Today we're learning what are the top things to look for when investing in hotels. We're interviewing Jerome Yuan, CIO of ASAP Holdings. He specializes in commercial real estate and capital markets, and has assisted ASAP with acquisitions and dispositions of over 33 hotels in the past 9 years.
Tell us a little bit about you.
I started investing in hotels with my family back in 2009 after the last Great Recession. I've been working with my family now for over 20 years since graduating undergrad at UCLA. We've been doing different types of investing since then, but really focused on hotels since 2009 until now. I work with my father, my uncle, and a small staff here in Pasadena. Over the last 10 years, we've bought and sold over 33 hotels across the country, mainly Marriott and Hilton franchise brands on the coast. Los Angeles, San Francisco area, New York, New Jersey and Florida are the main concentration. But we have hotels in Texas, Denver and Atlanta. A big variance across the country.
Why should investors invest in hotels, especially nowadays? I heard that where the economy might end up going, it might be a bit risky. But let's let's see what you have to say on that.
They say the hotels are probably the most sensitive to economic cycles. They're probably the first to get any type of effect, but they're also the first to rebound out of any type of recession as well. For us, investing in hotels is both a real estate play and also an operational play. We believe that hotels are like 50% real estate and 50% operations. Location matters a lot too, just like any other commercial real estate deal. But then you also have, depending on the hotel, 50 to 100 employees there that you have to take care of. You have guests checking in and out on a daily basis. The operational side is really where you can make a difference and improve the cash flow of the property. And we believe that improving hotels are are the fastest and easiest way to improve cash flows in commercial real estate just because of the daily transactions that you have with customers and hotel guests.
And how do you go about doing that?
It all depends on the project. If it's unbranded, we will try and find a brand for it, like a Marriott or Hilton. If it's already branded, we would change the manager. So even though it's a branded Marriott or a Hilton, we can hire our own property manager, third party, that's approved by the brands. And each property manager has their own strengths and weaknesses. Every market is different. We try to find a manager with much more local knowledge and more resources in the community. If they manage other hotels in the area or in the city, they can pull from those resources. Obviously, renovations and upgrading the hotel helps to improve the rates that we get with the guests. And just like any other commercial real estate where you buy a hotel, you want to renovate to make it newer, to get a higher rate. We feel like for the investment you put into the CapEx, you get a higher return with hotels.
How do you go about finding really good management? That is probably the hardest task, no?
Yes, it's extremely difficult. We work with a lot of national organizations, some of the biggest hotel property managers in the country. They manage maybe a thousand hotels or 500 hotels across the country, which, depending on the market, is great.
But then we also work with smaller regional property managers like for our New York properties. We use one company that knows New York extremely well. It's difficult, you have to evaluate, to see their track record, and you've to go visit their offices and talk with the management. Everybody's management style is different. We like to push occupancy at our hotels instead of getting a higher rate. A lot of hoteliers or managers have a different opinion where they think a higher rate can have a better flow through to the bottom line, which is definitely true, but it's a give and take between a lot of different variables.
What is their typical management fee?
The property manager usually takes a 2.5-3% percent fee off of the of the gross income. It's pretty reasonable.
Why don't we go over your most memorable deal and why. It could be your best and/or your worst one.
I have both, but the most memorable is probably our DoubleTree San Pedro Hotel here in Los Angeles where we're located. It was the first Los Angeles hotel that we purchased. It was not performing well when we purchased it, barely breaking even. It took a lot of underwriting and understanding what was going on with the hotel to really purchase something like this. We were able to turn it around. We obviously put in money to renovate the hotel and the market definitely picked up. But we were able to, with our contacts and relationships, get a big airline contract to come into the hotel to fill up half of the hotel rooms so that we wouldn't be so scared about raising the rates for the other half of the hotel. It's probably the only hotel we might never sell.
How long is this contract for? It would be my most memorable one too. Half of the rooms filled out. That's amazing.
We renew that contract with them every two years and it's a long term contract. That contract alone is worth about $3.5 million dollars annually in revenue. It's extremely important for us, and I think that we we've kept them happy, and I think they're going to be long term.
What are some of the top things that investors should keep in mind and watch out for when investing in hotels?
1. Investors should really look at the brand of the hotel, or if there is a brand, and if you're buying a boutique hotel or independent, those hotels rely on the location. If it's a beachfront property, you won't have any problems. But if you have an unbranded hotel in a suburban area where it's mainly business travelers, you're going to need to be careful and make sure that the brand is the right brand for the hotel.
2. The other thing is really the renovation costs after purchasing the hotel. Every brand requires the new owner to renovate it. They call it a property improvement plan that's issued by the brand. You've to make sure that you cost out every item and avoid any cost overruns because that just eats into your return on your investment. I think those two main things are the bread and butter of what to invest in for hotels.
3. Location. As long as you're in a good location, you might not need a brand. But some brands are stronger than others, so a Marriott would be stronger than a Four Points or something like that. So that's very important.
Tell us about your worst deal.
It was a deal in Texas. It was a Crown Plaza. One of our latest acquisitions. The Crown Plaza brand really didn't deliver as many guests as we thought that they could. The Crown Plaza brand is in a weird transition phase right now because it's owned by Intercontinental Hotel Group, which owns Holiday Inn. And Holiday Inn really is their number one hotel. They haven't put as much focus on Crown Plaza. I think that Texas Hotel partly was a brand issue. Partly I think it's also Texas, or Dallas. There has been a lot of huge growth in Dallas. But there has also been a lot of new supply in Dallas as well. So when a new hotel pops up next door to you, guests will want to stay at the new hotel, even if they want to just try it for one time and come back. But with the new supply coming in, our older Crown Plaza couldn't really compete with the newer type of hotels. Something else to really watch out for is the market. How much new supply, and how much real demand there is in that local market.
Do you look at Airbnb laws in that particular city?
We don't really focus on that too much. The way we invest in hotels, they're mainly business travel hotels. We'll have hotels in the suburbs, or near office parks, and things like that. We don't really compete with Airbnb, at least we don't think we do as much. They definitely do affect hotels stay, I do believe that, but the business traveler is there for one night, two nights, and then they're out of the hotel most of the day at business meetings. If we were to start transitioning our investment to resort, luxury, or tourist type of hotels, then we would definitely be looking more at how the local Airbnb laws are changing.
That makes a lot of sense. I personally have a like/hate relationship with Airbnb because the prices are as much as hotels nowadays with all the fees that they add. And then most of them are not even fully furnished. I stayed in one recently in Dallas and it didn't even have a table to sit on. So I have been tending to go back to hotels personally for multiple reasons.
I see that too.
Is there anything else that you think is important that our audience should know?
I know that hotel investing is a very niche commercial real estate product, and investors that are interested in it might not have the full picture. I just want to make sure that everyone understands that in an economic downturn hotels will get affected. I just want to reiterate, I think that they will be the first affected, but they're going to be the first to bounce back as well. I think it just depends on how big the next type of recession or slowdown is going to be, and for how long. We still feel like hotel investing currently will be good in the long run, which is why we're still buying hotels.