7. UNDERSTANDING NOI: WHAT DRIVES YOUR DISTRIBUTIONS

What Is NOI?

NOI = Net Operating Income

Simple definition: What the hotel earns after paying operating expenses, but before financing costs, taxes, and capital expenditures.

Formula:

NOI = Total Revenue - Operating Expenses

Why it matters: NOI is the source of your distributions. Higher NOI = higher distributions (after reserves and priorities).

Breaking Down Revenue

Revenue Sources

Hotels generate money from multiple streams:

1. Room Revenue (Primary — 70-85% of total)

Components:

• OTA bookings (Booking.com, Expedia, etc.)
• Gross room rate: $200
• OTA commission (20%): -$40
• Net to hotel: $160
• Direct bookings (hotel website, phone)
• Gross room rate: $200
• No commission
• Net to hotel: $200
• Travel Club bookings
• Internal rate: $60
• No commission
• Net to hotel: $60

Key metric: Revenue Per Available Room (RevPAR)

RevPAR = Average Daily Rate (ADR) × Occupancy Rate

Example:

• ADR: $180 (average price per occupied room)
• Occupancy: 75% (rooms filled)
• RevPAR: $180 × 0.75 = $135

RevPAR is the single most important performance metric for hotels.

2. Food & Beverage (F&B) Revenue (If Applicable — 10-20%)

Sources:

• Restaurant (breakfast, lunch, dinner)
• Bar / lounge
• Room service
• Catering (events, weddings, conferences)

Margins:

• F&B typically has lower margins than rooms (30-40% vs. 70-80%)
• Labor-intensive (chefs, servers, bartenders)
• Inventory spoilage (food waste)

Not all hotels have F&B:

• Budget hotels: Often no restaurant (guests eat elsewhere)
• Business hotels: Usually have breakfast + bar minimum
• Resorts: Full restaurant, multiple outlets

3. Ancillary Revenue (5-10%)

Other sources:

• Spa services
• Parking fees
• Laundry services
• Minibar sales
• Wi-Fi upgrades (premium speeds)
• Early check-in / late checkout fees
• Pet fees
• Resort fees (in some markets)

Margins:

• Highly variable (parking = high margin, spa = lower margin)
• Often outsourced (third-party spa operator, for example)

Total Revenue Example (100-Room Hotel, Annual)

This is gross revenue before any deductions.

Breaking Down Operating Expenses

Expense Categories

Operating expenses include everything needed to run the hotel day-to-day, excluding financing and capital improvements.

1. Rooms Department (30-40% of revenue)

Components:

• Housekeeping labor (cleaning rooms)
• Housekeepers: ~15-20 minutes per room
• Supervisors, inspectors
• Laundry staff (if in-house)
• Front desk / reception
• Receptionists (24/7 coverage)
• Concierge
• Bellhops / porters
• Supplies
• Linens, towels (replacement + laundering)
• Toiletries (shampoo, soap, etc.)
• Cleaning supplies
• In-room amenities (coffee, tea, bottled water)

Example (100-room hotel):

• Housekeeping: $450,000/year
• Front desk: $300,000/year
• Supplies: $150,000/year
• Total Rooms Department: $900,000 (18% of $5M revenue)

2. Food & Beverage Department (If Applicable — 60-70% of F&B revenue)

Higher expense ratio than rooms because F&B is labor- and cost-intensive.

Components:

• Kitchen staff (chefs, cooks, dishwashers)
• Service staff (servers, bartenders, hosts)
• Food costs (ingredients)
• Beverage costs (alcohol, soft drinks, coffee)
• Kitchen supplies (plates, utensils, napkins)

Example:

• F&B revenue: $410,625
• F&B department expenses: $280,000 (68% of F&B revenue)
• F&B departmental profit: $130,625

Many budget hotels skip F&B entirely because margins are thin and operations are complex.

3. Utilities (5-8% of revenue)

Components:

• Electricity (HVAC, lighting, kitchen equipment)
• Water / sewage
• Gas (heating, hot water)
• Internet / telecom

Variability:

• Seasonal: A/C costs spike in summer, heating in winter
• Occupancy-dependent: Higher occupancy = higher utility usage
• Geographic: Energy costs vary widely by country/region

Example:

• Electricity: $120,000/year
• Water/sewage: $40,000/year
• Gas: $30,000/year
• Internet/telecom: $20,000/year
• Total Utilities: $210,000 (4.2% of $5M revenue)

4. Maintenance & Repairs (3-5% of revenue)

Components:

• Preventive maintenance (HVAC servicing, plumbing checks, electrical inspections)
• Reactive repairs (broken fixtures, leaks, equipment failures)
• Groundskeeping / landscaping (if applicable)
• Pest control
• Pool maintenance (if applicable)

Maintenance staff:

• In-house team (general maintenance, handymen)
• Outsourced specialists (HVAC technician, electrician, plumber)

Example:

• In-house maintenance team: $120,000/year
• Supplies + outsourced repairs: $80,000/year
• Total Maintenance: $200,000 (4% of $5M revenue)

5. Property Taxes & Insurance (3-5% of revenue)

Property taxes:

• Based on assessed value (varies by jurisdiction)
• Typically 0.5% - 2% of property value annually
• Example: $10M hotel × 1.5% = $150,000/year

Insurance:

• Property insurance (fire, natural disaster, theft)
• Liability insurance (guest injuries, lawsuits)
• Business interruption insurance (covers lost revenue during closures)
• Workers' compensation (employee injuries)

Example:

• Property tax: $150,000/year
• Insurance premiums: $80,000/year
• Total: $230,000 (4.6% of $5M revenue)

6. Marketing & Distribution (5-10% of revenue)

Components:

• OTA commissions (15-25% of OTA bookings — deducted from revenue directly, but sometimes categorized here)
• Hotel website (hosting, SEO, maintenance)
• Paid advertising (Google Ads, Facebook, Instagram)
• Photography / videography (professional property shots)
• Reputation management (responding to reviews, monitoring)
• Social media management
• Email marketing tools
• Channel manager software (synchronizes inventory across OTAs)

Example:

• OTA commissions: Already deducted from room revenue
• Website + SEO: $30,000/year
• Paid ads: $50,000/year
• Software + tools: $20,000/year
• Total Marketing: $100,000 (2% of $5M revenue)

7. Administrative & General (A&G) (5-8% of revenue)

Components:

• General manager salary
• Accounting / bookkeeping
• HR / payroll administration
• Legal / compliance
• IT support (PMS, cybersecurity, hardware)
• Office supplies
• Bank fees, credit card processing fees

Example:

• GM + admin staff: $180,000/year
• Accounting + legal: $60,000/year
• IT + software: $40,000/year
• Other: $20,000/year
• Total A&G: $300,000 (6% of $5M revenue)

8. Other Operating Expenses

Components:

• Training (staff development, certifications)
• Licenses & permits (business license, liquor license, health permits)
• Uniforms (front desk, housekeeping)
• Guest amenities (welcome gifts, newspapers, etc.)
• Miscellaneous

Example: $80,000/year (1.6% of $5M revenue)

Total Operating Expenses (Annual Example)

Calculating NOI

NOI = Total Revenue - Total Operating Expenses

Using our example:

• Total Revenue: $5,000,475
• Total Operating Expenses: $2,300,000
• NOI: $2,700,475

NOI Margin: 54% (NOI / Revenue)

This is a healthy NOI margin for a well-run hotel. Industry average: 40-60% depending on hotel type.

What NOI Does NOT Include

Not Included in NOI Calculation:

1. Depreciation

• What it is: Accounting expense (building/furniture lose value over time)
• Why excluded: Non-cash expense (no money actually leaves)
• Where it matters: Corporate taxes (depreciation reduces taxable income)

2. Interest Expense

• What it is: Bank loan interest payments
• Why excluded: Financing decision, not operating performance
• Homeunity context: We have zero bank debt, so this is $0 anyway

3. Income Taxes

• What it is: Corporate income tax on profits
• Why excluded: Tax is SPV responsibility (paid after NOI distributions)
• HPOT holders: Receive distributions before SPV tax (gross distributions)

4. Capital Expenditures (CapEx)

• What it is: Major renovations, furniture replacement, building improvements
• Why excluded: Funded from reserves (20% of NOI set aside — see §8)
• Examples:
• Renovating all bathrooms: $500K
• Replacing HVAC system: $200K
• New furniture for all rooms: $300K

CapEx is "lumpy" (big expenses every few years, not monthly).

NOI Drivers: What Makes It Go Up or Down

Factors That Increase NOI

1. Higher Occupancy

• More rooms sold = more revenue (with minimal incremental cost)
• Example: 75% → 80% occupancy = +6.7% revenue (with only +2-3% expenses)

2. Higher ADR (Average Daily Rate)

• Charge more per room = more revenue
• Strategies: Dynamic pricing, upselling, premium positioning

3. Ancillary Revenue Growth

• Spa, parking, F&B upsells
• Low incremental cost (high margin)

4. Operational Efficiency

• Reduce waste (utilities, supplies)
• Optimize staffing (right-sizing labor)
• Automate processes (self-check-in kiosks, chatbots)

5. Direct Booking Increase

• Reduce OTA dependency (save 15-25% commission)
• Travel Club bookings help here (zero commission)

Factors That Decrease NOI

1. Lower Occupancy

• Fewer rooms sold = less revenue
• Causes: Recession, competition, poor reputation, pandemic, natural disaster

2. Price Competition

• Forced to lower rates to compete
• Race to the bottom in oversupplied markets

3. Rising Expenses

• Labor costs (wage inflation, labor shortages)
• Utilities (energy price spikes)
• Insurance (premium increases after natural disasters)
• Supplies (inflation)

4. Operational Inefficiency

• Overstaffing (too many employees for occupancy level)
• High turnover (constant hiring/training costs)
• Deferred maintenance (small problems become big, expensive failures)

5. Reputation Damage

• Bad reviews (lower bookings)
• Service failures (refunds, compensations)

NOI Variability: Real-World Scenarios

Scenario 1: Strong Year (Post-Pandemic Recovery)

Context: Tourism rebounds, pent-up demand, limited supply.

Performance:

• Occupancy: 85% (up from 75% baseline)
• ADR: $170 (up from $150 baseline)
• Revenue: $5,727,375 (+14.5%)

Expenses:

• Only +5% increase (mostly variable costs like housekeeping)
• Total Expenses: $2,415,000

NOI:

$5,727,375 - $2,415,000 = $3,312,375 (+22.6% vs. baseline)

Impact on distributions: Significantly higher (if reserves are already full).

Scenario 2: Weak Year (Economic Recession)

Context: Recession, unemployment up, discretionary travel down.

Performance:

• Occupancy: 60% (down from 75%)
• ADR: $135 (down from $150 — forced discounting)
• Revenue: $3,567,375 (-28.6%)

Expenses:

• Can't cut as much (many costs are fixed)
• Total Expenses: $2,000,000 (-13%)

NOI:

$3,567,375 - $2,000,000 = $1,567,375 (-42% vs. baseline)

Impact on distributions: Drastically reduced (or suspended to rebuild reserves).

Scenario 3: Disaster Year (Pandemic, Natural Disaster)

Context: Hotel forced to close for 4 months.

Performance:

• Occupancy: 40% (8 months open × 50% average)
• ADR: $140 (slightly below baseline)
• Revenue: $2,044,000 (-59%)

Expenses:

• Fixed costs continue even when closed (property tax, insurance, skeleton staff)
• Total Expenses: $1,500,000 (-35%)

NOI:

$2,044,000 - $1,500,000 = $544,000 (-80% vs. baseline)

Impact on distributions: Likely zero (all NOI goes to rebuilding reserves).

Industry Benchmarks

NOI Margin by Hotel Type

Homeunity target: 45-55% NOI margin (focus on efficient properties, minimal F&B complexity).

Occupancy Benchmarks

100% occupancy is rare (always some rooms out for maintenance, gaps between bookings).

Homeunity target: 70-80% average across portfolio.

How Travel Club Affects NOI

Incremental Contribution

Key insight: Travel Club bookings add to NOI, not subtract.

Why:

• Club members fill otherwise empty rooms (incremental occupancy)
• Internal rate ($60) exceeds variable cost ($50) → contributes $10 to NOI per night
• No OTA commission paid (saves $30-40 per booking)

Example:

• Room empty at 11 PM (no OTA booking)
• Club member books last-minute (internal rate: $60)
• Hotel earns: $60 (vs. $0 if room stayed empty)
• Cost: $50 (variable)
• Contribution to NOI: $10

Even though $60 is much lower than $150 ADR, $10 is better than $0.

Displacement Risk

Concern: What if Club bookings displace high-value OTA bookings?

Example of bad scenario:

• Room could sell on Booking.com for $200 (net $160 after commission)
• Club member books instead at $60
• Hotel loses: $100 in NOI

Mitigation:

• Capacity allocation: Only 5-15% of rooms reserved for Club (85-95% available for OTA)
• Dynamic availability: Club access restricted during peak demand periods
• Priority tiers: Lower tiers only get access to low-demand periods
• Forecasting: AI predicts demand and blocks Club bookings when OTA revenue would be higher

Net effect: Club bookings are additive, not cannibalistic (in well-managed system).

NOI and Your Distributions: The Link

Remember the formula:

Your Distribution = (Your HPOT / Total HPOT) × Distributable Amount

Where:

Distributable Amount = NOI - Reserves (20%) - Priority Fees (~1-2%)

So:

• Higher NOI → Higher distributable amount → Higher your distribution
• Lower NOI → Lower distributable amount → Lower your distribution (or zero)

Your returns are directly tied to hotel operating performance.

You're not buying a bond. You're participating in a business.

Summary: Why NOI Matters

NOI is the engine that powers your distributions.

Drivers of NOI:

• Occupancy (rooms sold)
• ADR (price per room)
• Operating efficiency (controlling costs)
• Revenue diversification (ancillary income)

You benefit when:

• Hotels are well-located (strong demand)
• Operators are skilled (maximize revenue, minimize waste)
• Travel Club adds incremental occupancy (fills empty rooms)
• Market conditions are favorable (economic growth, tourism trends)

You suffer when:

• Occupancy drops (recession, competition, disasters)
• Costs rise (inflation, labor shortages)
• Management is poor (inefficiency, misallocation)

Next: How NOI flows to you — the distribution waterfall.