Hotel Investing at EOS – Jonathan Wang (EP.506)

Jonathan Wang is the founder and CEO of EOS Investors, where he has built three real estate investment platforms totaling $2 billion in assets under management across the hotel and residential sectors. Jonathan also created a wholly owned hotel management company that oversees 60 properties for the EOS funds and five core partners.  Our conversation covers Jonathan's path to hotel investing and EOS' hotel investment process across market selection, property type, underwriting, vertically integrated operations, and managing through cycles. We also discuss extensions into residential real estate, hotel credit, and opportunities and risks going forward. Editing and post-production work for this episode was provided by The Podcast Consultant (⁠ https://thepodcastconsultant.com/https://thepodcastconsultant.com https://thepodcastconsultant.com/⁠ https://thepodcastconsultant.com/) Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup

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

• 0:00Speaker 00

  When COVID hit, which was a crazy time for hotels, we were running 95% occupancy and then the state mandated us to send everyone home and no one knew when they were ever going to reopen or if we were ever going to leave our homes again. There was a hotel at the time, once Florida lifted the ban on travel and they capped occupancy at 50%, what we saw at our other assets in the market was that we could fill up to max occupancy at rates that were higher than they were before the world shut down, basically the next day. We had this unbelievable data about how demand was going to be for leisure assets that you didn't have to get on a plane for in a mid-COVID environment and potentially post-COVID environment.

• 0:44Speaker 00

  There was a developer, he built a hotel. We had looked at it years before. We had a great relationship with him. He was in a lot of trouble because he had a full recourse loan. His lender was scared. They didn't want to extend the loan because they were just at zero occupancies. They called us and said, hey, we need to sell this at this price, which we knew immediately was incredibly attractive. We ended up looking at it, creating a business plan around it. And we were able to buy this hotel. There was some capital improvement as part of this business plan. And then there was mainly operational changes and improvement that we could have. The business plan in this case was we bought a hotel in the marina. We conde'd off the marina from the hotel. It was at the early stages of marina rollups starting to form.

• 1:29Speaker 00

  We took the brand off the hotel, made it independent. That allowed us to increase revenues through a variety of things and cut costs from paying the brands. The other thing that we did was spend about a million dollars landscaping to give it more separation from the road. We ended up selling the marina to a marina rollup group. We sold the hotel to a local hotel owner. We enhanced revenues. We were able to cut costs and there was a capital plan associated with it.

• 2:03Ted Seides?

  I'm Ted Seides and this is Capital Allocators. My guest on today's show is Jonathan Wang, the founder and CEO of EOS Investors, where he's built three real estate investment platforms totaling $2 billion in assets under management across the hotel and residential sectors. Jonathan also created a wholly owned hotel management company that oversees 60 properties for the EOS funds and five core partners. Our conversation covers Jonathan's path to hotel investing and EOS' hotel investment process across market selection, property type, underwriting, vertically integrated operations, and managing through cycles.

• 2:45Ted Seides?

  We also discuss extensions into residential real estate, hotel credit, and opportunities and risks going forward. Before we get going, summer's in the air and with that comes summer vacations and out of the office email responses. At the beginning of the year, I pledged to my team that I'd respond less rapidly to emails while traveling. So I started writing entertaining out of the office emails every time I'd be away from my computer. There was one about ditching my cellphone for a day at the Masters with no chance I'd respond, just like it ought to be. There was another about not responding because I was attending Will Gudera's Unreasonable Hospitality Summit, which created some cognitive dissonance for me, knowing that I wouldn't

• 3:29Ted Seides?

  respond while allegedly learning how to see others better. And there was yet another about attending Milken with the recognition that anyone getting the response would probably see me before I responded anyway. Now, many of these out of the offices increased my email count when I got back with a positive response about my reply. That caused me some confusion about whether I should reply to their reply to my reply to their email. One thing I learned from the exercise is we really don't have to reply to email when it comes in. Knowing that others know I won't respond reduces my people pleasing angst. That's especially true when I get interrupted, like while listening to an episode of Capital Allocators.

• 4:14Ted Seides?

  So if you're listening, ignore your email for a while. And if you do grab your phone to send an email, you may just want to reply that you're engrossed in the latest episode and need some time to thoughtfully reply. Yeah, that works for me. Thanks so much for spreading the word. Capital Allocators is brought to you by AlphaSense. Every allocator sits at their desk for hours, preparing the work around investment decisions, getting up to speed on a new theme, prepping for the next investment committee meeting, and tracking what changes across an entire portfolio. AlphaSense just launched something built to help. It's called SuperAnalyst, an always-on agent that works like a power user on your behalf.

• 4:58Ted Seides?

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• 5:43Ted Seides?

  Start a free trial at alphasense.com/capital and see what it has ready for you. Capital Allocators is also brought to you by RidgeLine, the investment management platform built for firms who are rethinking how work gets done. You're at your desk, looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated, with the team you already have in place.

• 6:29Ted Seides?

  RidgeLine is the only AI-native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate away operational drudgery, so your talent can shift from managing old technology to materializing new ideas. RidgeLine helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajectory. If you file Form ADV, your firm is already there. Then talk to RidgeLine about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square,

• 7:12Ted Seides?

  the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations, and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators. Please enjoy my conversation with Jonathan Wang.

• 7:56Ted Seides?

  Jonathan, great to see you.

• 7:58Speaker 00

  Great to see you, Ted. Thank you for having me.

• 8:00Ted Seides?

  Why don't you take me back to the early upbringing influences that led into the path we're on today?

• 8:07Speaker 00

  I grew up in Los Angeles, only child. I described myself as a late bloomer. I was a shy kid. On the weekends, I used to spend time at home with my parents, play cards, mainly gin and hearts, which I am now trying to impart on my kids today. I loved basketball, which was my focus for most of my upbringing, more than school or anything else. I was entering my senior year of high school, which was an important year for recruiting, and I got injured, which was tough at the time, but in hindsight was probably one of the most pivotal moments in my life because I started focusing on academics more. My friend circles changed a bit. Even the music I started listening to changed. I ended up going to the University of Michigan, transferring into the business school after that.

• 8:53Speaker 00

  Fortunate to get a job doing investment banking at Goldman Sachs after college. Came back to basketball again. I got two job offers out of school. It was both at Goldman. One for investment banking into the TMT group, so the technology media group, and the other into real estate. I didn't know much about either, but the guy that was recruiting me into the real estate group said, "I really want you to work here. I work on all of our hotels and gaming companies. We'll play basketball on the weekends. You'll have a great experience." At that age, I had a sense that mentorship was always important, not just what you're learning, but people focusing on investing in you. So I took the job in real estate,

• 9:36Speaker 00

  did corporate advisory work at Goldman for two years. Realized I liked real estate, but liked the investing side more than the advisory side. I was fortunate to get a job to transfer after two years internally into the internal real estate private equity group, which was called the Whitehall Group, which was one of the largest in the world at the time. Did that for about Two and a half years, realized I wanted to do something more entrepreneurial. I talked to a few people. I had this unique opportunity to go be the second employee at a startup real estate firm. It was started by one of the early founders of Blackstone's Real Estate Group.

• 10:15Speaker 00

  Not knowing what risk was at 27, took that job, had this great experience for about 10 years, learning about building a firm, not having the responsibility of building that firm, but seeing it from day one. As the team was getting built out there, I had the opportunity to figure out what I wanted to focus on. And because I had experience with hotels and he had bought a lot of hotels at Blackstone, I decided to focus on building and overseeing our hotel investment business, which became one of the largest in the industry. I love hotels. That's how I got started. I was there for about 10 years.

• 10:54Speaker 00

  Then I had the opportunity to take the next level of entrepreneurship and start my own firm. When I had a couple of folks that I knew from my time at Goldman that were interested in backing me, the timing felt right. I started EOS in 2017, so we're coming up on 10 years now.

• 11:13Ted Seides?

  So if you take a step back on what it was about hotels that excited you?

• 11:19Speaker 00

  I realized early on that I was curious about everything. I never wanted to be too focused on any one thing. I describe hotels as my window into the world. We have to think about everything that's going on, whether it's international relations or demographic preferences, or the price of gas, or the way populations are moving within cities, or how travel's segmenting, or how technology's becoming an intermediary to the booking process. We get to think about everything as a part of it. The nice thing about hotels is that you can relate to everybody about them. Everyone stays at hotels. Everyone has preferences. Everyone has opinions.

• 12:01Speaker 00

  It's a way to think about the world holistically, which I've always loved trying to do.

• 12:07Ted Seides?

  What was your thesis on how to make great hotel investments?

• 12:11Speaker 00

  The way institutions invested in real estate, going back to what I would say is the birth of real estate private equity coming out of the RTC, for the most part, was large investors partnered with operators to go buy real estate. Operators would bring the investments to large investors. They would figure out if they like the risk reward, try to figure out a deal between the two of them, and then buy an asset. When I was at Goldman, that's how that business model generally worked. When I started this new job, because we were doing this from scratch, we got to think about the model holistically and we said, hey, this is a bad setup for investors.

• 12:56Speaker 00

  Because we're reliant on operators to bring us the investment, we're not controlling our funnel of sourcing. Then we're giving up upside if things go well. So we said, is there a better way to do this? Well, what if we're both sides of it? What if we're the operator and we're the owner and we create this vertical integration? That seemed like a good idea. The problem was at 27, having no experience doing it, it was like, how do you now figure out if there's a good investment? I went back to say, okay, well, what data do we have available? How are we going to figure this out? And we created this framework that I still use to this day, although we continually tweak it and update it, which was quite basic and simple, but tries to make hotel underwriting

• 13:41Speaker 00

  scientific. It's tough to be scientific when you have daily leases and no long-term commitments, but what we realized was the data that was available to us was robust. If you looked at it over long periods of time, you could make some pretty interesting conclusions that I don't think is the way most people invest in hotels. What were some of those? The pillar of our analysis was predicated on a real misconception that people think hotels are super volatile. Actually, if you go back all the way to 1987, which is as far back as you have data, you can see that the demand for hotel rooms across the US has grown at

• 14:20Speaker 00

  just about 2% a year for 40 years and only ever declined in periods of global shock. So 91 with the Gulf War, 01 with the tech crash, GFC in 08, 09, and 2020 with COVID. But that trend line is very stable. If you take a little bit more of a medium term view, there's a lot of stability when people price in a lot of volatility. Then what you could figure out is that the nice thing about real estate is you have good visibility into the supply pipeline out a couple of years. If you have demand and you have supply, you can figure out occupancy. And we made these charts that we used to call compression charts, which was to figure out at what point of occupancy do you start to have pricing power?

• 15:04Speaker 00

  If you look at those charts, there's a lot of correlation and pricing power related to exactly what your occupancies are. So you could go back, look and create what you would view as a pretty reliable scientific methodology to project revenues when there was no certainty over medium periods of time. So you would always want to invest in areas where you could believe historical averages when you thought you were going to far exceed that. People have said that I might be a contrarian investor in hotels. I don't think we're contrarian at all. We're highly focused on figuring out what the data says and where it's leading us. What market should we be investing in, which might be before others find it?

• 15:46Ted Seides?

  What are the signposts of where supply and demand leads to an occupancy level where you think a particular hotel will have pricing power in the future?

• 15:54Speaker 00

  What's interesting about these charts when we put them together, every market and submarket actually behaves differently. It's a different level for every single market. That has to do with seasonality. It has to do with how much supply exists in a market. What's really interesting is that almost every one of these markets has a demarcating line, or if you do a scatter plot for the last 40 years, where above and below a certain threshold, there is a pronounced difference of ability to drive rate. It's not even close. It's below 72% occupancy. You have no pricing power. And above 72% occupancy, you might be able to push rate on average 5%. We oftentimes will find ourselves in a situation where people will say, oh, gosh, why are you buying in this market?

• 16:38Speaker 00

  You have to believe a lot of growth. You look at it and you say, yeah, because there's going to be a lot more coming. We'll also find ourselves in a position where people say, wait, why aren't you buying hotels here? They're so cheap. We say, well, they're not cheap enough. That's the really interesting thing that comes about the industry and the markets. We're always checking what we're doing and trying to see what's coming next or what's going to change this. What gives me great comfort is that over almost 25 years of investing in hotels, through some pretty dramatic changes, including COVID, these trend lines continue to hold constant even through everything. At the tailwind, I'd say you have some great things happening demographically

• 17:21Speaker 00

  where the younger generations want to spend more money on experiences and travel than they do on material goods. Even in this world where who knows exactly what the impacts of AI are going to be on everything. There's a school of thought that as AI continues to make things more automated, people are going to want more human interaction. And so travel has a lot of tailwinds to it, even based off of where we're coming from.

• 17:42Ted Seides?

  What do you see in this data that you said is pretty simple that other investors may not?

• 17:49Speaker 00

  I assume that everybody has created their own frameworks for analysis. I'd like to say that. I'm really a real estate investor that has focused on hospitality. There is a difference between that and somebody who is a hotel investor. What I mean by that is if I had to bifurcate the market underwriting from the idiosyncratic asset underwriting, I would give a 75% weight to getting the market right, if not higher. And doing all of the work on the individual asset is critically important, too. If you get the market wrong, getting the asset right is not going to make up for it.

• 18:30Speaker 00

  A lot of people in this space might not give that much of a weight to market and are more focused on the idiosyncratic business plan and take great comfort from being able to underwrite less market growth. We're definitely not the only one. I'm sure there's other people that do things that we don't, but I think that that's the methodology that we've used over the years that has generally kept us out of trouble. It's really thinking about the asset class as a real estate asset that is based off of the core fundamentals of supply and demand and pricing power, not putting as much emphasis

• 19:11Speaker 00

  on, oh, we can do anything because if we make it special, we can charge what we want.

• 19:17Ted Seides?

  Once you've identified a market that looks attractive, how do you go about deciding what type of hotel you'd like to invest in, in that market?

• 19:26Speaker 00

  We have four core pillars of how we're investing. We like to say interesting supply-demand dynamics over the short to medium term. We want to buy non-commoditized assets, assets that people will pay more to stay at, not just shop you for the cheapest rate on whatever channel they can do that. Third, we always like to have diversified demand drivers. There's really three forms of business that stay at hotels and how they're segmented. One is group business, conferences, meetings, weddings, anything that's over 10 room nights. The second is business transient, and the third is leisure.

• 20:06Speaker 00

  We never want to put too much leverage on assets where we're forced to make bad asset decisions because of financial pressure. On the first three pillars,

• 20:19Speaker 00

  Well, we always look to figure out how we can expand what we're doing. If you really stick to those three dynamics, it's been a pretty defensive way to invest over the last 20 years with a lot of asymmetry to the upside.

• 20:32Ted Seides?

  What are some examples of non-commodity assets?

• 20:36Speaker 00

  They can be in the resort side. They can be assets that people seek out that have no real competition. Your closest competitor is just very different. Non-commodity would be an oceanfront resort. In some cases, it could be the room type, or if it's standalone villas, city center locations generally have a much higher business percentage that would stay at those hotels. But what is their leisure mix? Are people choosing to stay there in the off-business time? Are their weekends stronger than their weekdays? Or are they outperform their competition during that time? You can have a variety of factors why people will pay more. Location, physical layout, amenity base.

• 21:18Speaker 00

  What are the reasons why people will choose to spend an extra $10 to stay here as opposed to somewhere down the street?

• 21:24Ted Seides?

  If you have conviction in the future levels of occupancy and some pricing power, why do you think about financing the assets more conservatively than maybe an average hotel?

• 21:39Speaker 00

  The reason for that would be because we live in such a volatile world. What we're trying to do is anticipate the future. You can't predict everything. We want to make sure we have a margin of safety from how we're financing ourselves so that if there are short-term shocks, we can ride through that without being forced to do something that we wouldn't want to do. We have great conviction in a five-to-10-year outlook in how we're investing. We do have to take into consideration the fact that there are no future revenue commitments. So if there's short-term volatility, we want to be prepared for that.

• 22:17Ted Seides?

  How do you think about an existing management team? How important that is to one of your rear investment thesis?

• 22:24Speaker 00

  One of the things I do love about this industry is it's full of great people. You've got the people you're talking about in terms of existing management teams are the managers' assets, which are not investors, but they are hospitality professionals. The strength of hospitality professionals is quite diverse. You could have a great business person running a hotel who understands ROI and trade-offs. And you could have a great guest ambassador who attracts the most loyal guests that will pay more because he or she's been there for 20 years. The quality of the team prior to our buying the asset is not as important

• 23:07Speaker 00

  as the quality of the team that would be in there when we're owning the asset. We've bought hotels where there's been terrific teams that we hope we can help supercharge, let them do their thing. There have been great teams where we've said, hey, they're great at this, but we can supplement with these other areas. And there's been assets where we have to make management changes to take the asset to where we want it to be. It's much less about the existing team and much more about the team that will be there when we own it. Anytime you're taking an existing team and changing it, there's more risk. So that would be more of a turnaround or a transformation of a property.

• 23:50Speaker 00

  And you factor that into the price and the returns that you're gonna hopefully get.

• 23:55Ted Seides?

  You have this investment assessment alongside of this vertically-integrated operations team. When does the operations team start their work on an investment?

• 24:04Speaker 00

  I've seen this all different ways throughout my career. The real unlocking of vertical integration comes when the operations team and the investment teams work as one, recognizing that they both feel different pressures and risks. Our investments team.

• 24:25Speaker 00

  And our operating team are partners throughout the whole investment. Before we're buying something, our acquisitions team is the majority partner. After we buy it, our acquisition team is the minority partner. What that requires is transparency between everybody that's making those decisions about what are the things that we need to go right for this investment to be good? And what are the things that could happen for us that would make it great? How many of those do we need to hit? And what's our confidence factor across each of those? Everybody needs to be in the room for those decisions because if you think about an acquisition person incentive, it's to get something done.

• 25:05Speaker 00

  If you think about the operations team, they feel pressure to hit the pro forma that the acquisitions person puts together. If you don't have full alignment between those teams and accountability across the board as one team, you end up with a situation where you've got misalignment of objectives, where an investment team says they feel good about something, they hand it to the team that has to execute, they say that's too aggressive, then you end up in a bad spot. From the time that we start to get serious about something, we bring in our operations team to be involved with the underwriting. When we decide to make a decision, it's a holistic decision across every one of those contributors.

• 25:48Ted Seides?

  What does a typical plan look like? Once you've bought an asset that the operations team is trying to improve upon?

• 25:55Speaker 00

  There's two main buckets that we would put a business plan into. One would be physical renovation. If we're transforming an asset, that could be from redoing a lobby, changing the appeal of it, redoing the rooms, adding real amenities. Some of those renovations can be anywhere from $5 million to $70 million. You can have a totally different impact, create real revenue enhancing cases, or just redo what's existing there. The other side of it is what we would call operational business plan, so management related, and that can either be strategies around improving revenues or strategies around. Around decreasing costs. In some cases, you could increase costs if you want to increase revenues

• 26:40Speaker 00

  because you offer more services, but it falls into operational or capital buckets. That is what we spend a tremendous amount of time on when we are buying an asset. Because we're figuring out what we think an existing asset can do. And then we're figuring out what the return is on any capital that we spend or any initiatives that we want to take to. And we will generally act quickly. So we will try to have our entire plan, obviously, figured out before we commit to doing an investment. But we're working to implement those changes on the day that we take over an asset.

• 27:14Ted Seides?

  Where have you found your sweet spot in terms of the types of hotels you like buying?

• 27:20Speaker 00

  What we have found over a long period of time is that 90% of what we're going to invest in is in seven large urban markets. So Boston, New York, DC, Miami, Chicago, San Francisco, LA, and resorts, which the vast majority of the resorts that we invest in are up and down the east and west coast. We've actually never invested in Hawaii, although we always look at Hawaii. Now, the reason that is, is that at most points in time, some of those markets are interesting in the framework that I mentioned. There are times where some of those markets are really interesting, and sometimes those markets are not interesting.

• 28:00Speaker 00

  And they come in and out of favor largely based off of what we're seeing from a supply-demand dynamic. If you go back, the most interesting and best performing hotel market in the world from 1987 to 2007 was New York City. The worst performing hotel market in the United States from 2007 to 2019 was New York City. That's largely because of the way supply came into that market over that decade. Within that framework, that's where we invest. We typically avoid markets with a lot of supply. Where we've seen people make money that we miss is the markets where there is a lot of supply and demand seems to keep pace.

• 28:42Speaker 00

  Eventually, we think the music stops and the supply stays, so you can get caught. But markets like Austin, markets like Nashville have been great performers for people over a large period of the last 15 years. If we're not early into those markets, we let that opportunity pass.

• 28:57Ted Seides?

  I'd love you to walk through an example in your portfolio, soup to nuts, from finding something. What that diligence showed you and then operating the asset?

• 29:07Speaker 00

  A lot of what we do in terms of sourcing assets and markets sometimes starts 10 years before we make an acquisition. We have been the most active investor in the Florida Keys since 2011. I think I've bought and sold now 17 hotels in the Florida Keys. When COVID hit, which was a crazy time for hotels, we were running 95% occupancy and then the state mandated us to shut, send everyone home and no one knew when they were ever going to reopen or if we were ever going to leave our homes again. There was a hotel at the time, once Florida lifted the ban on travel and they capped occupancy at 50%, what we saw at our other assets in the market was that we could fill up to max occupancy at rates that were

• 29:52Speaker 00

  higher than they were before the world shut down, basically the next day. We had this unbelievable data about how demand was going to be for leisure assets that you didn't have to get on a plane for in a mid-COVID environment and potentially post-COVID environment. There was a developer, he built a hotel. We had looked at it years before. We had a great relationship with him. He was in a lot of trouble because he had a full recourse loan. His lender was scared. They didn't want to extend the loan because they were just at zero occupancies. They called us and said, hey, we need to sell this at this price,

• 30:32Speaker 00

  which we knew immediately was incredibly attractive. We ended up looking at it, creating a business plan around it and we were able to buy this hotel. There was some capital improvement as part of this business plan and there was mainly operational changes and improvement that we could have. The business plan in this case was we bought a hotel in the Marina, we coned off the Marina from the hotel. It was at the early stages of Marina. Rollups starting to form. We took the brand off the hotel, made it independent. That allowed us to increase revenues through a variety of things and cut costs from paying the brands. The other thing that we did was we spent about a million dollars landscaping

• 31:14Speaker 00

  to give it more separation from the road. We ended up selling the marina to a marina rollup group. We sold the hotel to a local hotel owner. I always liked that example because it wouldn't have come to us unless we built a long relationship. We wouldn't have been comfortable to do it if we didn't have such familiarity with a market. We enhanced revenues, we were able to cut costs, and there was a capital plan associated with it. That is when things come together. It's a good example of all the areas in which we can create value.

• 31:48Ted Seides?

  How do you think about creating scale in the business if you're going in with an operating team asset by asset?

• 31:57Speaker 00

  I never thought that we would be as big as we are today. We own 45 hotels, mainly resort, and then I'd call it higher end urban assets. We have an operating platform that now manages about 60 assets. So they manage our 45 and then very selectively for other sophisticated owners in the business will manage for. When I started the business, I thought we would be small hotel investment firm. We'd buy a couple of assets, we'd add value, we'd sell them, probably never get to be more than 10. When COVID happened and we were so directionally invested in these drive to resort assets, the industry was on its back and we were doing quite well. Because we had this unique pipeline to execute

• 32:42Speaker 00

  on, the business scaled quickly in a way that wasn't anticipated. The real magic of that moment was that unbelievable talent started to join the firm. Others in the industry took notice and wanted to work with us. So the business has grown both on the operating side and on the investment side to now where we're one of the larger owners of hotels in the country, also one of the larger managers of hotels in the country. Going back to the investment framework, I think in six of the nine years that we've been around, we've made one or zero investments. When we have deep conviction, We move fast and we'll invest pretty heavily.

• 33:27Speaker 00

  But over that nine-year period, more times than not, it has not been a great investment environment.

• 33:33Ted Seides?

  What does your organization look like to be able to be patient and then deploy rapidly when the opportunity comes up?

• 33:41Speaker 00

  We're always working equally hard. It's just a question of how productive we are or not. It's more stressful when we're not finding good investments because you wonder what you're missing, what you can find, what you could be thinking outside the box, how you could be doing it. And it drives you crazy. It's much easier to be doing more because you're feeling productive, you're feeling good about what you're doing, you're making progress and you're growing. We have between our acquisitions team, our asset management team and the operations team. We are now fully scaled to where we're never at short of resources to be able to execute on investments. We are looking forward to a time when the investment environment becomes more fruitful.

• 34:26Speaker 00

  The workload has stayed constant, it's just how much fun we're having.

• 34:30Ted Seides?

  Where does art and taste come into the process of either identifying or improving assets in hotels?

• 34:39Speaker 00

  Hotels are a very people oriented business. A lot of what you create has to resonate with the guests that you have. That is one of the harder things to do. I go back to being a real estate investor that invests in hotels. Generally, we never want to make the core business plan or returns that we're banking on dependent on us doing an exceptional job with design or food and beverage outcomes or outperforming the market. We always want to do that. But we want that to be our upside.

• 35:20Speaker 00

  Where that's really important is that if you do a fabulous job, you should make a great return. If you do a good job, you should make your base case. We spend a tremendous amount of time and effort in the planning of renovations, our business plans for the assets, trying to figure out a story and a through line and what we're trying to create. And that's very different. When we own a five-star hotel in Cape Cod and we're renovating it and it wants to be really quintessential New England beach resort, it's very different than when we're buying a hotel out of bankruptcy in Beverly Hills and it's got to be five-star luxury for the highest-end consumers in the country.

• 36:02Speaker 00

  Making sure that we're assembling the right teams is critical to the success of the hotel. We want our returns to be based on us doing a professional job and we want outside performance for doing an exceptional job because even as much thought as you give to some of this, that's a much harder thing that shouldn't be baked into your base case.

• 36:21Ted Seides?

  On the other side, in the frameworks you developed, highly data-driven to try to get at the right markets to be in, have you thought about using AI to improve that analysis?

• 36:32Speaker 00

  I'd like to say we're doing a lot with it right now, but we're talking about it. We're close to hopefully doing something with it. Now that we've been doing this for a long time and we have a lot of data, both in terms of properties when we look to buy them in our files as well as data coming in every single day in terms of booking trends. We are really focused on figuring out how to identify trends quicker, seeing what more holistically we can do to isolate what's actually meaningful. When I think about the framework that we created 20 years ago now, in the next couple of years, that will be vastly improved

• 37:14Speaker 00

  because we're going to be able to look and see what markets look similar to these seven large resorts that we're seeing. I think it's going to broaden our ability to invest. What I'm also hopeful for is that we'll be able to see if we've made mistakes, where have we made the mistakes in the past? Going into COVID, or at least now, we are one of the largest owners of regional resorts, drive-to resorts in the country. For a long time, we thought that that segment of the market really was just Florida and California.

• 37:45Speaker 00

  It wasn't till 2019, when we bought a big, great property in Myrtle Beach, South Carolina, that we realized that the same dynamics exist in other coastal markets that are within three-hour drive to distances. And so, once we saw Myrtle, we said, hey, where else is this true? And that led us to Cape Cod and Kenny Bunkport, Maine, and the Delaware beaches, and Hilton Head, all markets where we're one of the largest owners of properties. How can we make that determination quicker than stumbling on it seven years after first buying our hotel in the Keys?

• 38:21Ted Seides?

  What are you most excited about when you look at the investment landscape today?

• 38:26Speaker 00

  I'm really excited. There is so much noise out there. I have never in my career seen assets and markets and types of travel perform in a less coordinated way. There's going to be incredible opportunity here as people make decisions about disposing of assets, where there'll be a lot of people that can't figure out what markets they should be investing in, and that's going to create great opportunity. For so long, a good market grew at 6% a year and a bad market grew at 2% a year. Now, you have markets that are going in totally different directions, and some markets within those markets that are

• 39:08Speaker 00

  going in totally different directions. So, it's never been harder to comp to the like sale. You can't really just comp to the like sale. So, I think there's going to be great buying opportunities. What we're finally starting to see, which is exciting, is that banks are starting to make people deal with problems, or sellers are now capitulating a bit. There's going to be a much more active investment environment over the next couple of years.

• 39:35Ted Seides?

  When you put on your entrepreneurial hat, after having built this business, what are the most important things you've learned from running an asset management business that are different from what you thought when you started EOS?

• 39:47Speaker 00

  The business has changed a lot. When I started it, what I knew was, we were starting a hotel investment firm late cycle. And people said, you're crazy. I said, no, you can't pick your time. You can just figure out your pace of deployment. Didn't raise a lot of capital, so it wasn't daunting. I knew we had enough to get through to another good time. The thing that has been the most fun is that being an entrepreneur, you are always trying to figure out what you should be doing or could be doing to capture opportunity. If you set up a business, how is that business set up? What's its edge and what does it deserve to be able to do? I thought we set up this business, we were going to be a small

• 40:29Speaker 00

  hotel owner. We were going to set up a stub hotel property manager to manage our own assets. We'd own five to 10 hotels at a time, and that would be a great little business. Well, the world changed. The opportunity for us changed. We now own a lot more hotels than I ever thought we would. Our hotel manager grew pretty tremendously. So that's now a really impressive entity that is a lot of fun and gives us a huge advantage. Also, about three years ago, we capitalized on some trends that we were seeing in the asset management space, and we started a separate residential business with a partner of mine, this woman Nicole Sermier, who's a fabulous investor. That business is different than

• 41:10Speaker 00

  our hotel business, but has made our company so much better. Just a few months ago, we launched a hotel credit business to fill a very needed hole that's been created from the way regulations at banks have continued to form and also the way private credit in real estate has formed. What has been really fun to be able to do, and I'm grateful that we have great existing investors and partners, is to try to see what the opportunity and the landscape is out there and to figure out how the business evolves over time to capture that, responding in some part to how the world and the industry around us is evolving.

• 41:56Speaker 00

  And based off of the opportunities that we're seeing that we can capture.

• 41:59Ted Seides?

  Residential real estate is a big market. I'm curious, when you made the decision with Nicole to lean into that as a business, how did you decide to go about it in such a way that it would make the whole a better organization?

• 42:15Speaker 00

  I had to ask myself that during that process. The trends that we were seeing out there broadly speaking were the large investment managers get bigger. We were seeing it getting harder for people to launch small investment businesses. We were seeing a fair amount of frustration mounting from people that worked at some of these large asset managers as the business models were changing. We started getting calls from people outside of hotels that said, hey, could we ever start something together? You did it. I don't want to do it on my own, but could we do something together? So we spoke with our initial investors and said, hey, would you ever back us in a non hotel strategy? And because we had earned so much trust surviving late cycle and COVID, they said, well,

• 43:00Speaker 00

  yeah, we have a lot of trust. If it's the right person and strategy, we back you in doing this. I went out and tried to meet as many people as I could in my network, outside of my network, that we could potentially do something with. I met Nicole. What was interesting is that the edge in the hotel side is largely driven by our vertical integration. The way Nicole invests is not a vertically integrated platform, but by having a broad mandate to trade in and out of residential subsectors as the risk reward becomes more interesting in those different areas. It was a gut check moment of, well, what is EOS? Is it a vertically integrated real estate investment? What I realized was, to the extent we're ever going to grow this business

• 43:44Speaker 00

  and we're going to set up different investment platforms, what we have to do is set up the investment platforms in a way that maximize their performance for our investors over the next 20 years. In some ways, one platform might be vertically integrated and another one might not be because it's set up and operational day to day oversight is less important and it's more important to have a broad mandate and to be able to trade in and out of those things. What we've leaned into here is creating a scaled specialist firm is deep expertise and outperformance at the Specific property level where deep expertise is going to lead to outperformance with

• 44:25Speaker 00

  the benefits of a larger halo on top to supercharge those investment platforms. We will never set up a platform that doesn't do four things. One is an opportunity set that we think has decades of tailwinds behind it. Two, we don't have a unique talent that we can attract to partner with to really run that business, who we think is at the top of the game. Third, we should never do it unless we think we can be the best or close to the best. Fourth, we won't do it unless it makes our other businesses better. How did the residential business make our other businesses better? When you're a specialist, what I fought every day was being too myopic.

• 45:08Speaker 00

  Don't make a good hotel investment because it's the best hotel investment you can make. Make a good hotel investment because it's a great investment. It became a whole lot easier the minute we could see the actionable opportunities in this other sector. As a firm, the most interesting opportunities that we've seen for the last two and a half years have largely been in the residential sector and senior housing, where Nicole was early and we were big buyers of that over the last two years. On the hotel side, the very small opportunity set that we saw was buying San Francisco hotels at deep discounts to 2019 levels. But when you looked at the broader cross section of what we could do, just in residential, senior housing was screaming as what we should do. It made us better investors to see what you could be investing in in a broader set.

• 45:52Ted Seides?

  When you were assessing Nicole as a talent to run this strategy, what did you look for to determine that she would be exceptional?

• 46:03Speaker 00

  When I met her, I thought she was a great investor. I had this gut instinct to it. I went and I spoke to one of our investors about it and said, we're thinking about starting this residential investment strategy. And I said, her track record is extraordinary. And I said, you gotta be really careful because everyone's track record in residential is extraordinary for the last decade. I said, ah, that's a good point. If you dissect the track record and figure out how Nicole's track record was created, what was so interesting about it was she didn't just invest in multifamily and ride the cycle for 10 years. She was pivoting in and out of these subsectors, in many cases, far too early because the risk reward became more interesting in other places.

• 46:48Speaker 00

  That logic about thematic investing, about risk reward, where the best risk return is between this and the pivot, to me, is one of the hardest things to do because it's easy to say, hey, that worked, let's just rinse, repeat and do it again. It's harder to say, hey, we made our money here. This now doesn't feel as good as this other thing and how are you doing it? That is what stood out was how well she could articulate how she pivoted across subsectors over close to a 15-year period where if she made any mistakes, it was getting out of things too early.

• 47:22Ted Seides?

  How did you think about layering in credit as the next leg of the store?

• 47:27Speaker 00

  Residential broadened us from a hotel investment firm to a real estate investment firm, which was a bit of an identity change. Leaning into a core competency felt much easier. The interesting thing was most real estate investors would look back and when interest rates rose in the middle of 22, you could look at your credit returns and you could say, wow, credit's more interesting than equity. We saw that. We saw that close to four years ago. We also made the decision that we couldn't be transient players in this space. So we decided to sit it out. Years and years passed, we kept seeing it. Our lenders were showing up in different ways. We saw the holes that existed and we kept thinking it was really interesting. We saw this huge opportunity set for years.

• 48:10Speaker 00

  What was the catalyst to doing it was this guy, Christopher Jordan, who was the most prolific hotel lender over the last couple of decades. He ran and built Wells Fargo's hotel hospitality lending unit, as well as many other things over a couple of decades. He retired from Wells in 22. We had created a great relationship over 15 years of working together. He was in New York, our office, saying, I might try to do something. I'm getting a lot of calls about this interesting space. I said, look, I don't think the things you're thinking about are interesting. I don't know if we can stand this up, but if you wanted to, the combination of our ownership and valuation and operational capabilities, along with your credit experience and network, this is a huge opportunity.

• 48:54Speaker 00

  So we decided about a year ago to launch this platform. We closed on our first fund a little while ago. We are so excited about the credit opportunity that exists. It's long-term opportunity set mixed with generational talent that also is additive to our overall business is what led us to start it.

• 49:13Ted Seides?

  As you describe these opportunities, you get a window onto what you think will happen in supply and demand in a market by an asset. But every now and then, there's some big shock, economic shock, pandemic. How do you prepare your investments and the organization to withstand whatever's coming next around the corner?

• 49:36Speaker 00

  The preparation comes in what we're buying and how we're trying to isolate for as much as possible and to create an asymmetric skew to the upside. COVID was totally unexpected, yet we found ourselves 90% allocated into a drive-to-leisure thesis, which was the small subsector of hospitality that took off like a rocket right in the middle of COVID. I generally believe that the shocks that we've seen have been short-term shocks that accelerate trends that we've seen coming for a long time. What the long-term trends that we've seen are,

• 50:21Speaker 00

  international travel has generally become harder over the last 20 years, whether it's visa issues or cost of flights. All sorts of stuff have made domestic travel more resilient than international travel. So we generally are investing in domestic travel because it's more stable. Likewise, One of the big things that's changed post-COVID with the combination of technology is that business travel is down because a lot of people are doing Zoom meetings. That wasn't something that just happened overnight. The adoption was accelerated because we were all forced to do it so quickly and it's held. If you look at how business

• 51:01Speaker 00

  travel was trending for years before that, you could start to see those trends happening. If we're not rinse, repeating and doing what's worked before and saying, oh, well, that feels good. And we're constantly evaluating what's changed, what could change. That's what you're preparing for. Now, look, COVID for the hotel business was a very scary time. I remember going for a walk and saying, okay, if a hotel makes $50 million of revenue, it has $40 million of costs and revenue goes to zero. How much money do you lose? No one had ever run the shutdown analysis of a hotel. You just had to deal with it.

• 51:44Speaker 00

  You had to figure out what a shutdown looked like, what your liquidity looked like and prepare for it. If we all couldn't leave our houses, the hotel business was over. Assuming you get back, actually what these shocks are is just an acceleration of trends.

• 51:58Ted Seides?

  What are some of the things that you're looking out as potential changes and how you're going to have to think about investing?

• 52:06Speaker 00

  I take great comfort because a lot of what I've mentioned continues to hold true. However, two things happened last year that are unique. The question that we're asking ourselves is, hey, are these trends of things to come or are these long-term things? So I started off this by saying, since 1987, you've only had hotel demand decrease in years of large global shock. What I left out was that it declined last year. Now, you could say was Liberation Day global shock, stock market's up. I don't think so. That broke a 40-year rule. It's up again this year, but I can't say that in absolute terms anymore.

• 52:48Speaker 00

  That was an absolute pillar of the stability of demand for hotel rooms. It was the same analysis that we looked at when we said Airbnb was not going to do to hotels what Uber did to taxis. We have our eye on that. Another thing that's dramatic is up until 2019, the US was an importer of travel. More people came to the US and stayed in hotels than left the US to stay abroad. We have now become a significant exporter of travel. More people leave the US to go abroad than come in. Both components of that are negative. More people are leaving the US to go abroad on vacation and less people are coming to the US for vacation or work. Where is that going to stabilize?

• 53:30Speaker 00

  Those are two things that are not spoken of that much that we have our eyes on.

• 53:36Ted Seides?

  As you look out, you're starting to build this credit platform. What do you hope EOS becomes in the next 10 years?

• 53:42Speaker 00

  I've always wanted to be a part of something that makes an impact. I'm excited for the relationships that we've built with our investors over the years, with the ways that we're becoming more and more significant in the industries than just being a occasional buyer and seller of assets. We now have almost 7,000 employees at our hotels. We impact a lot of people. You take great responsibility for the people that entrust us with their livelihoods. What I hope EOS becomes is a premium provider of whatever we offer, whether it's investment opportunities in equity, in residential, in hotels, whether it's credit opportunities, whether it's property management.

• 54:26Speaker 00

  And we do it in a way that is forward-thinking and innovative, that generally leaves the areas that we touch and the people that we touch feeling better than before we were there.

• 54:38Ted Seides?

  Jonathan, before I let you go, I want to make sure I get a chance to ask you a couple of closing questions. Before we get to the closing questions, I want to tell you about one of our strategic investments. We've made a few, and each are working on a product or service we think will be valuable to our community. One is OldWell Labs, or OWL. OWL is the very best software I've seen for allocators to find and track managers, and I've seen a lot of them. Trust me, it'll be worth the look. There's a link in the show notes so you can learn more. And here are those closing questions. What was your first paid job and what did you learn from it?

• 55:13Speaker 00

  Growing up in LA, I was a production assistant, otherwise known as a gopher, for a TV show called It's a Miracle, which was unsolved mysteries, but like, oh, it's a miracle. It was the positive side. I was a shy kid and the first day they gave me this list of 200 people that were owed paychecks, residuals or whatever they're making. I had to cold call these people and it was good news because I was trying to confirm their address so that they could get their paycheck, but it was mortifying to do. I still think back about that because I did not know how I was going to get that done, but I just did it because I had to. After I did the first three or four, it became so much easier. It was a lesson in, wow, something can seem really hard and you do it.

• 55:58Speaker 00

  There's a quote that I love, which is, "You're not improving fast enough if you're not somewhat embarrassed by your six-month-ago self."

• 56:05Ted Seides?

  What's one thing most people don't know about you that you find interesting?

• 56:09Speaker 00

  I said I love basketball. I was so fortunate in high school. I played with two future NBA players and actually played on the fourth-ranked team in the country where we got to play against all sorts of people that played in the NBA over the last decade or two. It was this amazing experience because it was one of these times where not only was it so fun and my big passion, but I learned about teamwork and leading, then also how to take a backseat and the experience of being a part of something great. I still look back on that and I was so lucky and fortunate to be a part of that experience. There's one more I should probably say. It was fun talking about my professional accomplishments, but actually I'm far from the most successful person in my house. My wife is an amazing author,

• 56:53Speaker 00

  Christina Alger. She's written four bestselling books and they are phenomenal. If you're going to start with one, I would start with The Banker's Wife, but what really makes all of this possible is her and her support. She's really the most talented in the family.

• 57:07Ted Seides?

  What's your biggest investment pet peeve?

• 57:10Speaker 00

  This goes back to my card-playing days. When I used to play gin, my parents always said, "Don't bet on an interval when you're making a decision and you feel like there's time constraints or you have to hit this right in a certain period of time." It's when people are making investments that have time pressure, I feel pretty confident that we can have a good view of what's going to happen, how quickly it's going to happen as harder. Time pressure and interval investing would be my biggest pet peeve.

• 57:40Ted Seides?

  What's the best advice you ever received?

• 57:42Speaker 00

  The best advice I ever got was from a high school English teacher. After I took my job at Goldman, I told her what I was doing. She said, why? And I didn't have any good answers. Finally, I came up with the answer. I said, well, if I don't like it, it won't close any doors. It'll just open doors. She looked disappointed and she said, I will advise you that if you live your life always trying to maximize optionality, you will always be unhappy. What's funny is that in investing, so much of what we do is about creating optionality. And you try to maximize optionality. But when I look at my life, I think about getting married, having an amazing wife,

• 58:25Speaker 00

  my kids, and even starting this business. My greatest joys come from when I have committed and not focused on maximizing optionality.

• 58:34Ted Seides?

  All right, Jonathan, last one. How's your life turned out differently from how you expected it to?

• 58:39Speaker 00

  My wife likes to say I'm great at rhyming and have a good way with puns and words. I always thought I was going to be in marketing and write jingles for commercials and come up with slogans. Working in real estate and finance and living in New York and having three kids, being an only child myself, life is very different than I thought it would be.

• 58:59Ted Seides?

  Jonathan, thanks so much for diving into the hotel business.

• 59:03Speaker 00

  Thank you for having me, Ted.

• 59:05Ted Seides?

  Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list and sign up for premium content. Have a good one and see you next time.

• 59:20Speaker 02

  All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.