#1158 Jake Wurzak | Investing Lessons From Billion Dollar Hotel Owner

Jake Wurzak is the CEO of DoveHill Capital Management, and Wurzak Hotel Group. In this conversation, we talk about the hotel industry, everything from investing to operating both boutique and roadside businesses. When you think about this hotels that you visit, there is an operator that owns both the business & real estate, and they constantly think about how they can drive a profit. Jake is an expert, and has been doing it now with multiple hotels around the country. Jake breaks down both the economics and what makes a good hotel. ======================= Announcing LYCEUM | Miami, a day-long event on March 4th in Miami Beach hosted by Pomp. We’re gathering an explosive group of experts to engage in a series of bold discussions, covering topics from investing, emerging tech, longevity, space exploration, entertainment and more. The speaker lineup includes names such as investing legend Cathie Wood, NYT bestselling author Vivek Ramaswamy, billionaire Christian Angermayer, master of Contrarian Thinking Codie Sanchez, Modern Wisdom host Chris Williamson plus many more. Listeners will receive an exclusive 40% discount on VIP and Insider Pass tickets with code POMP40. General Admission tickets are free of charge. Spots are limited so head to lyceummiami.com to buy your ticket today. ======================= Pomp writes a daily letter to over 200,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ =======================

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone. This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. We have no advertisers on this podcast, so it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Jake Wurzak is the CEO of Dove Hill Capital Management and Wurzak Hotel Management. In this conversation, we talk about the hotel industry, everything from investing to operating,

• 0:44Anthony Pompliano?

  both boutique and roadside businesses. When you think about these hotels that you visit and frequent all the time, whether you're traveling, you're on vacation, or it's just something down the street, there's an operator that owns that business, they own the real estate, and they're trying to think about how to do it better and how they can drive a profit. Jake is an expert, has been doing it now in multiple hotels around the country, and he breaks down not only the economics of this, but what makes a great hotel and what doesn't. Once you get done listening to this episode, jump on Twitter, let us know what you liked, what you didn't like, what you agreed with, and what you didn't agree with. The feedback is always helpful and helps us create better episodes. Here is my conversation with Jake Wurzak.

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  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 3:10Anthony Pompliano?

  All right, guys. Bang, bang. I've got Jake here with me. I thought a great place to start is you guys have a very unique model to an outsider in the real estate industry. You guys buy real estate, but you also operate the hospitality business inside of that real estate. So kind of you're double dipping, I think of that as like a McDonald's strategy, right? Own the real estate, run the restaurant. Why is that the area of real estate that you're so focused on and think that you can generate such great returns from it?

• 3:34Speaker 04

  So I grew up in the hospitality business. Ever since I was a little kid, I was working in restaurants when I was way too young to be dealing with alcohol. And it was a business that my dad had. When I decided to come into our business, there was three hotels and my vision was always to grow it. So the short answer is. I fast became an expert and really obsessed with hospitality. Because like you said, it combines real estate investing with an operating business. Most real estate businesses, you just buy the real estate, you sign a long-term lease, and that's it. Maybe you do some value add. Hospitality, you have to do that. Plus, every single day, I need to sell a room.

• 4:16Speaker 04

  I need to create an experience. I need to design a restaurant. I need to pick out food. I need to sell that room every single day and convince people that this is where they need to spend their money to create these special moments. And that is the most exciting thing about hospitality. It's also the biggest risk with hospitality. It is definitely the most complicated form of real estate out there, which can lead to great returns, but it's definitely more risky than a triple net lease that you're just signing.

• 4:46Anthony Pompliano?

  Yeah. So I think most people who kind of dabble in real estate, maybe not are professionals, but they own some real estate or if they've done some real estate investing, they'd be like, why would you spend all the time banging your head against the wall to do all of that when you could just buy the building, triple net lease it, and then like chill and a check shows up every single month? I'm guessing it's because you guys are like, well, if you're good at it, then there's this kind of outsized return that you can generate. What makes someone good at actually operating? And when we talk about hospitality, I think it's important to clarify, you guys really aren't running a ton of restaurants and things. It's specifically around these hotels that you guys own and operate. Like, what makes you good at actually operating those types of businesses?

• 5:20Speaker 04

  Well, we do do all the food and beverage outlets in our hotels, and that's a huge differentiating factor. So the type of hospitality that we don't focus on is commoditized hospitality. Because if you're going to do that, I always say you might as well do apartments. Because it's, there's no secret sauce. It's very commodity-driven. It's expected. The returns are all kind of guaranteed, and you can really plan. With apartments, it's very similar, except you just have an annual lease. What we do is highly differentiated lifestyle properties, boutique properties, where we can really out-compete our competition because of what we do. And we do it from design. We do it from food and beverage.

• 6:05Speaker 04

  And we do it from the experiences that we create on property. And by the way, this doesn't have to be some super cool hotel. Any hotel that we own, whether it's a Sheridan, a Hilton, or the Dalmar, which we have in Fort Lauderdale. We try to elevate that experience above what a guest would typically experience. If you're talking about a Hampton Inn on the side of the road. That is pure commodity. You're basically in the real estate business with a little sprinkle of hotel on it. But it's not what we do. We are experts in the hard stuff and we do it because I'm passionate about it. That's what I want to do. That's where I want to spend my time.

• 6:41Anthony Pompliano?

  So when you are going into a project, let's just take it kind of from square one. You're trying to find a good location. Are these usually existing hotels that you're just taking over and kind of you're going to rebrand and increase the operational efficiency and effectiveness? Or are you guys going and finding land and you're like, we're going to build a building from scratch and we're going to do this? Like, what is the kind of ideal deal that you guys look for?

• 7:02Speaker 04

  We do both. So we do ground up development and we find existing buildings. There's a lot less risk with finding existing buildings. But it's also a lot more fun and the upside potentially is greater if you go and develop. We focus on high barrier to entry markets, those commodity roadside type hotels that I talked about. Anyone could just build a hotel across the street from you, down the road from you, and the barriers to entry are very low. We want to focus on areas where there's less competition because it gives us a greater opportunity to compete. Now, the way that real estate is going, a lot of sites that could even be possible for hotel development are just getting priced to other asset classes like office or multifamily. So the amount of hotels coming in is actually far less

• 7:46Speaker 04

  than it was before. But I always say it's pretty simple. We want to invest in places that we want to go. That is typically these smile states. I mean, where are the emerging neighborhoods? Where are the existing high barrier to entry markets that have? The environment and the landscape that people want to spend money. That might be a resort, but it might also be a downtown city. But it has to have that energy and that life.

• 8:13Anthony Pompliano?

  When you go into a hotel that is not yours, so you're on vacation somewhere and you go into a hotel. What are the things that will either make you say this is an amazing experience? Or this is a complete shit, you know, experience and like they don't care at all. Are there like little tells on either direction that you're paying attention to?

• 8:31Speaker 04

  I went into one two days ago and I was like, this is why we're in the hotel business. That was the experience and the feeling that that hotel gave me. So you walk into the hotel, the design was stunning. It was actually the addition hotel in Tampa. The architecture was beautiful. There was a coffee shop, all the pastries looked high end and stuff that you'd want to eat. The bar was laid out well, we went up to the rooftop pool. It was active, the bartenders were all in great uniforms. There were flowers and plants and great landscaping and there were people laying out. And it just is the type of place that you're like, all right, this has a vibe, this has a soul, someone cares. It had a unique smell. It had a great nightclub there.

• 9:12Speaker 04

  Someone put the care and attention, the detail to make this thing a success. And that's the whole point of why you do it. Otherwise, just make it an apartment that you don't have to think about it anymore. If you're going to go through the brain damage and the investment to do a hotel, you might as well put all the time and effort in to make it unique and make it memorable.

• 9:32Anthony Pompliano?

  Yeah, what's interesting about this is to a hotel goer, which I've traveled a ton over the years. I am not the what is the vibe, what is whatever. I've usually been like, how close is it to where I need to be and like, what is the price?

• 9:46Speaker 04

  So you're transactional?

• 9:47Anthony Pompliano?

  A hundred percent transactional. But I will say that over the years, I realized there were certain places that I went where I was like, that place is nice. And it almost became this like joke, whether it was with close friends or my wife, where I'd be like, oh, the X hotel in this city. And they're like, what, what, I'm like, listen, I don't know. Uh, I just remember that hotel and you can't even necessarily like pinpoint what it was. I think you just know that like somebody cared or whatever. And so then when I found myself, even though I thought of myself as the transactional person.

• 10:17Speaker 04

  Yep.

• 10:18Anthony Pompliano?

  I would be like, oh, I have to go to that city, see if there's a room in this place. And I would actually think of the place before I thought of the price.

• 10:25Speaker 04

  Yeah.

• 10:25Anthony Pompliano?

  And so like, was one of those things where if you ask people what they do, they tell you one thing, but if you watch what they do, they may actually do something else. Why is that? Is it, do we like to think of ourselves as economic buyers, but maybe actually we kind of buy with our heart and emotion sometimes?

• 10:39Speaker 04

  Well, I think post-COVID, this has completely changed for everyone and people are placing a higher emphasis on experiences and experiences don't have to be high-end or expensive. You can have the coolest hotel that brings back some great memory for you. And it could be like a three-star hotel, or you can have the same thing at a five-star hotel. So I think it's like anything, look at the iPhone. People appreciate good design. They appreciate well-thought-out aesthetic, but more importantly, they want to feel like they identify with a hotel. Like staying here says something about me. Maybe it says I have taste. Maybe it says I know the great neighborhood to stay in.

• 11:20Speaker 04

  Maybe it says that I am a big foodie and I like the food and I like the bar at this hotel. So I think people want to identify with that. The second thing is when you're traveling for work, your primary focus is work. Now people are starting to travel for work and combining that with vacation. So you're saying, hey, I'm going to bring my wife or say, hey, I'm going to stay for two days. My wife's going to come for the next two days and we're going to hang out for the weekend. And that becomes the moment in the experience that you're looking for versus what was just before was like, hey, I want like a clean room and like a decent shower and coffee in the morning and I'm out.

• 11:58Anthony Pompliano?

  When you look at a deal, walk me through like the economics of one of these things, right? So I don't know what kind of like a down-the-faraway deal for you guys would be, but like, let's say that you were going to take over an existing building. So you're going to purchase the building and then you're going to put a complete rebrand of the hotel into it. How much money does that cost for you guys to actually kind of get started and get to just opening day, if you will? And then what does it look like to actually run one of these things? And how do you think about the potential investment returns for investors, including are there separate investors? For the real estate and the operating business, like just kind of walk me through one of these deals.

• 12:30Speaker 04

  Yeah, so I'll give you two really good recent examples. We bought a hotel a couple of months ago in Boca Raton, Florida. So pretty close to where we're filming this and I think we paid $40 million for the hotel. And we're probably going to put five or six million dollars into it. The reason why we love that deal is it's an incredibly high barrier to entry market. And all of the money we're going to spend is going towards guest facing return on investment items. So if we want to look at doing adding a bar, we're going to say, how much extra revenue will this bar generate? Or what impact will that have on the overall guest experience to justify whether to do it?

• 13:10Speaker 04

  Take another deal that we did where we bought a hotel in just outside of DC. Great deal. The hotel was ripping before COVID. We undertook a massive renovation. We probably spent on that hotel $30 million and we bought it for $30 million. So huge amount of investment. The negative to that deal, which maybe will pay off down the road. When someone else buys it from us is that probably half of that spend was behind the walls. Replacing windows, replacing a new skin on the building. And the other half was front facing. So the key is to really identify those buildings that have great bones, that the money that you spend is going to impact the guest. And you're going to get a return on that investment.

• 13:54Speaker 04

  And the way that we finance these deals is with debt and we raise money from institutional partners or high net worth investors. And they come in and typically we're shooting for mid to high teens IRRs. And I think a great deal would be 20 IRR with a multiple of money. So maybe we hold that for five years and you'll double your money. Or if we hold it for a little longer, maybe you'll triple your money. So those are kind of the economics that we look for. But when we invest in these deals, we are always going in saying, how can we improve it? Not only by upgrading the management, which is again, unique to us because we're vertically integrated. So how do we upgrade how they're spending money, how they're charging for the rooms, what their expenses are? But also how do we upgrade the physical product? Which goes back to the real estate side.

• 14:39Speaker 04

  So how do we renovate the rooms? How do we make a better bar? How do we make a better guest arrival experience? And one of the cheapest ways to do that frankly is with landscaping. So a big priority for us is always to go in and hit the landscaping. If we're in Florida to make sure the pool is great, to make sure there's an outdoor bar, because that's what people want. And these preferences have really changed. So a lot of these older hotels, you're stuck with things that you're never gonna use or need. So part of the challenge is figuring out where guest trends will be for the next five to 10 to 20 years. And repurpose some of these older hotels to do that.

• 15:20Speaker 04

  There's certainly a lot of upside to doing that, but you can also build new and design it exactly how you want.

• 15:25Anthony Pompliano?

  What are some of the trends that you guys think are changing? Like what were people doing that they may not be doing and what do you think people will be doing in the future?

• 15:31Speaker 04

  People have placed a huge emphasis on really inspired food and beverage. So I think every great hotel has to have a coffee shop right by the front door. People wanna go, they don't wanna go to Starbucks by the way anymore. It's like that's feeling too commodity. They wanna go to kind of this hipster brew spot and get their coffee. I think a rooftop bar is also critical to create that life. And the other side of that is more of a compact food and beverage. So if you're gonna have meetings, does it need to be these huge massive ballrooms? If you're outside of a big major metro like Vegas or Miami? Probably not. Maybe it's cooler, more creative type meeting spaces. One thing that we're also starting to do is put in podcast or Zoom rooms.

• 16:13Speaker 04

  So if you're a podcaster and you're traveling, you wanna still be able to execute your podcast. And how many Zooms have you been on where someone's like in their hotel room? And you see their messy bed in their background like it's a joke. So building these things is definitely a way of the future. Fitness is another huge thing that we prioritize and then like the offshoots of that. So maybe a golf simulator. So that is one of the things that you can put in. You know, if one of these big hotels have so many extra meeting space, put a golf simulator in one. Maybe you put a children's arcade in another and you enlarge the fitness center. That would be really another big priority that we focus on. And then. Another trend is I think people are going to be less reliant on brands and more focused

• 16:57Speaker 04

  on the hotel that identifies with them. So they're going to probably start to shy away from Marriott and Hilton as a name, which to combat that, those big companies are creating what's called a soft brand. So you're still getting their reservation system, you're still getting that power, but they're letting you call the hotel whatever you want. And that is going to be-

• 17:19Anthony Pompliano?

  It's almost like a white label solution where you get all of the infrastructure, but you can call the brand whatever you want.

• 17:24Speaker 04

  Exactly.

• 17:24Anthony Pompliano?

  And then they see, they'll get the data as to what's working, what's not working, and they can kind of move. What I think is fascinating is this idea of like, what are people doing in the hotel rooms? Right? So podcasting is one thing. Also, I've never really understood why inside of a hotel, there seems to be like sometimes really big hotels, like two floors, nobody's using except for like the big conference, right? And when you walk by them, it's always weird because like sometimes somebody will sneak in there to do a call or do whatever. How do you think about actual like dedicated space or golf simulator? You're not like rolling in and rolling out, right? It's like you're pretty much putting it there, it's static, it's fixed. Have hotels started to do anything with like dynamic type spaces where you could basically say, hey, there's a children's arcade right now, but if there's a big conference and we can actually make

• 18:09Anthony Pompliano?

  more money, like you almost get into like a dynamic pricing for the space that is not for the actual hotel guests? Or is that just too complicated logistically? And so it's better just to kind of go in with a thesis in terms of what the trends will be and stick to those?

• 18:22Speaker 04

  They were trying to do a lot of that pre-COVID. There were all these little startups that were kind of like renting rooms by the hour during off times or allowing you to check in later and you could use an app and use these rooms for little meeting areas if you had a longer flight. But I think all that's really just BS. I mean, the reality is you have to design and build better spaces so they're not being wasted, or you have to incentivize your sales team to really go sell those spaces so they're generating revenue. But there's definitely, in a lot of these older hotels, these huge, big spaces, like imagine back in the day, you've probably seen these pictures in the 80s of like people having the big buffet lunch. Like all the workers pour out of the building and they go to the hotel across the street and they have this big buffet lunch. That's not happening anymore. So if you have a hotel that's bought in the 80s, you have to figure out what, or that was built in

• 19:06Speaker 04

  the 80s, you have to figure out what that space becomes. And I don't see a huge business for- Different uses or temporary uses or gig economy uses, something like that.

• 19:18Anthony Pompliano?

  Um, you've mentioned a couple of times meetings. Obviously, there's people who will fly in for an event, right? And they'll kind of do whatever that event, conference, whatever is there. But also, one of the things that I've noticed from my own behavior and when other people come to visit, is they will be in town for a conference, you know, at a conference hall or some other event. And they're like, hey, just meet me in the hotel lobby.

• 19:38Speaker 04

  Yeah.

• 19:39Anthony Pompliano?

  But the hotel lobbies are not built for meetings.

• 19:41Speaker 04

  Yeah.

• 19:41Anthony Pompliano?

  They are very much usually built for kind of bench seating, you know, like you're waiting for maybe somebody to go get something. It just is very much like this is a hotel lobby. Is there a way to basically just repurpose space like that as well? For again, it's not a closed area where you're going to do a podcast episode or anything like that. But like, two people just want to meet for an hour in the lobby and feel like, hey, not everyone hears my conversation. But also, I don't feel like I'm in, you know, kind of like a jail cell, uh, talking to this person. Like, how do you kind of deal with things like that?

• 20:10Speaker 04

  Well, the hotels that you were describing, I think, fit in that commodity hotel category. Where you're sitting in this lobby, and it just sucks. Like, you don't feel inspired. There's nowhere good to sit. There's nowhere good to grab a coffee and you can't have this conversation. Compare that to the one hotel in South Beach, which is probably the best hotel in South Beach. It's certainly the most successful hotel in South Beach. That's a lobby that you want to be in. You want to, after your meeting, then have a drink in that lobby. So I think, A, these spaces have to be better designed. Another thing, though, that we're also doing is we're creating these little, almost, imagine like a glass fishbowl in the lobby. And there's a little keypad, you can go there and you can swipe with your credit card to book that room for 60 minutes.

• 20:52Speaker 04

  So you don't have to call the hotel and like, talk to a salesperson and go through all this nonsense. You guys can just come in, say, hey, we're gonna have a little impromptu four-person meeting. There's a TV in there, you can connect your, uh, Apple computer to it and knock it out right there. And so that's an example of something that we're doing in lobbies that otherwise would just be big vacant airy spaces. Or we're getting rid of a restaurant, like. You know, if you're in a big city, unless you have a food-driven restaurant with a great cocktail program, like, no one's going to your restaurant in your hotel unless it's really a standalone-style restaurant. So get rid of the restaurant and put in some of these other uses that you just mentioned.

• 21:31Anthony Pompliano?

  Yeah, I, um, uh, over the holidays, went to Naples for a few days and a couple of friends and my wife and I. And we were staying in a hotel that, um, there's two things about it that was pretty interesting. One, uh, in the lobby, they had a gift shop, which I was pretty surprised, actually, how many people were in the gift shop.

• 21:48Speaker 04

  Right.

• 21:49Anthony Pompliano?

  Um, but two was there was this big open area with horrible seating, the whole thing. And then they had two restaurants on the first floor. Um, and they literally were like across the little walkway from each other. And one had, uh, kind of a, uh, squared-off bar, right? And people were sitting there watching, whatever. And on the other side, uh, I watched for multiple days. People would go in, they would eat breakfast, and then they wouldn't go the rest of the day. It was just closed. You couldn't even go, right? And so I was sitting there thinking to myself, like, man, how much money could they possibly be making off of, uh, the, the meals in the morning? And so I went and I asked, and I was like, hey, are people paying? And they're like, no, it's included in the thing. And I was like, oh, so not only is the space going unused, but actually they are losing money essentially, right?

• 22:29Anthony Pompliano?

  Because they, people are not going to go to that, uh, hotel simply because they get the, uh, food in the morning. They're gonna go because they want the location, they want all these other amenities. And so if you rip that out, like, what else could you do there?

• 22:40Speaker 04

  Yeah.

• 22:40Anthony Pompliano?

  I think that's kind of what you guys are highlighting.

• 22:42Speaker 04

  And build the restaurant that people wanna pay, that people are gonna come from the outside to have meetings in the hotel. I think every great city needs the great hotel. Where you wanna come and have a coffee and have a breakfast meeting at? Try and make that your hotel. And ultimately, that's our goal in what we do, so that we don't have to worry about giving breakfast away for free and then having this vacant restaurant sitting there all day.

• 23:04Anthony Pompliano?

  All right, talking about the economics, uh, if you think of a gas station, they sell a lot of different things. Gas is usually where they make a lot of the money.

• 23:11Speaker 04

  Yeah.

• 23:11Anthony Pompliano?

  Right? For you all, is it, you're making money on the rooms, you're making money on the food and beverage, you're making money on, like, uh, all the incidental-type stuff that you could, like, rent scooters or like whatever other crazy things they could do, the valet, whatever. Like, where do you guys actually make money? And they're like the true profit centers of a hotel versus things that, uh, people may be paying for, but it's actually not what the, the purpose of the hotel or you guys are excited about doing?

• 23:32Speaker 04

  Yeah, the biggest profit center typically are the rooms. The second one is going to be food and beverage, but there's a high cost to that. So you want to make sure that you have a great outlet and a great bar. So you can generate as much revenue as possible. Stuff like spas and scooter rentals are amenities and they really don't make any money. The key is to maximize the amount of non hotel guests that are coming to your property to use it. One thing that all the hotels in South Beach are doing now and other places, they're creating these membership clubs, which I think is really interesting because you can join. There's maybe it's $7,000 a year.

• 24:14Speaker 04

  All that money is basically going to subsidize the operations of the hotel. So now all these other things that they want to do has such a better flow and a better margin. But you can only do that in certain hotels. You can't do a membership club at a random courtyard in Chattanooga, right? It's gotta be the cool hotel. I also think part of what you're getting at is these hotels are so big. And a lot of the hotels that I like staying in now are small and they have a sense of scale that really resonate with people. And some of the coolest hotels that I've been to are ones that it feels like you're staying at your chicest friend's like pool house or something like that. Or it feels like you're at a private members' club where like the guests are curated

• 24:57Speaker 04

  and the people coming in and out are people that you want to hang out with. Again, very different from the commodity stuff. Yeah. Which is where we can generate the extra return. If we're just going to do commodity stuff, then there's no special sauce there. We were talking a little bit before about Barry Sternlicht. And part of the reason why he is so successful is because he knows numbers better than anyone else. But he understands people's energy and the vibe and how to generate more revenue to make more profit by creating these spaces that people want to be at, they want to spend money at, and they want to stay at. A lot of big institutional hospitality investors are capital allocators

• 25:39Speaker 04

  and they happen to just be allocating capital towards hotels, but they really don't have. The soul and the DNA for hotel investing. They could just do it as good. They were doing apartments or industrial or whatever else.

• 25:53Anthony Pompliano?

  Got it. All right. I got a million questions now. So it seems like there's a trend of brands, whether they are restaurant brands, whether they are car brands, whether they are, you know, something outside of the hospitality industry, now getting into, sometimes it is kind of condos and apartments. Other times it appears that they're starting to try to get into the hotel business as well. Is that leading to kind of this idea of like, hey, if we have brand, if we have a following, if we have kind of an experiential component to what we do and people it really resonates with, if we then get into the hotel game, like maybe they will come and stay here. I don't think like Porsche has a hotel, but I know that they have some residential buildings that they're building. Is that something that you think will become more of a trend where these brands will try to get into the kind of hotel and hospitality

• 26:36Anthony Pompliano?

  game? Or is that like, ah, they're probably going to stop at the apartments and they actually won't get into hotels?

• 26:42Speaker 04

  I think it's kind of silly out of condos too. Like, you know, in Miami, the Missoni condo building, like, who cares? There's Missoni pillows. You could just, you know, buy those in the store and put them in your condo. What does that actually do to drive sales? I don't know. I think in hotels, it's very similar unless there's some sort of experience that they're laying, layering into that. So if you're creating the Land Rover hotel and there are these remote outposts where you go to do off-roading and all these cool activities, there's an amazing company called Eleven Experience, which was founded by a former Blackstone guy. And it is all known for kind of adventure sports, skiing, hiking, mountain biking,

• 27:23Speaker 04

  all this stuff. And they have these great lodges that are all very remote. That, to me, is very interesting. But I think that people are going to really shy away from brands and put a greater emphasis on like a collection. So this is what our collection stands for, but each property is unique and different in its own way. Because when brands start to get really powerful, everything starts to get standardized and you start to lose your soul and identity.

• 27:52Anthony Pompliano?

  Yeah. That brings me to Airbnb, which I think there was a whole multi-year trend of people saying, I'm going to a new city. Hotels are stupid. I'm going to stay in Airbnb. That makes me cool. That makes me be able to stay somewhere that feels not like a kind of standardized hotel. It feels like the pendulum swinging back now a little bit and a number of my friends and even myself like eh Airbnb, you know, I've stayed in enough of them now. Like it's, you know, sometimes amazing, other times like where's the key? Oh, the internet's slow. You know, like all the, all the problems that people have had in those experiences. Are you guys seeing that trend as well in data or kind of anecdotally talking to people where people are actually saying, I do prefer to stay in a hotel versus Airbnb when I travel now?

• 28:36Anthony Pompliano?

  Hey guys, what's going on? I hope that you're enjoying this conversation, but I wanted to interrupt for a quick second and tell you about a brand new conference that I'm hosting on March 4th at the Miami Beach Convention Center. The event is called Lyceum Miami and tickets are completely free for anyone who wants to come. I'm bringing together many of the most popular guests from the podcast over the last couple of years. Some of the guest speakers that we've already announced are people like Vivek Ramaswamy from Strive Asset Management, or Delian and Mike Solana from Founder's Fund, Chris Williamson from the Modern Wisdom Podcast, Codie Sanchez from Contrarian Thinking, and billionaire Christian Augermeier, among many others. I've got a number of amazing surprise guests as

• 29:19Anthony Pompliano?

  well, some that you definitely will not expect, and others that come from walks of life that you will be scratching your head as to how I even got them to show up. But come check out Lyceum Miami on March 4th. The Lyceum was a public gym in Athens, Greece, where people used to come together, talk about ideas, and debate topics that were important to society. I want to meet people in person, in real life, once again, after three years of a hiatus from real life events. And so, I'm hosting the event, and as I mentioned, anyone from anywhere can come to this event completely for free. All you need to do is

• 29:59Anthony Pompliano?

  go to lyceummiami.com and you'll be able to pick up a free general admission ticket. Make sure you claim your ticket in order to get in through the doors. Lyceum Miami is going to be a great time, so come check it out. Come hang out with me, many of the popular guests from the podcast, and other like-minded individuals. Lyceum Miami, March 4th, Miami Beach Convention Center. I hope to see you there. All right, let's get back into this conversation.

• 30:26Speaker 04

  Pre-COVID, everyone in the hospitality industry was freaking out. Well, the experts and the economists were freaking out about... Airbnb and VRBO and this whole shadow industry and then it started to get more regulated. But the reality is it's just additional supply that's out there, but it's very different. I think if people are looking for a big house, sure, Airbnb might be better. But if you're a business person, if you're traveling with your wife, a lot of the conveniences of a hotel cannot be overlooked to the challenges of Airbnb. And I think Airbnb and the short-term rental model is completely changing. All those people that wanted to, I don't know, like house hack or whatever that bullshit's called,

• 31:11Speaker 04

  you know, during COVID and like make all the side hustle. If they weren't doing it in a way that's differentiating themselves, now they're stuck with this house. It's probably not earning any income. So there's probably short-term rental 3.0, which is basically setting up a hotel within your collection of short-term rentals. The problem with that is, is scale. I have 200 rooms. I can spread all of my costs over my rooms in one hotel and provide these great experiences and all these amenities. You just can't do that in an economic way with one little house or two little houses. So that's a challenge that I think there's going to be professional hosts that try and do it,

• 31:56Speaker 04

  but the margins still aren't going to be as good as a hotel. And you're still not going to have a bar and you're not going to have all the fun.

• 32:01Anthony Pompliano?

  I have a friend who saw the TikTok, Instagram, like short-term rentals. Hey, I'm going to buy a single-family home basically and rent it out in the Airbnb. And he's pretty successful in the real estate industry. And he said to me, he goes, oh, I know what those are. And I was like, do I dare ask? And he was like, oh, those are uneducated slum lords. And I was like, wait, what? And he was like, no, no, like literally the houses that they are getting, he's like two things. One is these people don't understand all the dynamics of real estate and kind of all the things you're describing. But second of all is, he goes, I'm using slum lords as this like bombastic term, but actually what they become is like the party house, right? Somebody is coming in like they are only there to use it in this very transactional way. And naturally they will treat it differently than they would if they were at a hotel or anywhere else.

• 32:44Anthony Pompliano?

  And so it was fascinating to me to kind of understand as well, like what you do inside of where you're staying is really some way determined where you're staying, right? And so like, if you go stay at a really nice hotel, like you're probably not fucking around, right? You're probably just going to be like, hey, I should respect this place. Like, oh, they're going to kick me out versus the Airbnb. You know, people obviously do all kinds of crazy stuff.

• 33:03Speaker 04

  Yeah, I think you'll find in luxury hotels, there's still crazy things that go down, but.

• 33:08Anthony Pompliano?

  What's the craziest thing?

• 33:10Speaker 04

  Oh, well, I mean, you could just think of all these rock star parties like that.

• 33:13Anthony Pompliano?

  No, no, what's the craziest thing you guys have dealt with?

• 33:16Speaker 04

  Uh, well, I mean, we've actually had, uh, you know, I mean, we've had like FBI raids and like, you know, there's.

• 33:23Anthony Pompliano?

  Seriously?

• 33:24Speaker 04

  Four star hotels. I mean, you have people coming in that are criminals. It's not on the whole, but you know, certainly a hotel.

• 33:33Anthony Pompliano?

  So you guys are literally operating a hotel. You guys had the FBI show up and do a raid?

• 33:38Speaker 04

  We've had, um, I don't even know if I can say this. We've had people that were, uh, very high up criminals, basically stay at our hotel. We didn't know about it, you know? Very wealthy and the FBI contacts us after to basically, you know, get some information. What were they doing? You know, and we have to be careful and it's a little awkward, but, um, on the whole, we rarely have problems like at my level, I do not get calls. I can't even remember the last time I got a call from one of our team members that there was an issue that they had to tell me about in a hotel. So. Compare that to Airbnb. That's totally different.

• 34:22Anthony Pompliano?

  Yeah. What do you guys do from a marketing standpoint that kind of helps drive traffic? Is it, uh?

• 34:27Speaker 04

  It's pretty amazing. Hotels are literally stuck. They're 10 years behind.

• 34:31Anthony Pompliano?

  Yeah.

• 34:32Speaker 04

  Your world of technology. So things that you would think happen in hospitality just don't. And it's really frustrating. Part of the issue to that is these big brands control a lot of the technology and they're just slow moving. So think of like an airline. Think of your frustrations with an airline, similar issues in a hotel. Now you can check in with your phone and do all that kind of stuff and we have all the door locks, you know, can be open with a phone. That stuff's easy, but certain things like guest preferences transferring from hotel to hotel. Even Four Seasons, it's very tough for them to do that. When you think it'd be really easy for them to know the last couple of Four Seasons that you stayed in and what you did there, it's really hard to execute that. So I think that's a huge opportunity.

• 35:18Speaker 04

  The other big challenge, and it's also a challenge with short-term rentals, is pricing. So there are some algorithms, but a lot of the time, we have a team of revenue managers. All their job is, is to price and change the rates on a daily, hourly, minute-by-minute basis, based on whatever they're seeing in the property. But it's still a very manual process. It's not done by AI as much as you think it could be, and that's probably going to be coming. But there's definitely a lot of things that have improved. Like, for example, we have mobile ordering at all of our hotels. So think of the time you're sitting at the beach in Miami and you want to order food,

• 36:00Speaker 04

  but you gotta like flag down the person to come take your order. Well, now you can just do it on your phone and it'll just get delivered to you from, not Uber Eats, but from our hotel's kitchen and from the bar. So that's an incredible amenity. But a lot of people have tried to overcomplicate what guests really want. And a lot of the times, the things that they want are pretty simple, like being able to order on your phone.

• 36:21Anthony Pompliano?

  Yeah. When you think of these hotels and kind of building them out, is there a number of days in a year that you're like, okay, if we fill this room 22% of the time, we know that we've got a kind of break-even point?

• 36:37Speaker 04

  It's more than that. And the first time hoteliers actually figured out what their break-even was, was during COVID, when literally all the hotels closed and slowly business was coming back. You could tell that these hotels were break-even. And I think, by the way, this is before debt service. So that's a whole nother, going back to the real estate side. So break-even maybe at 40%, depending on the type of hotel. If it was a higher-end luxury hotel and you have higher fixed costs, it could be 50 or 60%.

• 37:08Anthony Pompliano?

  Which is actually lower than I would have thought, in terms of you basically, let's say it's 40%. You could have a room empty 60% of the year and still not lose money. Now, you're not making money, right? And obviously, you layer in all the amenities and all these other things that may change some of the economics. But To be vacant more than you are filled and still be in a decent position is like a pretty good kind of floor to have, right? If you're operating one of these hotels, if you don't own the real estate and you know, kind of all the caveats.

• 37:38Speaker 04

  The more interesting way to look at it is actually the opposite. So at a certain point in an amazing, in a great hotel, whether it's a three-star hotel, like a Home2 Suites by Hilton, or the One Hotel in South Beach, once their revenue and occupancy hits a certain level, the flow-through, what comes down to your bottom line, your net profit at the end of the day, becomes so large because you don't have to increase your fixed costs with all of that incremental income and occupancy that you're generating. So there's some variable costs that go up, like you're gonna have to have some more higher housekeeping costs, but because your hotel is 100% occupied, you're not gonna have to hire 10 new chefs and two new GMs and that whole thing. The system is running, so all that money's flowing

• 38:22Speaker 04

  to the bottom line. So if you're in a market that has higher occupancy, typically the flow-through will be better, which is why we tend to focus on these markets where people want to be. You know, you often have investors, particularly in hospitality, looking to these markets that sound like a great recovery story, and most of them tend to be in places where the government is pretty restrictive and it's cold. And you just look at it and you're like, well, I don't think that that many people are gonna be there. But, and then you go driving around like, look at all these hipsters, look at all these cool coffee shops and tattoo places. Well, like, okay, but that population is there and it's

• 39:00Speaker 04

  probably not growing significantly. Consequently, somewhere like Miami, or Florida, or Texas, very different. So we try and invest in these markets that have more occupancy and much more diversity of demand. So what happened during COVID is a lot of these big hotels, their demand only came from business travelers. So when that dried up, like, who's staying in the big Hilton in Times Square? Like, no one else. Resorts benefited immensely because all of their business was leisure and that kept on coming and now they're just going to continue to do well because group business, which is

• 39:42Speaker 04

  like big meetings and kind of these boondoggles, that's now starting to come back too. So the places that people want to be, it sounds so simple, location, location, location, tends to prove out in real estate and same with hotels.

• 39:55Anthony Pompliano?

  So resorts are boondoggle profit centers?

• 39:57Speaker 04

  Resorts are awesome. So one of my goals for the next three years is to acquire and never sell asset. Couple of people I know own them. It's something, sure, maybe you sell, maybe you trade in and out of partners, but it is an iconic asset that you just can't replace.

• 40:12Anthony Pompliano?

  What would be examples of ones that other people own?

• 40:15Speaker 04

  So the one in South Beach is one. A buddy of mine owns a hotel called Terrania in Rancho Palos Verdes, California. The Beverly Hills Hotel would be an example.

• 40:25Anthony Pompliano?

  It's like iconic type things.

• 40:27Speaker 04

  Hotel in New York, an iconic hotel that just has such a history and that is woven into the fabric of people's lives. Like when someone says, hey, meet me here, that says something. Like you know what you're going to get. If you go to the Fianna in Miami Beach, like you know the kind of experience that you're going to get.

• 40:47Anthony Pompliano?

  How much of the experiences, the, was it gold plated mammoth or whatever they got out there? Like things like that, which have zero revenue producing, direct, you know, to the bottom line capabilities, but it's very iconic. There's nowhere else I've ever seen that before. Like how much of that stuff can you kind of put some economics or data around to know, should you put that into a location or not?

• 41:12Speaker 04

  It's good to be a billionaire. So a lot of these never sell assets happen to be owned by billionaires because it's a great place to invest your money. You're going to own it over time. The real estate will appreciate over time. You're going to get cash flow. You're going to get tax benefits, but then you can put your gold mammoth that won't fit in your house, that no one will see, in your hotel. And that's an amazing story because, you know, the guy that owns that hotel is not Mr. Fianna. That was like a friend, a brand guy that he came up with, hey, I'm going to build a whole city in Miami around my friend. I mean, talk about having friends in high places and really trusting someone else's

• 41:54Speaker 04

  vision and that has proven out to be an amazing asset filled with.

• 42:00Speaker 04

  Gold mammoths and art museums and there is a lot of elements in that using that as an example that probably don't make money, but it adds to the experience. So in one way or another, maybe people are paying a couple of thousand dollars a night because they get to take a picture of that thing and they get to walk by it every day and it adds to whatever they're seeking.

• 42:21Anthony Pompliano?

  When you think about what they're doing there or other hotels, you mentioned earlier like a coffee shop in the lobby or whatever, do you put those in there and try to make them profit centers? Or are those items, hey, we need to be able to cover our costs here, but it's really augmenting the experience so that then we can sell hotel rooms? Like, how much of this is you guys are breaking out the actual economics and trying to make everything profitable outside of spas or whatever versus like it's really just get to break even and then just push more and more people here to actually rent these rooms?

• 42:51Speaker 04

  We are trying to make everything profitable. So that is the goal. We have investors, we raise money, we want everything to be profitable, but we also want it to be a great amenity for guests because we think the hotel can't maximize its revenue potential if they don't have something like this cool iconic coffee shop.

• 43:09Anthony Pompliano?

  Yeah, I guess a better way to think about it is like, is there a single P and L for the entire like hotel? Or do you actually break them out into separate P and Ls and then you're literally looking at it like, should we shut down the coffee shop because it's not making enough money?

• 43:21Speaker 04

  That's a great question. So how it works is you have one summary P and L, which includes your rooms, your food and beverage, your spa, you know, your cabana rental, all that stuff. And then you have details. So each little department like that has its own P and L.

• 43:35Anthony Pompliano?

  Got it.

• 43:35Speaker 04

  So you can look like, wow, my rooftop restaurant is whipping. It's doing amazing. But my like ground floor restaurant, that sucks. Like, I think we need to reposition that. Or you might say, hey, we're fine.

• 43:50Speaker 04

  subsidizing this ground floor restaurant because it's important for the kind of like look of when you come into the hotel. We want a certain appearance. We want to hold it to a certain standard. The other really cool thing about a hotel is food and beverage, like restaurant business is really hard. It is really hard to make money. And with a hotel, with all this other revenue streams coming in, you can actually subsidize and pay for really good talent, pay for really good design in a standalone restaurant that would never work. So for a hotel to have a good restaurant, I think is a great opportunity for the hotel, but it's also really important for the neighborhood and the hotel should, you know, vocalize that probably more like all the things they're doing.

• 44:33Anthony Pompliano?

  When I think of hotels that off the top of my head, I can remember that I know other people would know if I mentioned them. There is this word that keeps coming up, unique in my mind.

• 44:43Speaker 04

  Yeah.

• 44:44Anthony Pompliano?

  And that uniqueness is actually two different things, but I think they're related. One is the unique brand. So when you think of the Beverly Hills Hotel, like you just, when you see it, it looks different. It just you're like, okay, there's something here, right? There's one here in Miami, which I actually don't know if it's been successful or not, but I think it's called Strawberry Hotel or something like that.

• 45:04Speaker 04

  No, it's called the Good Time Hotel.

• 45:05Anthony Pompliano?

  The Good Time Hotel. Okay. So like already, but in my mind, the branding is very different, right?

• 45:11Speaker 04

  Yeah.

• 45:12Anthony Pompliano?

  And then there's the experience once you're actually in there. And so I think about it as like you could have a really unique brand and a shitty experience nets out probably negative in terms of the people's thoughts on the, on the hotel. But I actually don't know if it works in reverse. Like if you don't have a unique brand, but it's really, really good service, is that a net positive or net negative in people's minds when they leave? And it feels like it's obvious you'd want a really unique brand, a really unique experience. They're both, you know, knockout factors. And so you put those together and it's like a home run and you're very successful. But if you had to choose between the branding versus the experience, which one is more important?

• 45:44Speaker 04

  The experience.

• 45:45Anthony Pompliano?

  The experience. Interesting.

• 45:47Speaker 04

  You're hitting on something that happens all the time in the hotel industry. You'll read a press release and it will say, Introducing ex hotel brand, our goal is to have 10 of these amazing hotels in these type of cities throughout the world and we're going to take over the world with this amazing hotel brand. Well, you don't even have one. Like, what if this whole thing sucks? Like, one of the things that I find so ridiculous in hospitality is having to launch this big brand and having nothing to back it up with. So, the approach that I think is a better approach is to create this iconic hotel, create this experience hotel, and then use

• 46:27Speaker 04

  that to leverage creation of a brand. But, everyone wants to like, raise a whole bunch of money around a big concept with no proof and, you know, they do this in other industries too. And there's a huge amount of risk and it might not go anywhere.

• 46:42Anthony Pompliano?

  Yeah. How does interest rates start to affect you guys? And obviously, like, the macro environment. So, we know that it affects travel and things like that in general. Obviously, recessionary periods, people will just spend less, go on less vacations. All that's pretty self-explanatory. But, when you start to think of the more nuanced conversation around Fed policy and interest rates, you guys use debt and that's a huge piece of driving, you know, outperformance here. Is it something where it's pretty tried and true and you guys are going in with like, these fixed mortgages and not taking a ton of risk? Are you guys doing like, interest-only adjustable rate, you know, five-year balloon payments? Like, how does this work?

• 47:17Speaker 04

  All the above.

• 47:18Anthony Pompliano?

  Okay. All right. And how important is things like Fed interest rates moving in terms of hotels specifically?

• 47:24Speaker 04

  So, it's actually very important. And I think it's important in two ways. One, it's a big opportunity for us because during COVID, we raised a fund and made a tremendous amount of what's called preferred equity investments in deals. At that time, it wasn't as a result of rising interest rates, but the concept was the same. The cash flow was reduced, the owner needed to hold on to the asset. We could come in and there was an asymmetry at the time, and I think there's going to be one again, between the amount of risk we were taking relative to the reward, the return that we were getting. And, in a hotel, you can get fixed rate debt or you can get floating rate debt. In our portfolio, we have a lot of fixed rate debt. We also have floating- Rate debt, it is phenomenal to see what has happened over the past six months.

• 48:09Speaker 04

  Literally like you can have cash flow that has evaporated because it's all going to pay interest rates. There's ways that you can hedge it, which we've done and taken advantage of, which you never think those are going to pay. And now we're in an environment where those are actually paying.

• 48:22Anthony Pompliano?

  And what are you guys doing that? Like, what would be an example of something?

• 48:24Speaker 04

  So there as a hedge?

• 48:25Anthony Pompliano?

  Yeah.

• 48:25Speaker 04

  So there's something called a rate cap. So you basically buy a financial instrument that says if the Fed funds rate or SOFR, which is the rate that it's measured off of, moves above a certain level, then the counterparty will actually pay you. And if it doesn't, then you bought this thing, you paid for it upfront, and you theoretically get no value from it. And historically, over the past 10 years, that's what happened. Lenders would require you to buy this stuff, it would never come into play, and you just blow it. Now, like, you're actually getting a check. And recently, I had to talk to one of our investment guys, because I'm like, hey, we're in this interest rate cap. Like, what do we do? How do we get the money? Like, we had to call them and see how it happened.

• 49:07Anthony Pompliano?

  And I know that we didn't think we were going to get paid, but actually, like, here's our banking conversation.

• 49:10Speaker 04

  We had to figure it out. Yeah, like, does it come to us, or does it come to the lender? And actually, you know, in many cases, it goes to the lender, which we didn't know. So, interest rates are incredibly important. The question is, what's going to happen? So you get debt from primarily two or three different places in the hospitality world. Traditional banks, CMBS, which would be mortgage-backed securities, or maybe a debt fund. Debt funds have no problem owning your asset, whether it's a hotel, or an apartment building, or industrial. CMBS debt, which I'll probably never take again, is the worst. Because you end up dealing with what's called a servicer in Kansas, who's like a 22-year-old kid,

• 49:55Speaker 04

  who has no experience, doesn't care about you, doesn't really care about the asset, is literally just reading the words on the page, and that's how he's making decisions. And in those cases, they probably don't want to take back the asset. So we've seen certain instances where we've provided preferred equity to extend out that loan by two years.

• 50:15Speaker 04

  Compare that to a debt fund. They're like happy to own your hotel.

• 50:19Anthony Pompliano?

  Is that their goal?

• 50:20Speaker 04

  They say it's not, but a lot of the debt funds, that is their goal. Some of them, it's certainly not. So we've known ones that don't want to take things back and want to support you and have been tremendous to work for. Our banks have been, and our debt funds have been tremendous to work with. There are others that you can read about that are taking the stuff back now. And maybe they can do a better-

• 50:43Anthony Pompliano?

  If they actually take over an asset, are they taking it over and trying to operate it? Or are they just taking it over and just asset sale?

• 50:48Speaker 04

  Well, you know, if they take over my friend's hotel, they're going to call me and have my management company run the hotel for them because they don't know what to do. But they're going to put an asset manager in charge. They're going to try and make these decisions, but ultimately they're going to sell it. That's really what they're going to do. Maybe they'll put in an improvement plan, depending on what needs to be done. But to get back to your question, over the next year, year and a half, there's going to be a lot of mortgages that are coming due. And interest rates are higher. It means your borrowing power is less. So you're either going to have to pay it on those loans, sell your assets, or try and extend them. So there's going to be a lot of opportunity for, we traditionally invest in common equity, but during COVID, we did a lot of preferred equity.

• 51:31Speaker 04

  So we think there's going to be a huge opportunity for preferred equity, particularly with strategic partners like us who do this day in and day out.

• 51:38Anthony Pompliano?

  Explain to everyone in terms of, uh, people who have heard common and preferred equity will think of tech startups. But, uh, although it's a similar concept, explain how that works exactly with the hotels.

• 51:47Speaker 04

  So typically in a hotel capital structure, you have debt and you have equity. The equity that people refer to is common equity. If you have preferred equity, it comes in between the debt and the common equity. And the basic premise is that the preferred equity has to get paid back first, plus a preferred return before the common gets any return or some return. So you're taking less risk relative to the return, but you're still an equity player. So you still have some control rights. You're not debt, so you can't just force a- Takeover or a sale. But what you can do, and the way that we often structure it is we do soft pref.

• 52:30Speaker 04

  So we don't have to be paid like a mortgage, like mezzanine financing. We can be paid through available cash flow because we're making the bet that ultimately after two or three years, the hotel is going to be worth more than what we're currently investing in at that value. And we're going to get paid either along the way or at the end. But you, as the common holder, do not have to pay us, which is a huge stranglehold off their neck that other forms of financing would require, like mezzanine financing or traditional debt.

• 53:03Anthony Pompliano?

  What's the biggest lesson you've learned in terms of financing the deals? Like, what are some of the things that you wish you knew when you first started?

• 53:14Speaker 04

  Don't do CMBS deals would be one. Because when stuff goes wrong, it's just a pain. Even if stuff doesn't go wrong, it's still annoying. Relationships, like with anything, are key. So you want to identify those lenders that can grow with you. What happens a lot is groups start out with a lender and then they outgrow them. And now they're kind of, you know, trying to find a lender that they trust. That's been really important. Also, specific terms. So everyone always says, well, it's never going to happen. But all this stuff actually does end up happening. So you really want to not just focus on the interest rate, the term, who the bank is,

• 53:57Speaker 04

  but what the specific terms are and the mechanics of the loan. Because when you're operating this deal and you have to go through 10 different hoops, maybe to access some cash that's locked up or to renovate the hotel, it becomes very complicated if you just, ah, we'll deal with it when we get to it. So those two things, I think, have been.

• 54:20Speaker 04

  Probably the most informative for what we've seen coming out of COVID and even now. And then the most obvious thing is just to not over leverage. Cause I've seen too many friends that with senior financing and mezzanine financing, bring their debt all the way up to 80% and that becomes tough to manage.

• 54:41Anthony Pompliano?

  What do you guys target?

• 54:42Speaker 04

  60, 65%.

• 54:44Anthony Pompliano?

  Yeah, it seems like the folks that I know that are kind of the most experienced and tend to do the best in real estate, that's about where their kind of upper limit of risk is. It's about 60, 65%.

• 54:55Speaker 04

  And you should look at a deal as if you're not using any debt at all. So on an unlevered return, that's often a metric that we use. Well, that doesn't make sense because you're always going to use debt. Sure, but you want to understand the deal from that basic notion. A lot of people syndicate deals in this sort of way where they're like, hey, you're going to get 5% of cash, you know, for the life of the investment on a yield basis. But at the end, it's going to be a 20 IRR. The only way to make that math work is if at the end, there's some massive improvement in the valuation that all has to come at the end. One of the things we like about hospitality is the cash flow along the way, when things

• 55:39Speaker 04

  are going well, is much higher. So sure, you want to have a big exit at the end of the day and you want to have the asset appreciate, but you're less reliant on that in order to hit your ultimate IRR return hurdle or multiple, whatever it may be.

• 55:54Anthony Pompliano?

  Yeah, it's fascinating. What about the actual talent that you guys bring in-house? So I'm assuming that you have kind of a, I'll call like a home office in terms of the actual investment in acquiring the real estate and brand building and that type of stuff. But inside of the hotels, there's leadership and then you've got kind of what I would consider, or I think most people would consider like kind of the service workers across the different verticals inside of a hotel. Those types of jobs tend to be hourly, they tend to be very high churn, they tend to be younger people, right? Like all the things that would make it very hard to manage a large organization. How do you deal with that or what are some lessons you guys have learned there in doing that well?

• 56:31Speaker 04

  It starts from the top. So what happened when I founded Dove Hill, which is our investment company in 2011 with my dad. We ended up growing way faster than we scaled, which maybe is a common story for a lot of entrepreneurs. So at the time, my dad had three hotels. Now we have 17. So we've grown a lot in a very quick way. And pre-COVID, the culture wasn't that great at the company. We had some really good people, but we had some really bad people. So coming out of COVID, our goal was to come out better than how we went in. So it started at the top and we have an amazing head of people now. We do all this culture and team building stuff. We set priorities.

• 57:16Speaker 04

  We have Monday morning meetings. It's just a totally different vibe and that filters through to the property teams. But each hotel is like its own little business. So what I always find fascinating is some people don't put enough emphasis in creating that culture at the property. They might have a great corporate culture, but they don't have the culture at the property. And they hire what's called a general manager. That's the person that runs the property or managing director. And they don't realize that this person is in control of a 50, $100 million asset. Like this is almost like a CEO. So he has to create an organization

• 57:59Speaker 04

  and a culture that people want to be a part of. But there's a big mix of people. Like there's a lot of, as you said, hourly team members. And there's a lot of small amount of salaried team members. So in that sense, it's, it's very different from corporate America because you're dealing with people that maybe don't speak English as well. You're dealing with people that have completely different priorities than some of the senior people. But we have events, we have parties, we have newsletters. Engagement is key and we try and empower people to feel good. And we want them to feel like working at our hotel is different from working somewhere else because churn is really big. And the, the biggest challenge right now hotels are facing is labor.

• 58:43Speaker 04

  Post-COVID, it has just been a disaster, frankly. It's improved significantly and we've been able to get some great talent. But

• 58:53Speaker 04

  There are a lot of the, the little secret in hospitality right now is that most of these hotels are staffed by staffing companies. And essentially, they hire workers that the hotel couldn't hire.

• 59:10Speaker 04

  And it's not because we don't pay them enough, it's because they don't have the proper paperwork. And I think what the hospitality industry is really now lobbying for is to increase the amount of work permits and to separate the conversation between immigration and work permits. There are avenues that we use, like J1 Visa, where we get hospitality students from other countries to come in and work at our hotels. And those are phenomenal people. There are people outside of our borders that want to work here. It's figuring out how to do it in a way where they can pay taxes and it's done in a legal way. And that's what the hotel lobbying industry is doing right now. It's not for lack of paying people.

• 59:53Speaker 04

  We've increased wages massively across all of our hotels. In certain positions, probably from the start of COVID, like take room attendants, which is the largest group in a hotel. In some hotels, it could have gone up 20 or 30%. In some cases, maybe even more. And you're setting wages competitively against the other hotels around. And wage is not always enough to get people in the doors because there's just not enough people.

• 1:00:23Anthony Pompliano?

  So let's say that you've raised 20, 30%. What does that look like on an hourly basis? One of the things that I'm fascinated by is, obviously, the national minimum wage is sub $10. And there's been a lot of talk about bringing it up to $15 an hour, but there's a ton of companies that have already, because of these dynamics, 18, 19, 20, I think McDonald's, Amazon, like multiple companies now are well above that $15. And it's always fascinating to me of like, the free market somehow has accomplished something that the politicians haven't been able to yet. And there's pluses and minuses as to why that happens, how it happens, like it's a super complicated topic. But what do you guys think in terms of, somebody who didn't go to school or goes to school, wants to come work at one of your guys' properties?

• 1:01:08Anthony Pompliano?

  Like what does like the average wage look like, you think?

• 1:01:11Speaker 04

  It depends. So it's market dependent, but my sister called me the other day and she's like, do you know the average, you know, or the minimum wage in Philadelphia is X? I'm like, yeah, it's crazy. I don't think we have one hotel that a starting wage is anywhere close to the minimum wage.

• 1:01:24Anthony Pompliano?

  Yeah.

• 1:01:25Speaker 04

  It just is not competitive and that changed and it was like that before COVID, but now it's even more extreme. So in a market where the minimum wage might be $10, we could be paying room attendants $15, $16. So 50% greater than what that minimum wage is. And sometimes that's not enough.

• 1:01:46Anthony Pompliano?

  And you guys are nice people, but it's not because you're like, hey, let's just pay as much as we possibly can. You're literally saying to yourself, what is the dollar amount to get people to come, apply here that are good, qualified people who can execute and kind of be part of this company. And you're saying that even when you pay those wages, it is still difficult to find the best people.

• 1:02:01Speaker 04

  Yeah. And in fact, we're paying the staffing companies more because they've got to get their vig and they've got to pay their people. So the cost to us ends up being higher. We'd prefer to pay it direct to someone that will come. So hopefully that transition will start to happen, but we are nowhere near minimum wage. And I would bet that any, you know, above three or four star hotel is, is probably well above the minimum wage. It's also, we started to stop hiring outside of or inside of hospitality for certain positions. So like traditionally, the front desk is like a total waste. They ask you like a dumb question when you come to the hotel, like, oh, are you here to check in? Like, of course I have my suitcase. You

• 1:02:43Speaker 04

  know, I look like I just got off a plane. Of course I'm here to check in. You know, that is what every single front desk agent asks the person. Oh, can I see your credit card? Can I see this? It's just so transactional. Instead, wouldn't it be great if they said, hey, Mr. Pomp, I love your podcast. It's awesome to see you here. By the way, do you know we have a podcast room? I don't know if you have anything scheduled, but you can actually do it there. Oh, and by the way, like I need your credit card. But to open that way is so much more interesting, but people have been trained to do that in the hospitality business. So we're trying to find people that. Are not in hospitality to be some of those front facing positions. Obviously, management, you need this deep experience.

• 1:03:27Speaker 04

  You can't hire a cook that's ever cooked before. But for some of that stuff, we want to find people that haven't worked in hospitality. And that holds true for the corporate level, too. So we've been hiring some investment people that might not have a hospitality background. A lot of them do. A lot of them went to big fancy Ivy League schools and whatever. That's great. But we also want to look at people with a different perspective. Our head of people and culture that we just brought on to our team has essentially no hospitality experience. I thought that was the greatest, one of the greatest attributes about her.

• 1:03:57Anthony Pompliano?

  Yeah, I am. I have a couple of friends that went to Cornell.

• 1:04:00Speaker 04

  Yeah, that's the big Mecca for all these like hospitality people.

• 1:04:04Anthony Pompliano?

  So two of the friends got married on Cornell's campus. And so we went and of course you got to stay in the hotel because they were talking about it. And it was fascinating to, for those that don't know, Cornell has a essentially a hotel on campus that they have a restaurant, they got a whole bunch of stuff, but it is run by the students. And that can go one of two ways, right? Either like it blows you away because they're young and hungry and they want to do a great job or whatever. It also goes the other way, which is like they don't know what they're doing and whatever. And you see kind of a little bit of both, but it was a pretty cool thing to kind of be there and literally realize like this is like a 20 year old kid who is responsible for the front desk. And like, he's going to figure it out, right? One way or another, or maybe they fire him. I don't know exactly how it works.

• 1:04:47Speaker 04

  And that's where, I mean, that's the gold standard in the U.S. And then there's European hotel schools and our head of investments went to Cornell and he went to European one and just the mentality.

• 1:04:56Anthony Pompliano?

  He double dipped.

• 1:04:57Speaker 04

  He double dipped and it's so different. Like, so you're talking about a 20 year old like checking you in. I think at the European schools, the kids have to wear like a suit and tie to go to their dining hall. It's like a full fine dining experience. So the students are serving other students. But that's sort of old school hospitality. I think in some ways it'd be great if it would come back, but.

• 1:05:19Speaker 04

  Cornell is a tremendous foundation. I think it's so important though to layer it with practical on the ground training.

• 1:05:26Anthony Pompliano?

  I don't want to say good things about Cornell because then my friends will, their heads will explode. So

• 1:05:29Speaker 04

  They probably will.

• 1:05:30Anthony Pompliano?

  Cornell is whatever. It's fine.

• 1:05:33Anthony Pompliano?

  You've mentioned that you started the business with your dad. He had already been kind of in the hotel business. Did you always want to go into the hotel business and kind of growing up around it? Or was it something that you just kind of were like, ah, I'm going to do this because there was kind of an opportunity to, to jump into it?

• 1:05:47Speaker 04

  So when I was younger, I would always work these odd jobs in a hotel. My dad is the hardest worker you'll ever meet. And maybe in some ways it was an opportunity to hang out with my dad because he was always working in his hotels and he loved doing that. And I was hanging out with him in the hotels and, and working too. But it's kind of like, I don't know, if a kid's dad is a race car driver and he becomes up and grows up to be a race car driver, it's a similar thing. I always knew I wanted to be in real estate. But I always thought hotels were the most difficult thing and I had some sort of insider knowledge and that could be a real competitive advantage. If I would have went into some other form of real estate, I would have done well, but I would have been setting aside the advantage that I had.

• 1:06:32Anthony Pompliano?

  Yeah.

• 1:06:32Speaker 04

  And now, as we continue to grow, we'd like to invest in other real estate asset classes. But you know, anything looks easy after you've done hotels, which is much better than going the opposite way, going from, you know, industrial to hotels, completely different.

• 1:06:48Anthony Pompliano?

  Yeah. Um, how do you guys operate together?

• 1:06:52Speaker 04

  Father and son?

• 1:06:53Anthony Pompliano?

  Yeah, I work with a number of my brothers and all this stuff. So like, how have you guys found is the best way to work together? Because I'm sure there's some amazing moments. And then I'm sure there's some like, hey, are we going to see eye to eye on this thing?

• 1:07:05Speaker 04

  You nailed it.

• 1:07:08Speaker 04

  So

• 1:07:09Anthony Pompliano?

  He won't listen to this, so you can say whatever you want.

• 1:07:11Speaker 04

  Yeah, he won't. I mean, he, it's, it's pretty funny. I'll, I'll send it to him. So he'll figure it out. But his assistant will have to show him how to use YouTube.

• 1:07:19Speaker 04

  But my dad is just super old school. I mean, literally came from nothing, worked his way up in the hotel business. And I think was incredibly proud and humbled with what he created as he should be because it was phenomenal to have three hotels in in a major city like Philadelphia, you know, coming from the streets of Queens. And when I came into the business, there wasn't any room for me. My dad kind of had a right-hand guy. So if I wanted to find something to do other than to just be my dad's kid, I had to grow it in a slightly different way.

• 1:08:00Speaker 04

  And that's definitely caused some pain points and some challenges, all that we've been able to work through. But certain ways that we were doing things when we were three hotels just don't work when you're 17 hotels. So we had to transition that and a lot of those, we had to learn the hard way. So for the past couple of years, we've been really focusing on our systems and our processes. And my dad and I actually went to coaching, like we have an executive coach that primarily works with me, but part of his role is to help my dad and I work better together and I credit my dad for being way more open-minded to this stuff than I had ever thought.

• 1:08:45Speaker 04

  And at first he's gonna like slam his fist down and say, we're not doing this, what are you guys crazy? And then he evolves and he thinks about it and we end up going down that role and that road. And I find that the path to a decision, if my dad and I have to make it together, might be bumpy. It might be very tumultuous, but we always end up landing at a good place and probably where our minds were both at, at the end of the day. There's very many times with my dad and I'll say, okay, we'll agree to disagree. He'll, you know, that might be said, but then he'll end up agreeing with me. So it, it works out well, but it. Takes a lot of work is you know, you have to be very intentional with it.

• 1:09:29Anthony Pompliano?

  This is one of the weird dynamics where if people haven't ever been in it before, it kind of feels like, what are you guys talking about? But it's natural to have the disagreeableness, right? Because you trust the person so much, but like not in, hey, this is my business partner. Like this is my son, this is my dad, this is my brother, this is whatever. And what I've found is that like, part of that process of just like knocking heads over and over and over again, is because you can be so honest with each other. Like you will definitely say things to your brother, your dad, your son, whatever, that you would not say to anyone else. Sometimes good, sometimes not.

• 1:10:03Anthony Pompliano?

  But that disagreeableness almost is kind of like the iterations that get you to a better decision. And so I've noticed that like, some of the decisions that we've made, literally is the same thing. Like on first pass, it's like, oh, this is gonna be a blowout fight. And then what you realize is when we get to the end, you're like, I would not have made this decision unilaterally. They would not have made this decision unilaterally, but we ended up here because we kind of had to like, fight it out a little bit. And because of that process, we actually end up in a better place. And so it almost makes you like, kind of wish that every business that you were an investor in had some dynamic like that. Now, it needs to be respectful, it has to have the long-term trust of like, you know, you're gonna go away. And so I always tell my brothers, like, dude, we can be as mad at each other as we want, we've still gotta be brothers.

• 1:10:45Anthony Pompliano?

  Right? And so like, we will survive this, even if it takes a little while.

• 1:10:49Speaker 04

  But that's very admirable, because I think oftentimes today, and you hear about it, people, you know, just pull the ripcord with their family. And they're fine with not speaking to a family member or blowing up a whole relationship over something that happened in business. But if you are both coming from the place where our end state is not just walking away and never speaking to each other, that we need to find a solution, tension that you're describing often results in better decisions and more thoughtful decisions. And by the way, like, it's sometimes good to have a speed bump, because it might make you, as the one pushing something, more thoughtful, more analytical about whatever it is you're doing. And maybe you have to make a little presentation or put some more work into it.

• 1:11:33Speaker 04

  And maybe the first path you thought you were going down is not where you end up. It's kind of close, but it ends up being better because of that tension and dispute. So it's a benefit and a curse all at the same time, which not many people know.

• 1:11:49Anthony Pompliano?

  So you've got your dad, you've got you, I don't, do you have kids?

• 1:11:52Speaker 04

  I have kids. They are, you know, I don't know how old you, we look like the same age, right? Like my kids are five and eight. If they want to work in the business, great. I have a powerhouse wife who runs her own mega business. So maybe they go into that, maybe they go into my business, but I definitely want to build something that's enduring to last and that could survive with my kids coming in, could survive without them, but.

• 1:12:19Anthony Pompliano?

  What are you doing with them to prepare them? And this is fascinating to me because the the joke and especially in like the asset management world, right? It's like the first generation starts, the second generation scales and the third generation gives it all back.

• 1:12:32Speaker 04

  Screws it up, yeah.

• 1:12:33Anthony Pompliano?

  Right? And like royally screws it up. And there's all kinds of theories as to why this happens, but like, are you guys, obviously, I don't think you're like pushing your kid and you're like, you know, get into the hotel right now and like learn.

• 1:12:44Speaker 04

  Yeah.

• 1:12:44Anthony Pompliano?

  But are there certain things that you all are trying to do with your kids to kind of just prepare them for what I would think is just like a different life, right? If they run any business, whether it's the businesses that you guys are in or different ones, it seems like you need a different skill set and a different kind of approach and mindset. Is there anything that you guys intentionally do there?

• 1:13:00Speaker 04

  Kids are sponges, so they're going to absorb everything from their parents, the good, the bad and the ugly. And if you have a mindset where you're focusing on your family and your kids and you're finding a way to work at the same time, then I think they're going to see that. They also know what business I'm in. They know what business my wife's in. They like going to hotels. So now it's basically like bringing them to a construction site or bringing them to a hotel opening, or even better, taking them on a great vacation and instilling that passion for hospitality and travel through seeing these great hotels and really opening their mind to travel and being more worldly, but they're five and

• 1:13:41Speaker 04

  eight. So it's just a totally different conversation from some friends of mine who have kids that are. In their late twenties, starting to look at coming into the business and maybe that's a third generation business and you have to be really thoughtful about it because if you have multiple brothers and you both own a piece of the business, well, like, how do you deal with that family dynamic of one kid that just wants to be a shareholder, one kid that wants to work in the business? So I think you really have to be thoughtful about it and maybe it's not so much the third generation that screws it up, maybe it's the first and second generation that didn't really set the guardrails for that third one to succeed.

• 1:14:21Speaker 04

  So that's something that I think about, we have plenty of years to deal with it, but even the transition between my father and I, that has to be very thoughtful as well. So it's first to second to third, equally along the way is something that we definitely think about because you don't want to be in a situation where you have outside shareholders that are making decisions and hurting the business. In some cases, outside shareholders that can't say anything are great because you don't have to buy them out and they're getting dividends and it's perfect. So you really have to think about what structure will work best, but right now I'm just hanging with the kids and trying to be there all the time, be flexible.

• 1:15:02Anthony Pompliano?

  I think that's a great way to approach life. Where can we send people to find you on the internet or find out more about the business?

• 1:15:07Speaker 04

  So I started getting really intentional on Twitter.

• 1:15:10Anthony Pompliano?

  I noticed.

• 1:15:11Speaker 04

  @JWorzak, so I guess you can find me there. JakeWorzak.com will probably have some links to our company's ways to invest. We've raised over a hundred million dollars from high net worth investors. We've partnered with a bunch of private institutions and I am fascinated with social media and the power of the internet because I think that what you put out, you get back 10 times through new relationships, new friends, maybe new deals, new opportunities, new employees, and the opportunities are endless. So that's really why you see me out there, but.

• 1:15:46Anthony Pompliano?

  I think you're doing a great job and you've got a very unique perspective, I think. Right, obviously, real estate stuff is different than all the tech stuff, but also kind of the hotels and the way that you present the information, I think people really are enjoying. So don't stop tweeting.

• 1:15:58Speaker 04

  I won't.

• 1:15:59Anthony Pompliano?

  But no, thank you so much for your time. I've learned a ton today. I think a lot of other people will really enjoy this conversation. We'll definitely do it again in the future.

• 1:16:04Speaker 04

  Thank you. You're the man, you're a master.