Hotel Operating Margins (Select Service)

Any hoteliers here? Curious to compare bottom line NOI margins on limited/select service hotels (flagged).

I am looking at a 3 year old extended stay/all-suites project. Had a 3rd party mgmt. co perform a basic Year 1 proforma. They used a 50% Gross Operating Profit (25% distributed expenses and 25% undistributed expenses).

Seems light, but it's extended stay so perhaps the rooms expenses are lower since they are being turned over less frequently? I'm used to seeing about 33-35% total bottom line margins on deals like this. The management co is projecting 39% total margin on this, again seems very aggressive.

Any input would be appreciated, ty.

 

I work for a hotel real estate investor and it's not at all uncommon to see select service properties with an NOI margin around 40%. I would however then expected the GOP to be around or above 60% especially for an extended stay property given that all the savings associated with less turnover are realized above the GOP line and not below.

Has the management company factored in FF&E and management fees? This will easily drop the NOI down to the 33-35% you mentioned.

 

GOP and NOI margin can fluctuate significantly based on your occupancy and rate because of high operating leverage.

Consider a hotel with a $100 ADR. With that $100 you pay expenses for rooms, A&G, S&M, Repairs & Maintenance, Utilities, etc). Now consider a hotel with a $200 ADR. You still pay most of your expenses with that first $100 of ADR, but 85% of the incremental $100 of rate flows to the bottom line (pull out credit card fees, franchise fees, management fees, FF&E reserves, say 15%). Your margins are going to be substantially better in the second hotel.

The poster above mentioned the 2016 Host almanac, that's a good start. Also, see if you can get your hands on the Hotel Trends annual report, or look through HVS and see if you can find some good benchmarks, ideally on a per occupied room basis.

 

On a side topic, for those who are in the hotel space, are there companies that specifically handle PIP projects? Would you go through a general contractor, or would the scope of work require someone who is specialized in hospitality projects? I am helping a friend identify potential hotels and a few of them have PIPs that were ordered so we know what the brand requires, now I need to understand the cost implications and who I should go to in order to price it out.

Thanks

 

Many companies specialize in completing PIPs. Depending on the brand, you can speak directly to the franchise and they will give you a list of well qualified contractors with experience. Many hotel owners sell due to the fact they don't feel like completing the PIP. They would rather have that be someone else's problem. Provide a PIP list to contractors and they will give you quotes.

Array
 

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