The Next 3-5 Years in Hospitality with Chad Cooley | Ep. 98

- Hello, everybody happy spring. This is Darren Powderly co-founder of CrowdStreet. Welcome back to this edition of StreetBeats. Today we're gonna talk about hospitality with Chad Cooley. He's the co-founder and managing partner of AWH Partners in Manhattan. So Chad, welcome to the show. Thanks for coming on as a guest and please introduce yourself and the firm please.

- Thanks Darren. It's great to be here. Always good to catch up. My company, AWH Partners is a company I founded with two partners in 2010. In the middle of a recession. Very different from this one, but similar, you know dynamics or similar distress dynamics going on in the industry at that time. We found our business with a sole focus on hospitality because we saw it as an asset class that is both challenging for investors to get into. It's a roll your sleeves up business where we think value is created through a lot of hard work. It's not so much a financial engineering business as much as it is operated business. And we have built a business around that, we have an investment business based here in New York city, where I am today at my office. We have an operating business that manages hotels. We acquire, that's based in Dallas, Texas, moved that to Dallas in 2019, very excited to be in the lone star state, not too far. And then our third business is a development business where we had a team that exclusively focuses on our renovations and ground up construction of hotels. So between the three, we like to control as many aspects of our investments as possible.

- Excellent. Yeah truly a national platform. And I think you were saying there that crusher just recently announced our corporate relocation to Austin. So we will see you down there in Texas at some point here soon, if not New York city one of the two, you have raised capital on the crowd street marketplace, and it's it's been a great experience for our investors and and yet the hospitality market everybody knows that it has changed dramatically. Can you just give us a an understanding from your point of view of, you know what we've been through and also where we are today and then we'll kind of get to, you know where we're going in the future?

- Yeah. So the last 13 like months now I'm going back to March, 2020. We're like nothing we ever predicted, you know we've talked about and planned around it as much as we can, black Swan events

- Mhm.

- But, you know, this is like a herd of black swans flying through the air and landing in your, in your backyard. You know, dating back to early March last year we're talking the first week of March. I had been in 10 cities in two weeks, looking at, you know 15 different hotels as potential acquisitions. And we had built in our models of this time. Again, it was like March 7th, a decline of demand about 30% for a couple of months and rebounding by the end of 2020. two weeks later, we knew that the world was on fire and our models look a lot more like they do now which is we decline to the month of April from about 75% occupancy in our portfolio 30 hotels across the country down to 8.6% occupancy, the lowest occupancy. I think we never could have predicted going that low nor have even understood the dynamics of operating at 8.6% occupancy.

- Yeah I don't think it's, I mean other than world war II, perhaps in certain areas of the world, like not on a global scale have we ever experienced something like this, right?

- That's right. There was, there was nothing we could have done or predicted and so what has transpired is a very slow recovery. You know, we, we jumped to the kind of the thirties, you know, 35% occupancy last summer. And then we went back down and only starting in January this year, where we hit another low we started climbing about 5% a month and we'll be at 45% occupancy across the portfolio for the month of April, still off of what would have been 75 or 80% for the portfolio. So while we've come a long ways, we have a long ways to go. And, you know, it's, it's really shaken the the foundation of the industry to its core. I think a lot of things we all held as, you know absolute mandates, how we how we operate our hotels and how we staff our position. I mean, all of that went out the door. We've had to really reinvent our operating model and and continue to reinvent it as the dynamics change at the time.

- Incredibly challenging as a, as an operator, right. To try to predict where you're at because you're also in the business of servicing clients. You know, the, the people who do show up to the hotel, even if it's, you know much lower than what you have forecasted for. So the staffing and, you know, the ability to to provide a really excellent experience for your guests. That's, it's very difficult. I mean, extremely difficult. So can you speak to what some of those things have been like a little bit more on, you know, inside scoop there?

- Yeah. It is a great question because we the most what most people probably don't think about on a daily basis, what's going on at the hotel when you're not there. You know, the the hotel environment changed dramatic going back to the last March. And when I say we dropped to 8.6%, the 8.6%, that was there was actually not the same customer that had been at the hotel two months prior. They were transient people who were in need of a hotel room during COVID at a time when there was a national lockdown. it was just a totally different dynamic. So we, we found that the profile of the guests changed and then the customer demands change, actually in general the service standards went down meaningfully. We stopped cleaning rooms on an interim basis while you're at the hotel. And that has actually continued somewhat to this day, though that I think that standard is going to start ratcheting up quickly. As customers start paying the same dollars they were paying pre COVID they're going to demand the same service. What's so interesting though, is that is that demand profile change. You have this you know uptick in revenues and an uptick uptick in demands from guests. But what we're finding is while we've had to downscale staffing at the hotels and just creating a tragic human toll, fortunately there's been a lot of government assistance set up to ultimately take care of, of of many people who are in the hospitality business who weren't able to keep their jobs. But those programs today we find have, have set many up so that they don't intend to go back to work or they don't intend to go back to work yet. So while demand is ratcheting up and guest prof or guest expectations is wrapping up we're having a real hard time finding the staff to to bring back to the hotels. You know, we we want staff who were looking roll their sleeves up, work hard, be a part of the the great industry we're in the hospitality business. But, you know, I was chatting with one of our general managers last week. He said, you know, we have ads out there looking for employees. We're not getting any bites. It's not like the candidates aren't qualified. It's like, there's nobody looking for these jobs which is it's, it's going to be a challenging dynamic as people really start hitting hitting the road this summer.

- Yeah. It's such a challenging thing because obviously you mentioned it is a tragic human toll you know, and you, you serve like most businesses, you you serve your guests, right? You serve your, your shareholders in the company but you're also very much care deeply about your team. And you've had to go through this tragic experience, just like every other hotel operator where you have to, you know reset employment levels appropriately for the demand in order for the health of the overall business. And, and now you've, you've come through that. And you're trying to hire like, you know the government stimulus. I think Peter Lindemann said it very well. He said, if you're going to ask people to stay home you know, and not go to work then the government stimulus is actually is there for that purpose. Like you have to help them stay in their homes or apartments, right. And afford groceries, the basic human needs of shelter and food, and you know safety. And then as we've now come through that and are seeing the light at the end of the tunnel and allowing people wanting them to come back to work, you know, there's this weird time where they still might be getting enough stimulus, but they, you know employers need them to come back to work. And that, that this is a weird time like that. I hope it'll end soon, you know, but smoothly, right. Like a soft landing for that stimulus and then people really do react to the job market so that employers can provide a level of service.

- Yeah. Yeah. And, and, and we could provide jobs. I mean, it's, it's, if they've got to go in tandem and hand-in-hand, and you know, we're we're hoping to find them thousands of good people over the next you know 12 months.

- Okay. Well, for any of the guests looking for employment or know of their kids or friends looking for employment you know, AWH is hiring. Good. Good to know. So where around the country do you see sort of some of the better performances in your portfolio or maybe hospitality in general? You know, what's coming back sooner and what's lagging?

- States that have demonstrated their openness to allowing people to come to their state conduct business to hold meetings and to do it, you know, pursuant to to standards that weren't around pre COVID but to do it, nonetheless those states are benefiting. Texas, Georgia, Florida. We see these states actually dramatically outperforming California and Boston. I mean, the differences are staggering. We have hotels, you know, in in the city of Atlanta, they have already conducted had citywide scale conventions in 2021, right. City-wide scale conventions where we have received compression nights in our hotel which is not a convention hotel compare that to the city of Boston which is still, you know, effectively on lockdown where we have a couple of assets that continue to operate much like they did last spring. You know, we're talking sometimes in the teens of occupancy you know, 15 to 20% occupancy relative to, you know Atlanta where we might be running 60, 65%, which which isn't pre COVID levels. But the difference between those two markets is just it's breathtaking in California, where we have a hotel that has really been it has really been held up by the the volume of production business that continues to go on in that market is still held back by the fact California has, has, has told the world they can't do meetings in California, maybe until November. You know, you're not, you know are you welcome to come to California or not? You know, it's just a very different vibe. Than going to Dallas, Texas where you know, now everyone, you know, politics aside the governor came out and said, we're open for business. And so in terms of demand and hotel customers, you know there's no comparison between us.

- Can you speak to, you know, how to be on the offensive while also managing if you will, the defensive and where you see some opportunities out there nationwide.

- Yeah, for sure. I think when you rewind to last March our first and only goal was to get the business in shape to withstand this downturn and that that required, you know, rightsizing hotel staff. It required talking to every single investor and lender. It required restructuring our business to to focus on that as a full-time endeavor which probably lasted four months of last year. I really believe the team here. I mean, we were just so impressed with how we kind of pivoted and, and really focused on that. And across the organization we were able to put kind of the pieces in place a lot of capital into deals a lot of PPP, you know, we've, we've launched, you know hundreds of initiatives on cost saving measures throughout the portfolio that enabled us to say, okay we now by about last June, July are in a steady state. We've achieved a stable state where we can operate at 20 30% occupancy for the foreseeable future. And that's when we were able to get back to business and start, you know, really looking for, okay we're in the business of making investments in the hotel space. When we think, you know, we can, we can buy well. And that definitely felt like Tom if we were having this conversation last summer I think I would have told you we expect the distress to really hit. And am I, you know, the volume of transactions to pick up dramatically late, you know, late 2020, early 2021. And I think our, our view on that has changed entirely. That never happened. And we now really don't think it's gonna happen. And PPP helped. So, you know, lender relief helped. And so what, what we think is going to happen today which actually gets us pretty excited is not a daily luge of distress, not not like a hoovering up of, of, you know, assets at pennies on the dollar that, that probably happened in the RTC days. And even to some extent, the great recession but more an orderly workout of, of deals with broken balance sheets, you know, where, you know that maybe the asset never gets to be worth more than the debt in the future, you know, again or maybe the capital needs are too great for the existing ownership to, to support going forward. You know, maybe they just burned off all the reserves and kind of aren't going to be able to continue to service the property or the business plan never panned out. In any one of those scenarios, Sellers are going to end up selling something, owners are gonna end up selling something that didn't quite meet expectations. And that's where the hard work comes in. You, you come and you roll your sleeves up you look at an asset from the bottom up, and you say can I do this better? Roll your sleeves up. What was the business plan? How did they penetrate? How did they renovate, how did they operate? And when you, you know, you really dig in on each of those things you uncover, you know sometimes you uncover value and sometimes you uncover, okay someone's asking way too much for this but it's that process that we think positions our platform really well over the next three to four years.

- That is so interesting to me that unlike prior, you know deep recessions that hit the real estate market and commercial real estate, that this one is very different. But I guess there each one has its own characteristics but you know, most informed even full-time professionals in the real estate space one year ago thought that we were going to see distress and just due to the capital markets being so incredibly open and liquid that, you know, there there is a lot of money out there to sort of step in. So, but yeah, I think, I think focusing in on you know the business plans like you, like you said and you're going to see some COVID discount of course right. But not as, as deep as stealing properties or having them sell on courthouse steps like we saw in the great financial crisis, you know not a lot of volume there. So that's, that's really interesting Chad. And where are some of the what are some of the types of properties? Are you, and you're putting your team at AWH are you seeking extended stay hotels, you know more essential travel hotels, or are you seeking you know, class A destination resorts, you know are you seeking certain, you know, markets or or geographies that you, you like more than others

- We've always been an opportunistic investor willing to go and look at any, you know, we we believe a lot of assets have a, have a price that that is an interesting price in which we can buy. Rarely do we find that, And so we don't buy that many hotels, but when we find it we're not so focused on specifically what it is or where it is as much as we are, are we buying this with a discount that we believe that we can create value but one thing we're not doing, you know I think we've heard so many investors who, you know maybe just getting into the space or, you know, you know capital to put out that they're looking at, like, you know, okay I'm going to go buy an asset and drive to this money. Those have been the top performing aspects of our portfolio and in everyone's portfolio but that play, I mean, it's, you know, it's kind of done. It's like, yeah, that's where everybody wants to invest. So you know, we have like no desire to to try to go against all of that momentum in that space. So it's, as I said, true to our roots we're looking around the country across asset classes within the hotel space. So we're looking at service, We're looking at full service we're looking at luxury and we're looking at economy. And, and you know where we're finding opportunities is, is where you know, probably where a seller is a forced seller. You know, we bought, we bought a hotel earlier this year which was the product of a debt maturity that probably wasn't going to get refinanced. So, you know, we paid just over this the debt and helped us, essentially an owner out from, from losing an asset. We have another asset under contract in a similar scenario now where we're, you know curing a bunch of unpaid debt service but the owner just couldn't support it. So we're paying just over the debt and acquiring that asset. So those by definition are at a substantial discount to their 2020, you know, pre COVID values. And, and we'll, we'll continue to look for that story whether it's a, you know, a lender who's, who's trying to get out of an asset that, that they had to take over or an owner who isn't going to have the money to support it, where, you know, we know from all of our data and experience, we can go in, we can operate better. We can you know renovate efficiently, maybe rebrand, you know, it's it's a tough business. It takes a lot of elbow grease, and that's why we like it. But, you know those are the opportunities we're looking for.

- What are you communicating to, you know, prospective investors, you know, in a new deal, right? You go out there and you're telling your story about why you you see value in an acquisition on a specific property today, and what are they, you know what are you, what's your sense from them? What are some of the hesitations that they might have?

- Yeah, it's funny. It's what we're not sensing is hesitation.

- Oh!

- I think where this, where there is a where there's a dearth in the market is in deals and deals where there's a surplus is capital raised to invest in the hospitality space. And we've had more inbound calls from institutional investors over the last 12 months than any year, or then, you know, multiple years combined. And the amount of attention that the hotel visits has received just because of the dynamic of the precipitous fall. And the expected rebound. I mean, people are lined up on the sidelines to invest. And I think a lot of those dollars ultimately won't get invested or they'll you know they're not going to get invested in the same dynamic that that it was raised to invest in. And that's why we do think we make a great partner for institutional capital and for non-institutional capital, where, you know to get into the business, it requires, we think it requires a group like this, where, you know, you can you can roll your sleeves up, operate, develop investment and asset management acumen. You know, all those things are required, but we really have we have really been shocked at how much capital demand there is. And, you know, we've seen some really breathtaking prices and decisions and not at the type where you're like, wow this is a bull market, but you're the type of, wow. That doesn't strike me as a knowledgeable purchase like that that really feels like substantial overpayment for an asset. And, you know, only time will tell we could be wrong but yeah, capital is not in short supply.

- See, that's good thing for you guys. And I know you guys all worked at big institutions yourself. You're based there in Manhattan. You have a lot of those relationships there going back decades now. So I'm glad to hear that, that some of that dry powder that we've read about, you know for multiple property types is finding you and asking you to help them deploy that capital. So, good. It's been a tough year. I'm glad to hear there, there's good news happening on your end, you know, as you as you look forward. So where do you see some trends over the next sort of three to five years within the hotel space?

- Yeah. Great question. One I love to answer I heard an interesting anecdote on an interview. Someone describing zoom being the next air conditioning. So air conditioning allowed residents to move further from cities where the rear air conditioned buildings you know, into the, into the nether worlds where they can get air conditioning in their house. And zoom is going to enable the next level of kind of distance living. And, and, and we know that to be true. Zoom has enabled this conversation and the decentralization of the office space, work from home But we are firm believers at AWH that travel pre COVID post COVID. It's been the biggest growth business outside of technology of the last you know 100 years, 50 years it's it's year over year compounded growth is, is exceptional. And it's it's track record of growing it's related to access. It's related to the growing wealth of the world. It's related to people wanting to get out and see each other and see new places. We don't think any of that's changing. What I think is really exciting for our business is the decentralization of the office space will lead to more travel demand of people who don't live in the city where their home office is traveling to that home office. And that's just transient demand. And then those companies, like when you have an office in Austin and an office in Portland and you have resources around the country how many times a year do you need to come together for cultural purposes to see each other, to build a company. And we think those two demands more business transient travel because of de-centralization a more group business, because of de-centralization are going to lead to the biggest boom in travel that we've ever seen. And we think in five years, we'll look back and be very happy with our, how, how our hotels have done.

- I think crowd Street's living proof, right? We've gone virtual. We hire people all over the country. We have two headquarters right now, you know, Austin and Portland, but we've got employees all over the country. How often do we need to all come together at least twice a year? And then certain groups need to get together more often than that smaller groups for certain, you know quarterly or sometimes monthly. And so that's just one driver, one example like that is going to increase our travel budget. We'll probably save a little on office space but maybe not because we all have to spread out more and we'll have multiple offices but we have a lot of people working from home and a lot of this hybrid sort of approach to it. But our travel budget and our hotel spend is going to increase in 2021 and certainly in 2022. So yeah, I think that thesis of yours is very smart and I would agree with it.

- Yeah. Well, fingers crossed.

- Yeah. Yeah. Well, excellent Chad. It was great to have you on the show today. Thank you for teaching us about, you know the hospitality sector and what's going on there. I wish you and Russ, Jonathan all the very best and look forward to seeing you again and investing with you on, on some of your, your portfolio some of your property acquisitions and re-capitalization or developments in the future.

- We're, we're really looking forward to it Darren. We'd love working with you and tour Shannon, all team. I think, you know, I sent multiple leads your direction a year, and every time I'm thrilled to tell people how how great it's been to build a relationship with you and also really your, your position as the leader in what we think is the future of fundraising. So we're just excited to be, to be your partner. And we look forward to continuing that relationship for many years to come.

- Now those are the best type of new introductions or one coming from, you know a customer and a friend of the firms. So thank you very much for that. We appreciate it, so. All right. Well, take care and we'll see you again soon.