The Opportunity In Select Service Hotels - Greg Kennealey, Mission Hill Hospitality

00:00 Josiah Could select service hotels, those properties offering a more limited range of services, actually be an underrated opportunity in hospitality today? Today, Mission Hill CEO Greg Kennealey makes the case for select service hotels, both as a way of providing hospitality and as an investment opportunity. But we start off with him explaining how he came to be so interested in this type of hotel.

00:47 Greg I've had the pleasure of working on some of the most iconic hotels and resorts in North America, and that was a real treat. But I have for years, a decade or more, been fascinated by the premium select service model. I've stayed in a number of those hotels that anyone listening to this who has kids who are on a travel club team for soccer, lacrosse, or whatever, you've definitely stayed in a Residence Inn, or a Fairfield in, or a Hilton Garden Inn, or whatever. And what I love about those hotels is several things. One, they're growing rapidly because they deliver a fantastic guest experience. So it's not luxury, but it's sort of everything you need and nothing that you don't. Right. It's sort of like the really nice minivan version of the car world. Right. And it's someone with three kids. I've owned several. But I love the value proposition to the guest. Right. It's very affordable. It's got free breakfast in certain cases, a comfortable room, a hot shower, fast Wi-Fi, et cetera. But out all the frills that maybe those guests don't want or choose not to pay for. So I love that piece of it. It's also the fastest-growing segment within hospitality. And the reason is because of the guest satisfaction. What I also really like about this space is it's an incredibly efficient operating model, which means that it tends to fall the least during tough economic times and tends to rebound very, very quickly when times get better. We've seen that play out in the COVID world and then in the recovery as well. So it's an incredibly attractive sector. It's very large and it's growing. And so We launched Mission Hill two and a half years ago specifically to pursue an investment strategy focused exclusively on what we call premium select service, which would be sort of the higher rev par assets within that space.

02:29 Josiah Makes a lot of sense. And I was talking to Craig Sullivan, the founder of the California Lodging Investment Conference the other day, and he was saying, I love select service because it helps spread some of the money out in the street. You're a good neighbor. You don't offer everything on property, so you're pushing people out to your local restaurants. And it's interesting to see that community impact. But I want to talk a little bit about how you think about, you know, in the investment world, we call it creating value on the, you know, maybe the brand world that's more around designing guest experience, but how do you think about these different levers that you pull once you make an acquisition to make it more interesting financially to you and your investors, but also to create a better guest experience? I'm curious if there's a couple of things that stand out as sort of first priorities when you think about a turnaround in these, or not a turnaround, but some first steps after an acquisition?

03:13 Greg Sure. For us, we are generally looking for assets where we see value creation in one of several ways. The most common are assets where we see opportunities there from a physical perspective. So assets are undercapitalized or just need a little tender loving care, little updates, PIPs as they're called in the industry. So we see assets that are in need of renovation and In almost all of our cases where we're buying branded franchise hotels, Marriott, Hilton, Hyatt, Holiday Inn, they have a very strong view as to what's needed to stay on brand standard. And we'll obviously do that. But what we also find, even in these relatively simple assets, are other opportunities to drive more value. So as a couple of examples, we have business hotels that had pools, indoor pools that nobody uses, but what they desperately needed was more meeting space. Fill in the pool, create a meeting space. Fill in the pool, put in a much better fitness center for health-conscious travelers. Take the old crappy fitness center, turn that into a nice boardroom. We see oversized lobbies that have pretty underwhelming food and beverage offerings. Now, this is select service, so we're not trying to be a five-star restaurant by any means, but I can put in a basic grab-and-go. I can put in a pour-my-bev, so folks, if they want a drink, I can do a basic bar and grill, which we've done in a number of cases. Those are profitable, right? They generate direct profit to the hotel, of course. But what we also believe they do is they help a customer choose our hotel over the one next door when they're deciding where to stay or help us get $5, $10, $20 more in rate. And so we see those opportunities in many of the hotels that we pursue. Rooftop bars, we've added keys to hotels within the existing box. We try and get creative there. And each of those things is small dollars. But when you do them in totality across 33 hotels, it turns into real money.

05:09 Josiah This is why I love hospitality investment, because some businesses are a bit zero-sum where it feels like to make a lot of money, you got to shortchange the customer. And I feel like a hospitality, it's a really interesting situation where what I'm hearing from you in this example of filling a pool and creating meeting space, you're attentive to your customer, to your guest. what they're looking for. You're creating something that meets what they're looking for and you're increasing guest satisfaction. By increasing guest satisfaction, you can earn higher rates, you can get those group business blocks, right? And then you ultimately make more money as an investor. So it feels like it's a win all the way around.

05:45 Greg It's not that difficult to connect the dots, right? And so in our world, we get feedback every single day. We can go onto TripAdvisor, we can go into Google reviews, Yahoo reviews, Yelp reviews, et cetera. We can find out how our hotel is doing this morning. We'll have feedback on breakfast by now every single day on every single hotel. And we pay a great deal of attention to that. And some of that is, hey, your restaurant's tired, your fitness center needs whatever, and we can make those adjustments to the physical product. But we can also find out how our team is doing day to day on the ground interacting with guests. And we have a couple of examples of hotels that are not the nicest physical product in a market. In certain cases, not by far. Renovations pending. but where we are winning on rate, where we're winning on TripAdvisor because we have the best team on the ground. And that's truly fascinating to me, right? Because you're seeing that an incremental amount of payroll to get that incrementally better employee or team member, right? That better GM, that better director of sales, the better housekeeper, right? The more friendly person who puts out the breakfast buffet in the morning, those little touch points really matter. And when I'm randomly touring a hotel and you're seeing employees and guests who know each other's names because so-and-so is a road warrior who's here every other week for four days, that's when you know it's really working.

07:10 Josiah What you mentioned there is really interesting because before we started recording, you were talking about in your experience, it's actually this sort of people-first approach is something brands will talk about, management companies will talk about, but what you've seen in the investment world is it's not necessarily what investment firms think of first. And so it sounds like you're taking this people-first approach, bringing it to the world of investment. How else does this manifest? You mentioned in terms of how you tour and how you think about maybe paying a little bit more money to get these good people. How else do you think about kind of a people-first approach to investment management?

07:42 Greg Yeah, you know, where I think we can win is through the talent of the people we that we work with and the way in which we work together. And so what I have focused a great deal of time on is the team that you see outside this window and putting together what I think is a team with incredibly high character, incredibly high talent, and very good skills and experience.

08:04 Josiah I am curious to hear about your perspective in working with brands and maybe things you would like to see from brands. You mentioned this being a part of the equation, of course, in the ecosystem. Where do you feel like brands are missing the boat or what would you like to see from brands specifically within the select service sector?

08:22 Greg Sure. I think that the brands we work with, as I mentioned, Marriott, Hyatt, Hilton, Holiday Inn, they're incredibly impressive organizations. They're globally recognized firms. They attract a tremendous amount of wonderful employees. They attract a tremendous amount of guests, which I care about a great deal. And so, kudos to them on all those fronts. The challenge that I think they have and where I'd like to see their focus shift a little bit is they have essentially three constituents, right? They have their guests, of course, they have their employees, but then they have the owners or the franchisees of their hotels. And that third constituent is very important. I'm in it, so I'm biased perhaps. But there have been a number of opportunities where I think brands could have put on their owner hat a little bit more or thought about things through the owner's lens. A number of examples, right? I mean, COVID was awful from a human perspective. but it created an opportunity from an industry perspective as folks got vaccinated and started traveling and we started ramping back up. There are a number of things that happen every day at hotels that are in response to brand standards or brand preferences that are not profit-maximizing. Some examples, right? Everything from a brand perspective should be free. Your breakfast at certain hotels should be free. The transportation to the airport should be free. Housekeeping should be free. In other industries, there's tiered pricing, there are add-ons. If you want to sit in first class, you pay extra. You can book multiple reservations in the same hotel or in multiple hotels in the same brand family, in the same neighborhood, and cancel all of them, some of them, or none of them, the day of arrival. And I can monitor online resources for price changes and cancel through Marriott.com and buy on an OTA, which as the owner, if someone does that to me, now I'm getting a lower rate and I'm paying a commission. So there are things that could be done, I think from a pricing standpoint, that would be beneficial to owners from a profit, but also I think would be fine from a guest perspective. You want housekeeping? It's extra. You don't? You pay less. Wonderful. You want to ride to the airport? It's 10 bucks. You don't want to ride? You don't have to pay it. I think that's OK. Give options.

10:46 Josiah Give options. But I would love to see a better brand-investor/franchisee relationship, right? Because I think that partnership is going to be essential for creating enduring

10:57 Greg We're the growth engine and look, we do well. I think there are just missed opportunities as we reset the world coming out of COVID. And I think now we have to really look at things like pricing.

11:09 Josiah Yeah. Pricing, focus on profit. I feel like this is this is some cancellation fee.

11:13 Greg Yeah.

11:14 Josiah It's huge. Do you want to talk about how you think about acquisitions? Sure.

11:17 Greg We can certainly do that. It's very difficult to get deals done right now. Transaction volume across our sector is way, way down in 23 versus 22 or pre-COVID. Our team has managed to get eight acquisitions done this year, which we feel great about. We love the hotels we've been able to buy. And I think there's a couple of ways in which we've been able to do that. One is there are many investors in the hotel space that do hotels and X, Y, and Z, right? Or do all types of hospitality and lean in and out of different subspaces within our industry. We are select service 24-7, 365. And I think as a result of that, We're more likely to have our finger on the pulse of opportunities. We tend to get outbid in certain cases in first rounds, stay around. Eventually, a seller gets motivated because the buyer they chose ultimately couldn't perform. We get the phone call. We come back in. That's happened several times this year. So, I think that's a huge benefit for us. I also think that our investment strategy has paid off very well for us thus far. which I would summarize quickly as follows. First and foremost, we're looking to acquire fundamentally good real estate. There are thousands and thousands of select-service hotels across the country. The vast majority of those won't fit our profile. You know, it's premium, institutional quality, select service assets that are very well located. So, first of all, it's got to be good real estate. The second thing we focus on is the supply-demand dynamic, which at a macro level for our industry is actually quite favorable right now. Demand is growing, and supply is muted because of interest rates, but we look at that at a very granular neighborhood level and that balance has to feel very attractive to us. The third part I mentioned a little bit earlier is we're looking for a value-creation levers that we can pull. And if we find those, then we lean in. The last piece, which is different from the world I came from, is you don't fall in love as much in select services as you do with luxury hotels and resorts. And there's also a whole lot more of these hotels. If we get outbid today on a deal, we'll find another one tomorrow. So, psychologically, it makes it easier to stay super disciplined and a bit dispassionate. And I think that if you can hang on to that discipline over the long term, it'll serve us really well.