Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - Understanding Hospitality

Adam Hooper
September 2, 2021
Podcast - Understanding Hospitality

Listen as Adam Hooper and Mike Hu go in-depth on the key fundamentals of hospitality investing.

Mike Hu is a Senior Vice President at Gaw Capital and he leads the Capital Markets team in the US. Mr. Hu is based in Los Angeles, our US headquarters, and is responsible for capital formation, co-investments, separate account investments, investor relations and marketing.

Mr. Hu joined Gaw Capital in 2011 and was previously a member of Gaw Capital’s acquisitions and investment team based in Hong Kong, our global headquarters. In December 2014, Mr. Hu was relocated to Los Angeles to help grow our US business.

Before joining Gaw Capital, Mr. Hu was with Tishman Speyer in London and New York, where he as part of their Leadership Development Program. While at Tishman Speyer, he completed rotations in acquisitions, debt financing/restructuring, property and asset management, and design & construction.

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Adam Hooper - Hey, Tyler.

Tyler Stewart - Hey, Adam, how are you today?

Adam Hooper - I'm doing well, and welcome RealCrowd listeners to another episode of the RealCrowd podcast. Tyler, whose in store for today?

Tyler Stewart - Adam, today we have Mike Hu, Senior Vice President at Gaw Capital.

Adam Hooper - Mike is like you said he leads capital markets out of the Los Angeles based office, but, boy, has he been around the world, hasn't he?

Tyler Stewart - Previous to Los Angeles he was out in Hong Kong.

Adam Hooper - Before that he was in London, so he's seen a lot of different real estate around the world.

Tyler Stewart - He has, and that really comes across during the podcast episode.

Adam Hooper - Yeah, it does. Today we're talking about the hospitality industry what makes hotels different than other investments out there, office, retail, multi-family what we see a lot of. There are some very interesting nuances in the hospitality world that you don't see in other asset classes.

Tyler Stewart - The supply and demand operates a little bit differently from what you would see in traditional commercial real estate products, and Mike really dove into what are the driving factors behind occupancy?

Adam Hooper - We talked about some of the terminology that you get in the hospitality world that you don't, again, see in other asset classes, so there's certainly some terms that we go over. We touched on technology how that's changing things. We talked about Airbnb a little bit what those impacts are. Are they going to be as big as some people say, or is the hotel industry going to be fine even considering that change?

Tyler Stewart - Yeah, Mike got his start as a student of real estate, and that comes across early in the podcast where he talks about those resources he used, and the books he read to help him get up to speed, and now he's worked for some very large institutional groups. He just has a wealth of experience on commercial real estate, and hospitality, specifically.

Adam Hooper - It's the kind of episode I wish we could have gone two hours with, but we had to keep it a little shorter. As always, if you have any questions, comments, or other feedback on the podcast please do send us an email to podcast@realcrowd. Enjoy the episode.

RealCrowd - This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit to learn more about how we provide our members with direct access to commercial real estate investments. Don't forget to subscribe to the podcast on iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.

Adam Hooper - Well, Mike, thanks for joining us today on our podcast episode of how to understand hospitality. Happy to have you on.

Mike Hu - Thanks for having me.

Adam Hooper - Let's take a little bit of a step back, Mike, and tell us kind of how you got into real estate. Where did you start before with Gaw, kind of what led you into this asset class, and tell us what you're up to these days.

Mike Hu - In terms of my background after finishing my undergrad I got into management consulting, and was focused primarily in strategy and operations consulting with a focus on the real estate, and energy industries, so did that for about five years. That's where I think I sort of got introduced to real estate, but more on the real estate operations, so like real estate operating companies, and corporate real estate side. Then went to business school, and after spending time at London Business School had joined a large New York developer Tishman Speyer. Initially started in the London office, and then they relocated me to New York where I joined. It's basically like a rotation program they call it the Leadership Development Program, but basically rotate through different parts of the business. It was a great training. I feel like it was probably the best real estate 101 I think one can get out of B-school, so had a chance to do some acquisitions, some asset management, debt restructuring, design and construction. I think that really solidified my interest. I think from there got a chance to work on some of our China developments, so it was based in New York, and traveled out to Asia, and ended up getting put in touch through two mutual friends to Goodwin Gaw who's the chairman of Gaw Capital. I joined Gaw Capital in 2011, so six years ago, and started in Hong Kong. Spent 3-1/2 years in the global headquarters in Hong Kong, and then they relocated me back here to the U.S. so a little over 2-1/2 years ago. I guess that's sort of a background on I guess how I got into real estate. I run our U.S. capital markets team, which, basically, involves capital formation, co-investments, and separate accounts. You know we focus in the U.S. at least for Gaw USA we focus primarily on creative office and hospitality assets, so that's sort of I guess a long-winded way of saying how I got into real estate.

Adam Hooper - Wow, thanks for that overview there. When you first got into real estate what sort of resources were you using to learn the space?

Mike Hu - Yeah, it's a good question. In terms of sort of I would say academic resources a couple of books I thought were actually quite helpful were a book by a Wharton professor, Peter Linneman. It's sort of a standard it's like a light blue real estate book that everyone reads. I think it's called Real Estate Finance and Investments. There's also another one I can't remember the name of it off the top of my head, but it's by a guy with a surname of Brueggeman. Those two real estate finance books are really, really good reads. I think those two give like sort of a novice a very good overview of real estate. The other things that I sort of developed, or I would say I picked up along the way were we sort of had like a crash course training both in B-school, and also when I joined Tishman Speyer, but you go through sort of like I call it almost like an analyst or associate training for people that are entering like a real estate investment bank, so it gives you sort of a tutorial on financial modeling, how to do valuations. I think that those are basic skills that you can learn not just for real estate, but for private equity or other general finance courses. I think that those are candidly probably the best for learning the very high level basics, but if you want to specialize deeper within that I think than you got to get into you got to look at other sources, right? There's a number of other organizations whether it's Urban Land Institute, or Private Equity Real Estate, PERE, but a lot of these organizations provide great reading materials as well as actually one of them that I saw recently, actually, I just received that I haven't read yet, but I've glanced at it, and it looks really good is the Association of Foreign Investors in Real Estate, AFIRE is the acronym, but they publish a book on real estate investing in the United States. They have leading experts in real estate that actually write the different chapters. It seems like it's very, very detailed, and those are all resources I think that are great for sort of a novice getting into the industry.

Adam Hooper - Yeah, you mentioned Urban Land Institute, ULI, I know they do their annual kind of analysis on the market with PricewaterhouseCoopers, and that's always a great read. It can be a pretty heavy read at times for casual real estate investors, but I think like you said there's a ton of really good information in there, so those are some great resources for listeners out there. Today's topic obviously we're talking about hospitality in this asset class that you guys focus on quite a bit. I think it would be good for listeners out there to just set some base definitions. Let's talk about the different kinds of hotels. Let's talk about some of the metrics, some of the different locations and strategies, so when investors are looking at opportunities whether it's on RealCrowd or direct, or with other platforms out there they can have a baseline of what some of those differences are, so if we could take a minute to go through some of those high-level differences, you know, full-service, limited-service, budget, extended stay, flags, boutiques, micro hotels. There's a whole bunch of different kinds of hotel opportunities out there. Maybe tell us a little bit about where you're focusing on, what some of those differences are, and then we can use that as a base to go forward with the rest of the conversation on.

Mike Hu - Sounds good, I think that within the hospitality industry with what you just described I mean there's a wide variety of different types of hospitality products. Our main focus at least within Gaw USA is really focused primarily on I'd say the limited-service hotels, which are hotels that I think the ones that come to mind are sort of like a Four Points Sheraton or Courtyard Marriott. These are hotels that do not have room service, right? They're I wouldn't say budget hotels, but I think that they're hotels that, basically, they don't provide as many services. They're not going to have a spa. They may have a small gym, or maybe one restaurant, but they're not going to be your Four Seasons, or Ritz Carlton, or a W Hotel, right? So when you go to a full-service hotel like a Hilton or a West End, for example, these hotels will generally have all those other amenities. I think that most people think of when they think of a hotel, right? You got room service, you've got multiple F&B, or food and beverage outlets, and then generally speaking they're larger hotels so they've got at least depending on the market, and the location at least a couple hundred keys, or a couple hundred hotel rooms versus more boutique hotels generally speaking are I would say under 200 keys, and that's a very general number because there are some hotels that have less than 100 keys like we have a botique hotel in San Francisco in Union Square has 153 keys at Hotel G, so we consider that a boutique hotel. Then obviously they're five star and luxury and resort hotels if you're looking at a Four Seasons or a St. Regis, Ritz Carlton, et cetera. There's like the really high-end hotels as well. I think for us in the U.S. we play primarily as I said in a limited-service, and full-service space. Within capital globally, though, in Asia we actually do participate across the whole spectrum, so we're doing limited-service hotels. We have our own boutique brand under Hotel G and we've also acquired five star hotels like we just closed on the Four Seasons Bora Bora Hotel in French Polynesia as well as the InterContinental Hotel in Hong Kong. The type of hotels are generally a lot more complicated because generally speaking you get a lot of the food and beverage revenue from the restaurants and bars, et cetera. The higher the percentage of F&B income it's a little bit harder I would say for someone to value it because now in a way it's less consistent because you don't know if that restaurant concept, or if that bar, or club, or whatever it is is not very successful then, obviously, your cash can be more vulnerable.

Adam Hooper - That's a distinction to make as people are looking at these different operating models, or different service levels if you will the breakdown of that income where that's coming from the consistency and we'll talk, hopefully, in a little bit about some of the metrics that come into play and the hospitality that are different than what you'd see in a multi-family, or an office environment. How much of those income streams influence a real estate decision? When someone is looking at investing in a hotel with you got capital hat on, and you guys are looking at hotel opportunities versus an investor that's maybe looking at investing with someone like you guys how much of that decision is made on the operations versus the real estate part of the equation?

Mike Hu - That's an interesting question. On the real estate side it sort of depends. I know it's hard to answer that question with sort of a standard answer because I think a lot of it depends on the location, and what's the basis of that hotel, so like what does it mean? What is the price per-key that you're paying for that asset? I think for us some of it is completely operationally driven meaning we acquire hotels where we look at the operating expenses. Maybe this is actually if you take a step back one thing that's interesting about hotels is that there's some hotels that are pretty consistent regardless of the location meaning if you're in San Francisco, or if you're in Da Nang, Vietnam, or in Shanghai, China there is a certain number of restaurants that you'll need to have based on how large that hotel is, so there's some things that you can kind of measure, and our in-house hospitality team is really good at doing that when they assess sort of the operational expenses because you can look at it and say, well, on other hotels in a comparable location, comparable size you know there's roughly this much spend for utility expenses. That rate might differ based on the market, but you know that there's usually a certain level of spend, and that's obviously dependent on climate, but you can at least back of the envelope calculate and understand if a hotel is running a little too heavy, for example, you know how many staff that a particular hotel should have. If it's a similar size hotel, similar F&B outlets it would be a little unusual for one hotel to have twice as many people if it's exactly the same, so those are things that we can look at to figure out how do you manage the operating expenses, so OPEX is sort of a key thing because if you can obviously reduce OPEX you can increase your NOI, and your net operating income would go up which obviously increases your cashflow. I think there's different ways of looking at it, but I think operationally that's the one thing that's I think the biggest challenge about hotels because it's daily leases, and people see that as being I would say most investors look at hotels as being a lot riskier than an office or industrial, or multi-family because of that reason because they're daily leases, which is true. I think there's definitely a fact behind that, but I think it's also that for daily leases if you understand the operations of a hotel, and you have a team that has experience doing it you can also generate I think returns much more quickly, or at least I think from our experience you can do that much faster than what you can in some of the other asset classes.

Adam Hooper - Your ability to like you said if you come in, and you have a great operational model your ability to actually create that value day two versus if you're coming into an industrial property where you've got a five or 10-year lease in place there's not really all that much you can do to add value during that time period, so that definitely makes sense.

Mike Hu - That's right.

Tyler Stewart - Mike, it sounds like you're saying when you're looking at hospitality the locations may differ, but you're seeing a consistent consumer behavior, so you're able to have a very similar operational plan no matter where the hotel is located. Is that correct?

Mike Hu - I think that's generally true. It's not going to be a cookie-cutter approach like where you're doing the exact same operations, but I think that there's some things that will overlap so generally speaking, yes, you're right. That's also why I think when you look at the largest operators, and the ones that are sort of I would say the ones that are seen to be sort of the most successful, and have grown the quickest when you look at whether it's a Marriott or a Starwood, or Hyatt or Hilton these large behemoth operators they actually can scale up very, very quickly because they have a set of processes and procedures to be able to do this... I read a statistic where one of those large operators I think they were opening something like it's like a dozen plus hotels every month in mainland China, so if they're able to scale up that quickly it's because they can only do that, right? If they have sort of a standardized process. The problem with that, though, I guess on the flip side is when you do that, obviously, you're making it a little more cookie-cutter for lack of a better word. I think that some people like business travelers really like that like I think for myself like I really like knowing what I'm going to get.

Adam Hooper - A consistency, yeah.

Mike Hu - Yeah, there's a consistency versus like an Airbnb where, honestly, and this is the biggest critique I think I have over Airbnb is you may get better value, it may be more unique, but you also don't know how that individual owner will take care of their property, so his or her property may not be nearly as clean as the property next door or in the same building, so that's something that I think is a big challenge versus I think one likes to believe that if you go to any if I'm picking a Westin, or a Sheraton, or a Marriott like you're going to get the same experience largely within that sort of band in any city around the world.

Adam Hooper - I was hoping we could touch on Airbnb that's obviously a huge factor that's going on in the hospitality industry right now. As a fellow Y Combinator company I feel like we have to talk about it. How are you guys viewing that, right? Their what valuation is more than Hilton now right around the same valuation as Marriott they don't own any properties how is that possible?

Mike Hu - It's a great question. Airbnb, they have a brilliant model. It's not dissimilar from some of the other disruptors in the real estate industry.

Adam Hooper - Like WeWork in an office space, right?

Mike Hu - Yeah, like WeWork, exactly. The thing about Airbnb I think that is brilliant is just like you said they don't own a single hotel room, and they are effectively taking over a large portion, or maybe not a large portion, but they're taking over a significant portion starting from zero of the hospitality space. I heard Airbnb talk about this, but I think for them to say that they do not compete against the hotel industry like in the markets they play in. I mean I think that's in my opinion that's sort of a little disingenuous in my opinion. I think that they're for sure taking some of that market share. I don't believe that every single person that chooses to travel will consider Airbnb as part of their travel meaning if you're traveling for business, and you need to go to New York City there are for sure some people that would consider hotels and then Airbnb, but I think there's actually a large number of people that will just say, I'll just stick with the hotel that I'm loyal to, but I think where it's more interesting is if you're traveling personally, or if you're traveling as a family, and you need more space I think the Airbnb option makes perfect sense. I mean I've used it myself and I think it's been a great experience, but I think that it is more inconsistent at least from my experience.

Adam Hooper - I think that's spot-on. I mean, again, just looking at the travel we do here we travel a fair bit as RealCrowd doing conferences, and meeting with people and what-not, and the consistency when you're trying to go to a city your schedule is jam-packed you don't necessarily want to fiddle around with what's the key code to get into this place. Am I going to be able to find a spot to park? I would agree business travel is probably much more traditional. You're going to go to a brand that you have a loyalty program with, or something like that to keep that consistency going I think that is definitely a big part of it. Have you seen in your properties do you guys own properties that are competitive? Have you seen any kind of a delta in your occupancy rates, or rates that you're able to get to in the post Airbnb world? Has it impacted your guys operations much, or is that not really affect the areas that you guys are active in?

Mike Hu - It definitely impacts some of the assets that we have because most of our hotels are in large cities I would say. I don't believe we've actually been able to get the data to truly analyze how many customers we're losing to Airbnb in each market. In my opinion, I think it's a lot harder to capture that because unless you're doing a survey, or unless you can understand how occupancy is changing, or rates are changing over like let's say deep travel months like in the summer, for example, where people are traveling for leisure I think it's harder to know what that true impact is. I know that there's an impact. I think I would be naive to say that there's zero impact. I think the question is how deep is that impact? We haven't seen our hotels suffer from Airbnb. I'm almost positive Airbnb's in every single city where we own a hotel. I'm almost positive that's the case even in some of the smaller secondary or tertiary cities, but I don't believe that it's taken the full market just because to what you said earlier it's the fact that a lot of the business travelers they're not going to choose any other option, right? There are going to be some people that are price sensitive, but I think there are other groups that are just going to say, you know what I need to be in the city center that's convenient to all my meetings. I'm only going to be there for one or days so I got to be close, and I'm not going to like schlep around, and drive 30 minutes away to try to save a little bit of money. I don't think that's as common for those travelers, but I think if you're traveling with a family then it might be a different story.

Adam Hooper - Do you see that as a market hotels will start to shift into, so if a family is traveling for leisure, and they're looking to use Airbnb for the larger space, for the full-sized kitchen. Do you see hotels making a shift to where they start to offer some of that?

Mike Hu - I definitely have seen that. I think that hotels now they realize they've got to be more competitive. Actually, going back to your initial question I think that's where you see some hotels starting to operate like extended stay, or service apartments, which is what you see more commonly in Asia where you can stay for a week or two or a month at a time, or multiple months, and I think those type of hotel rooms may have a kitchen, right? They may have a living room, and by having those additional amenities it's almost like an Airbnb in a way because I think the Airbnb the advantages if you're staying in an apartment you've got a kitchen, you've got more space. You might have maybe the house provides some local information for restaurant recommendations, or sightseeing recommendations. I think that that's something that hotels are trying to be better at. I don't know how well necessarily they're doing. I think you're starting to see if you look at just think of some of the hotel brands. I'm thinking there's certain brands I've seen where they're taking that approach to try to make it for lack of a better word, but I think they're catering these hotel rooms more towards millennials. I recently stayed at an AC Hotel which is a Marriott hotel started by a designer in Spain. It's very common in Europe. It's very like sleek. It's a limited-service hotel, but it's done really well. It's sort of like maybe Aloft or like a boutique a limited-service W Hotel, and those type of concepts I think do really, really well with people that are under the age of 40. I think that they've been able to scale that up. I know that Marriott is actually rapidly expanding that because I did a little research on it. You could see that they're rapidly expanding that in the United States because I think they realize that brand it's almost like I think people might choose that over Airbnb.

Adam Hooper - This has been a theme recurring through some of our episodes here in the podcast. We've done a couple on retail, and the change of retail going from I'm going to go to this box, and I'm going to pick up my goods to more of the experience side of things. I think we're seeing similar in hotels. Certainly, when you talk about ones that are catering more towards the millennials, right? So there's now the Yotel, there's going to be some more micro hotel units, Virgin Hotels, right? They've got their properties in Chicago now, and a bunch more in the pipeline. It's much more about that experience, and that brand versus I'm just going to go here and sleep, and maybe get some room service. It's really building that experience for the user for the millennial. I think, again, that's probably, also, partially in this not to keep harping on the Airbnb thing, but providing that experience that you can get more that familiar, and more comfort out of a hotel versus just a bed, right?

Mike Hu - I agree, completely agree.

Adam Hooper - Where are you guys seeing demand for this scale? We just talked about the millennials, and these different travel habits what are you guys seeing in demand drivers right now? Are we increasing? Is it decreasing just as a kind of overall look at the hospitality industry how are we looking in that sector?

Mike Hu - Going back to I think the way people travel and the way millennials and sort of the younger generation is choosing to travel I think that that is going to continue. I believe that in terms of overall travel now people want experiences. People aren't buying things to just collect things. They want actual experiences, I think that that is going to continue, so I think that the question around what products do you create I think that every hospitality product will need to cater to those particular customers for those particular trips if that makes sense. It's not going to be a one size fits all that's why I think you're seeing the largest hospitality operators create multiple brands to allow their customer to choose. On this trip I want this experience a full-service hotel.

Adam Hooper - And still staying loyal within that overall brand.

Mike Hu - Exactly, so you can be affiliated with one brand and one loyalty program.

Adam Hooper - You got to get those points.

Mike Hu - You get your points. You go to a resort in Southeast Asia, and you can go to whether it's a limited-service, or boutique hotel in an urban center to wanting to stay out in the back country for a getaway. I think that that's where those larger groups are going. I think you're seeing smaller brands try to make these more boutique concepts. I think that those groups are trying to cater to a niche focus, but I don't think it's dissimilar to what you're saying with WeWork, for example, on the co-working platform. In the co-working platform it will be the same thing. I think that people are going to choose if you're in Portland, Oregon, or in San Francisco, California, or Nashville, Tennessee there will be specific co-working platforms that local groups will choose and favor. I don't believe necessarily that like WeWork it will be a one size fits all globally, although, I know that they're expanding internationally. I personally think that it will be like the hospitality industry, so people will choose those different brands based on locations. That's why you're seeing so many competitors pop up in the U.S. from NeueHouse to all the other different co-working platforms here. I mean there's probably I think a dozen or two in downtown L.A. already, and then you go to Asia, and you've got other concepts out there like one of the groups that we backed called The Naked Hub, and they're the fastest growing co-working platform in Asia. I think that those sort of local niche focused concepts will create, and cater a concept that has a more local appeal. I think that that will probably be I think more successful in different markets going forward.

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Adam Hooper - A lot of our listeners are coming from the technology world. The typical thing that we see there is you've got these incumbents, these big huge legacy corporate behemoths, move very slow aren't very quick to change and mold to what's happening at a real-time level. It's interesting to hear you bring that up with these big brands that have been around forever creating these smaller more nimble brands that can go after these different segments different local niche plays. Is that going to be successful? Are they going to be able to do that, or is the I guess the barrier to entry for someone to start up a new hotel brand a new concept that seems like that's a much higher barrier to entry than someone starting a new technology company, or something to challenge in a different industry do you think there's room for more smaller nimble entrepreneurial approaches to take over some of these bigger players current players in the space?

Mike Hu - I think that there's definitely space for smaller operators to break in and challenge some of the larger operators. It's a good question around the difficulty of building that up because, obviously, the resource constraint and being able to scale up quickly will be a challenge.

Adam Hooper - What you guys have done with your brand as well with the boutique brand that Gaw has?

Mike Hu - Right, so with the Hotel G brand I think that it's been something that we've grown. I agree. I don't know how easy it will be to be able to compete against the largest brands. I think that we can do well in select cities where I think it has been successful. If you're starting a new hotel brand today I think that it's likely to start in one or two markets, or something very localized, and then hopefully from there they'll scale it and expand. Whether that's on the limited-service, or full-service to sort of way on the high-end like five star like sort of like a montage type experience. I think that those brands in my opinion it will be difficult to sustain those unless it's backed by a lot of capital, otherwise, it's likely that it will get built up, and then probably get acquired by one of the larger brands.

Adam Hooper - When Gaw is entering a new market what sort of fundamentals do you do to make sure it's going to be a success? How do you make your name known? How do you let visitors know this is a new place to stay and it's great?

Mike Hu - Yeah-no, that's a good question. We actually just recently rebranded a hotel that we own in Chicago. It used to be called the Chicago Public Hotel. We just rebranded it literally two weeks ago to the Ambassador Hotel, which is the original name of the hotel in the Gold Coast of Chicago. We are having sort of a soft launch party of the rebrand in a couple weeks, and that's sort of what you want to do is you want to have whether it's a launch party or something that helps the key stakeholders be aware of what that changes. Obviously, in addition to rebranding, all the authenticity, and all your branding, and signage in the hotel you also need to have key people in that community know about that rebrand, so once you get that then it spreads like sort of wildfire because you've got word of mouth where the key people saying, oh, by the way, did you hear about this new hotel? This is opening up. Oh, there's this really famous restaurateur that's opening a new restaurant here, and like that's what we have. We've got a well-known local Chicagoan opening a new restaurant and a hotel, and we're going to be doing some new things that we think will be created into the hotel, but there's a rich history with the hotel. Actually I was just there two weeks ago, and they were telling me about how JFK he used to stay there. He used to like meet with Marilyn Monroe in the basement.

Adam Hooper - And secret service would take him down there, yeah, there's some crazy stories around.

Mike Hu - Reportedly.

Adam Hooper - Right, reportedly, yeah, allegedly.

Mike Hu - But there's like just really interesting stories about, you know, the rich history of the hotel. I think that taking those ideas out like we like to talk about these hotels that have, especially, the ones with the rich history, and you know it all started with Goodwin, our chairman he bought the Hollywood Roosevelt Hotel in Hollywood, California, which is where the first Academy Awards was hosted back in the 1920's. You go there and one thing that's really interesting about these hotels is they have a soul, and you go in and you see the history behind it. It's very interesting when you bring that out because when you share that with the guests, and you share it with the community I think people really embrace that, and they like to hear about that story, and be able to tell their friends, and family and other guests about it. I think that that's what we try to do. We try to basically curate an experience for people to understand more, and hopefully experience something unique at the hotel.

Adam Hooper - Right, it makes it more than just a bed, just the place to go and sleep, and maybe have a meal. Again, it gets back to what we were just talking about the experience, and that whole the story of it, which is definitely a trend we're seeing now.

Mike Hu - Right.

Adam Hooper - When you guys are either acquiring new assets or entering new markets, Orbitz, Expedia, Kayak there's tons of them out there right now. Trivago, I think was another one. How much of that can technology guys relying on for bookings with the OTA's versus coming direct how does that play out?

Mike Hu - That's a good question. It depends on each hotel, so some hotels will have, basically, what you're talking about is really customer channel strategies, so it's really trying to figure out how do you want to get to your ultimate customers? I think the question is going through some of the online avenues they basically result in a lower margin for the owner, so I think that what we've seen is if you're able to either do it through in some cases it depends it could be like your group bookings or through specific corporate events. I think that most hotels, and I'm definitely generalizing here now most hotels that are of a certain size they need to rely on some percentage of corporate, and it generally depends on, obviously, the location, but if you're looking at a resort, or if you're looking at an urban center. You basically will try to play around with that mix to get the right balance of occupancy because you want occupancy, right? You need to get a certain level of occupancy, but if you're operating a five star hotel you actually don't want that hotel to be operating at like 95% occupancy because if you're operating at 95 to 100% occupancy in my opinion your service is going to go down. The quality of service is going to go down, but you really should be increasing your rates, so we always look at that. It's like a measure of how much occupancy do you want, but if you're in a limited-service hotel it's okay to be running it like plus person occupancy, so it's always this fine balance, so depending on the type of hotel you need to balance the occupancy. They call it in the hospitality industry it's called ADR, or your Average Daily Rate. Then to your sort of RevPAR numbers which are your ADR's times your occupancy, so you can figure out from there what's the balance of how busy do you want the hotel to be, and what is the optimal level of service that you can provide because the problem is in my opinion that you have a five star hotel, and you run it at full occupancy first of all you have more staff there, right?

Adam Hooper - Right, operating expenses are going to be skyrocketing.

Mike Hu - Yeah, but you may not be able to provide the best service, so when you think about it you may have a 300 key hotel, and you sold every single hotel room. On the surface it sounds great, but what if now to 50 of your guests your room service is slow, your spa is overbooked, you can't accommodate whether it's like other outdoor activities that the hotel might have, or water activities, water based activities, so that there's all these things that now your restaurant is overbooked, and then people staying in the hotel can't stay there that's a real problem. I mean that's a genuine issue. A good example is I was down at the Montage Laguna Beach Hotel which is one of the best hotels, if not the best hotel in Southern California, and I just tried to stop at the hotel a couple of weeks ago to just valet park our car, so we could have a meal there, and the valet said, "We're completely full" because there was a big wedding that day, and they said, "We actually don't even have capacity," so I was thinking to myself they just lost a customer because they don't even have space for valet parking, which is, I think, I actually wanted it for the experience.

Adam Hooper - Interesting. So real quick you mentioned two things there. ADR and RevPAR for investors out there. Let's just spend just a couple of seconds on each of those. ADR, Average Daily Rate, so that is your?

Mike Hu - Your average daily rate is what you're getting for what you're charging for your rooms at a hotel as a measure of your average rental income per paid occupied room. Effectively when I look at ADR I see it as this is what you're charging for each room per night, so if it's got a $200 ADR figure it's what the hotel would be charging what they see the charge for a particular room.

Adam Hooper - Okay, and then RevPAR?

Mike Hu - RevPAR is your ADR multiplied by your occupancy, which basically tells you what your revenue is per available room hence RevPAR.

Adam Hooper - Are there any other metrics that are unique to the hospitality industry that people might see when they're looking at these investments?

Mike Hu - There's a number of other metrics that people look at. I think that those are sort of the key ones that most people will focus on. Obviously occupancy is very important along with top line revenue, so what are all the sales, or what's the total revenue from the entire hotel meaning from the hotel rooms from all the food and beverage, and then what are your operating expenses, so you can look at operating expenses per square foot or per room, and then ultimately that gets you to an NOI, or EBITDA earnings before interest, taxes, depreciation and amortization. What that will help you understand ultimately the way operators are incentivized is that they usually earn what's called an incentive fee. If they can run a hotel more profitably, and it depends on each operator it's usually a percent of your EBITDA, so like they're getting a percentage of whatever better margin or profit that they're making, so, obviously, the higher the profit the more that the operator makes, so they're incentivized around a hotel with lower operating expenses, and higher revenue.

Adam Hooper - Owner versus operator some are one of the same, some of where, again, coming out from an investor that might be looking at deals on RealCrowd or others direct, whatever it might be. Investments can be structured where they're buying purely the real estate, which is in partnering with a third party operator, or some are owner operated in essence is that correct?

Mike Hu - That is correct. It really depends on the brand because to your question there's some brands, and if I were to just pick on a couple I think that there's some brands like Marriott that are choosing to not own their hotels. They'll be an operator, but they actually, generally, do not own the real estate. So, someone else like let's say Gaw we might own the hotel, and we actually acquired recently the Marriott City Center in Oakland, California, so with that example we own the hotel. They are the management company behind it. In some cases they could own, and be the management company. My understanding is they've made a conscious decision at the corporate level to basically have what they call in the industry it's called as asset light model, but it basically means they don't own the real estate, and they just operate it because if you think about it from Marriott's perspective they don't put any money into it in some cases like they don't have key money, and they can operate, so they can earn money, right? Earn a revenue stream from a hotel by having their people staff there, but not have to pay X hundred plus million dollars to buy a hotel.

Adam Hooper - Right, it's much more capital intense process when you're owning, right?

Mike Hu - Yeah, I mean it's a very, very ... I don't know enough about this to know, I guess, the drivers of what sort of shifted in the very beginning. My guess is it's driven largely by Wall Street because I think Wall Street probably looked at this model and said, hey, this is a great model. If you think about it, right? If you take a step back if I ran 100 hotels across let's say the United States I ran 100 hotels I have a staff of 20,000 people. I don't pay a dollar to be an owner of those hotels, and now all my costs of my people are covered by that hotel. If I beat certain hurdles I make an incentive, or an additional profit. That's a great model in my opinion for an operator versus if I had to buy the hotel instead of having 100 hotels maybe you're only at like eight or 10. It ties up all your resources and your capital so that's why a lot of groups are basically pushing it off and they have more of an asset light model.

Tyler Stewart - Hey, Mike, I wanted to jump back to something you said a little bit earlier. It sounds like from a supply and demand standpoint with occupancy price is the main driver, and just out of curiosity during the off-season if a hotel has some seasonality to it during the off-season is price the main metric you play around with to keep occupancy up or are there some other things you're doing to drive that occupancy up during the off-season?

Mike Hu - During the off-season for sure price is a lever, and obviously when you go to hotels during their off-season, or their non-peak season the rates are generally a lot lower. You can obviously use different promotional packages. You can go through different companies that have different sales channels to target those customers, for example, whether it's like through tourism and international travel you can go through those avenues to be able to target groups, and bring them in from areas where you typically would not be able to reach. There are different strategies that you can use. It really depends on I think how much you're willing to give. You can obviously do the math, and figure out how much are we willing to give, and how low of a margin are we willing to earn, or how much money are we willing to pay to get that customer, so I think that you got to balance that to say, well, we need to have a certain level of occupancy just to break-even. It's not dissimilar from the way an airline would operate. You need to have a certain number of seats to be able to justify the cost of flying that airplane. You have to do something very similar, and once you do that then you can say if we're at this level of occupancy you know what we can actually target. I'm just thinking of an example of like a resort that we own where you could say I'd rather get these new customers in from Korea, or Japan, or Hong Kong, or China, and you can target those particular demographics, get them in at a lower price point, but by getting them in that might have like a future effect because if someone goes there, and you get now 50 people from a tourist group that comes in, and they see your hotel they have a great experience the next thing you know, obviously, that's going to spread to another 100 of their friends and family, and then that might result in additional revenue. I mean you sort of have to think about it in multiple ways, but, yeah, there's no doubt price is a huge lever.

Adam Hooper - Mike, I know you've got a hard stop coming up here. One last question if you can for the listeners out there they are looking at hospitality as an asset class they might have interest in, or looking at investments in the asset class can you give us a couple of just kind of really high points when you looking at this versus something like a multi-family, or an office investment opportunity what are a couple high points that people should be considering when looking at hospitality as an investment?

Mike Hu - For us I would say we're pretty straightforward when we look at different hospitality deals, so what you're looking at what's your cap rate, or what's your going in cap rate, so what's your yield on your costs. You look at that in terms of your initial metric. You look at what is the price per-key that you're paying? What is the balance of the breakdown between rooms versus food and beverage or F&B?

Adam Hooper - In terms of where that cashflow is coming from like we talked about a little earlier.

Mike Hu - Exactly, is it 50/50 or is it 80/20?

Adam Hooper - What do you guys look for in that split typically?

Mike Hu - It's not necessarily that there's a right or wrong answer of what the split is. We just want to know what the split is because I think understanding what the split is helps you understand where you can sort of improve the hotel like in some markets if you know that this is like a really hot market for food and beverage you might say, look, this is great because you can really do a lot better than this, and you look at a hotel and say, well, why is this doing so poorly? Oh, it's doing poorly because you have the wrong restaurant to worth. It's like the restaurant in here is priced too high. We've seen that, we've made that mistake in some of our hotels you put in a restaurant that's too fancy and people in the market are like, no, I don't want to go there. I don't want to eat at that restaurant. It's too fancy for this area. I hate getting that, right? One of the things that I personally like to look at is what is the discount to replacement cost? So what are we buying this at relative to if we were to literally buy the land and build the same hotel here like what does that cost? If you're buying it at a discount, obviously, that's attractive, and then I think you're also looking at trends. What is the trend of RevPAR and ADR growth? Like you can look at that historically even though, obviously, historical numbers don't predict future growth, but it gives you a sense of has this hotel been growing? Is this market on that upward trend? If it is then your question is do I think that this is going to continue to grow, or is it going to fly now or decrease? The other thing I think the one thing I didn't mention is looking at what capital has been put into the hotel? That's always something to look at. I didn't mention that earlier, but I think, obviously, if a hotel has just, you know, undergone a huge renovation, and an owner puts in tens of millions of dollars to renovate the hotel rooms and lobby, and food and beverage outlets like obviously that's attractive, right? What you generally see is you do not see that reflected in the numbers for in some cases another 12 to 18 months post renovation. That's where there's still upside in some cases. We've seen that where an owner will put in a ton of money into renovating a hotel, and then they sell it. What happens is when you sell it immediately ...

Adam Hooper - You wouldn't be able to realize that value.

Mike Hu - Yeah, exactly, sometimes you actually leave some money on the table. We've been able to find opportunities like that where we buy a hotel, and it's been fully renovated, or we'll renovate it. Then, typically we like to hold the asset a little bit longer, but there's some groups that they just want to do the renovation and flip it. You can make a higher return because of, obviously, the time value of money, so if you hold it for two years instead of four or five years you can get a better return in that period.

Adam Hooper - Good, all right, well, Mike, that takes us to the end today. I think that we got into maybe, maybe a third of what we wanted to talk about. We definitely appreciate your time coming on the podcast today.

Mike Hu - No problem, thanks for having me.

Adam Hooper - Yeah, listeners out there. Thanks for making it through another episode. As always if you have any comments, questions please send us an email to and thanks for listening.

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