers, meal periods, and at least high-level market comp data.
This was a long way of saying 'it depends'.
Thanks for the input, good to hear from a owner/operator. This is not far off from how we look at building a P&L, in particular the segmentation part.
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