This "Quiet" Role Manages Hotel Managers, And Here's What They're Seeing Now - Sarah Gulla and Justin Epps, Hospitality Asset Managers Association

Josiah: To tee up our conversation, I wonder if you could share with our listeners what hotel asset managers are. Before we started recording, you called this role the quiet hero of the hospitality industry. I'm always trying to bring new people from outside hospitality into this business, so there may be people who are unfamiliar with this role. How would you describe it?

Sarah: It's a great question. So I think people who aren't familiar with sort of the nuances of lodging real estate don't really understand what we do. In fact, some of my dearest friends and family are pretty sure that I manage hotels day in and day out. And I joke often with my counterparts in the space that, you know, asset management is one of these funny things. We don't make anything, we don't produce anything, but yet we're really impactful, right? I mean, our whole role is really to influence people's behaviors. Right. We manage the managers and help set strategic directions for our hotel investments. I mean, whether you're in the private equity space, the public REIT space, if you're an owner operator, you know, at the end of the day, everyone invests in hotels in order to drive value for whomever their stakeholders are. And the asset manager's job is to help maximize that.

Josiah: Yeah, well, you say you manage the manager. So I think, you know, if there are folks that are brand new to the industry, you might have somebody owning the real estate, the physical building, right? They might contract with a brand, maybe one of Hilton's brands for the flag and some of the operating practices. They'll often work with a hotel management company that, I believe, are the managers that you're referring to, right? So where you sit on the ecosystem or where hotel asset managers would sit in the ecosystem would be working for the owners or on behalf of the owners. And then managing the managers would be managing those management companies, which of course, sometimes the brands and the management companies are the same thing. But is that a fair summation of the ecosystem?

Sarah: Yeah, I think that's a fair representation that I think people who are new to the industry or outside of the industry are pretty sure that if there's a Marriott, Felton, or Hyatt name on the outside of the building, that they own the building, that they manage it, and also sort of are their brand system in terms of loyalty programs and such. But that's not how it works.

Josiah: So thanks for that context. I wonder if you could tell us a little bit about the Hospitality Asset Managers Association. You're the president. Tell us a bit about the association and what you do with the members there.

Sarah: Well, first and foremost, the association is designed to provide a resource to our members. I mean, the membership is comprised of seasoned asset managers. I mean, you have to have a certain number of years of lead asset management experience in order to become a member, you know, because we really want it to be a conversation amongst peers. So there are people who have had primary oversight of both operating capital budgets for a couple of years in order to become a member. And the membership sort of spans across a couple of different I mean, it's institutional owners, whether it's the private equity groups, the large public REITs, there are owner-operators who are represented in the group, and then there's also quite a few people who are third-party asset managers who are hired on behalf of folks who invest in lodging real estate is not their primary organizational responsibility. So they hire people who are experts in the space. So we really tried to provide resources for our members, both that are educational in nature, you know, we host two conferences a year and focus a lot on programming that we think is going to be timely and relevant to the status of what's happening in the lodging space, whether it's technology trends, what's going on with capital markets, things of that nature. But it's also an opportunity for people to network. I mean, it's a pretty tight-knit industry. You know, we have about 250 members domestically and probably another 250 internationally. And a lot of this business is finding the right resources, right? And by networking at these conferences and through other events, It's an opportunity for our members to reach out and connect with people, whether they share similar types of hotels, similar markets, understanding sort of what the brands are working on and things that are sort of advantageous to the owners, what's happening within the management companies and identifying trends across the board. And, you know, I can't tell you how often people will pick up the phone. and call me and vice versa to say, hey, who do you know who does this? Because it is a tight-knit group of people it's been really valuable for me for quite a few years, which is one of the reasons why I have participated in a leadership role in the last four or five.

Josiah: Amazing. Well, you talk about resources, obviously events are an incredible resource. Another resource that you provide is an industry outlook. And I think we might get into some elements of that, but just in general, what is your goal for producing this outlook report?

Sarah: You know, I think it's getting a pulse on the industry, right? I mean, because we do service different stakeholders within the asset management community, for us it's important to understand sort of where everybody's sort of head is at in terms of where we are, largely as it relates to sort of the economy and sort of how it relates to hotel operating performance. All of these big industry conferences for years, it's always been like, oh, what inning are we in and whatever we're covering, whatever recession we're coming out of. right? And for us, it's a snapshot, right? It's a sense of where we are at that moment in time. And it'll helps allow us to cater sort of our programming at future conferences in terms of, you know, what's happening in real-time, but also a way for us to sort of message to the broader industry, particularly for people who are outside of the membership, saying, Here's what we're seeing, right? And because it's such a good cross-representation of the different asset classes and different markets, I think it's a pretty good read on sort of where the industry's at.

Josiah: Well, I would be curious, what are you seeing? Because I feel like, I mean, we're heading into another industry conference, and I feel like within these investment conferences, I feel like regardless of the year, or where we are at the cycle, it feels like people are always cautiously optimistic. And I'm sure we're going to hear this over and over again. You have a very close read of what's going on, you know, leading this organization and through this research. What are you seeing out there in the market right now?

Sarah: Well, actually, with that, I'd actually like to hand it over to Justin, since Justin runs point on sort of all of our industry pulse checks. I'll let him sort of get into some of the details of the feedback that we got from surveying our members. But generally speaking, yeah, it's encouraging. So with that, Justin, I'll hand it off to you.

Justin: Sure. We do an outlook survey two times a year where we poll our membership to get a sense of how they're feeling about the industry and the different kinds of fundamentals that are out there in the space. And so this most recent survey that we did, I would say was, it kind of had the same theme that you just mentioned, the cautiously optimistic. The main thing that I think came out of that is that people don't think that a recession is likely to happen this year, which is different from what we've seen in previous surveys. There was, at one point, this overall thought that we were going to head into a recession. So I think most of our membership is of the belief that we are going to have kind of the soft landing, if you want to use that term. Most of our members are seeing, I would say, about half to 75% of their portfolio performing either right at or just below budget, right? So as we are in this timeframe where we're still overall as an industry recovering from the COVID-19 crisis, we are trying to get back to the fundamentals that we saw in 2019. Overall, When you look at Revpar, Revpar has grown back above 2019 levels. So, you know, a lot of the headlines have read, the industry's back, this is awesome. But when you dig into that further, what we've also seen is an unprecedented level of expense, lift as well, particularly in wages, benefits, the cost of goods, the cost of doing business, the cost of food. And so with that, the NOI levels and the net operating income levels, unfortunately, are not back to pre-COVID levels. So when we, as asset managers, think about that kind of return to 2019, we're trying to get back to the profitability because, as Sarah mentioned earlier, our job is to maximize profit, which ultimately maximizes the value of these hotels. So, you know, many are seeing good results, but we're still falling slightly short of budget. And we are seeing we're seeing headwinds particularly with respect to the expense side of things. So we're constantly trying to figure out how to basically build a better mousetrap and operate the hotels more efficiently so that we can maximize the profit.

Josiah: I'd be curious to hear what you're hearing or seeing, I guess, among your members around what's the conversation around what that takes, right? It's great to see travel recovering. It's not so great to see expenses accelerating. What's the solution to that?

Justin: Well, that's, that's a big part of why we get together twice a year because our goal is to promote and create a space where we can share best practices. The answer is there is no right answer because every single hotel out there is very different. But there are best practices that can be shared across different types of hotels that can assist with that. And it, you know, it comes down to everything from operating procedures that, that we can share that work for one hotel that made may or may not work for another. Ways to use purchasing power to try to combat the food cost and bring the food cost down. You know, on the labor side, it's utilizing the best tools that are out there to help manage labor and help schedule. most effectively so that you can not only operate the business but also meet the needs of the customer. Because the customer expectation is higher than it's ever been in the hotel space. And so you've not only got to figure out how to serve the guests but serve them well.

Josiah: Which shows the power of working together, right? And an association such as yours where people can get together, share best practices. Sarah, I'm curious from your perspective, you know, are there elements of this that you feel hold the most promise or the most potential for turning around the situation of decreased net operating income?

Sarah: Well, look, it's something that we, as asset managers, sort of battle against every single day, right? And while I think there have been some structural changes as it relates to pricing in terms of what's guest-facing, and everybody's gotten used to the idea that things just cost more in what's been sort of a hyperinflationary environment over the last couple of years. I mean, that's obviously impacted the expense side too. And, you know, I think that some of the things that we spent a lot of time talking about are whether or not there are technology solutions that can help us better address some of these structural changes in terms of the operating model. I think through COVID, we all realized there were some sort of more efficient ways to run businesses because we had to, right? We didn't, it wasn't even a question of how much the labor was costing, it was the availability of labor and figuring out ways to continue to maximize those labor savings in an environment where you're operating much busier hotels. right, and taking advantage of all the technology tools that have been developed, because technology has moved so quickly over the last few years, that, you know, what can we use that's out there in terms of tools that can help us be more efficient operationally? And, by the way, sometimes it involves some tough conversations where, you know, these are some big upfront expenditures, right, which is, as the owner or the owner's representative, we are responsible for making those decisions, whether or not they make sense as an investment.

Josiah: Are you seeing, we don't have to get into specific technology tools or categories, but I guess, are you seeing some promise that technology is delivering on this? I guess the promise of technology that it can create efficiencies, it can create more profitability. Is that just marketing hype or do you have some evidence that technology actually is driving results?

Sarah: No, I think there are some success stories, certainly, from implementing technology. And I think, you know, Justin had mentioned earlier things like labor management systems, right? I mean, look, the hospitality industry has operated in a sort of a very traditional sort of model for a long time. I think that the industry as a whole has been a little bit fallen into the trap of we do it this way because we've always done it this way. Right. And I think that some of the technology that's out there, specifically as it relates to labor management, which, of course, is our biggest expense in hotels, really can move the needle. Now, there is a you have to adopt the technology. You've got to invest the money. You've got to be able to adopt it. You've got to have the buy-in throughout the property, right? Because they're the ones who are sort of the rubber to the road in terms of implementing it. And you've got to figure out sort of what your expectations are in terms of the success and what metrics you're going to measure it against.

Josiah: For the hotel owners that are listening to us talk, what would be your message to them?

Sarah: Well, I think, look, I mean, one of the things I love about this industry is how connected we all are. And, you know, whether it's the Hotel Asset Managers Association, whether it's getting involved in AHLA, attending these industry conferences, I mean, this industry is a very people-focused business. And I think that the best practices that we can learn from each other are better than anybody sitting in their own office banging their head against a wall, right? Trying to figure out a solution to a problem that somebody else has probably at least started to make progress on. So I would encourage owners that are out there to get involved, get involved in the industry and take advantage of all these terrific people that are out there because these are truly the best resources that we have.