The V Shaped Recovery for Hotels & The Future of Travel with Greg Friedman, CEO Peachtree Hotel Group, Principal at NewQuest Crosswell

Greg Friedman, CEO of Peachtree Hotel Group, sits down with Ryan Morfin to discuss trends and forecasts for the hospitality industry.
Greg Friedman, CEO of Peachtree Hotel Group, sits down with Ryan Morfin to discuss trends and forecasts for the hospitality industry. Prior to COVID-19, Friedman believed the market to be in a great spot with high occupancy, ADR and rev par. However, all of that changed when the pandemic ignited lockdowns that led to the industry’s socioeconomic destruction. Occupancy nearly hit zero as mandated lockdowns went into effect. Now, you can see a sharp recovery as occupancy has jumped forty percent in a matter of weeks.

If a second wave were to occur, hotel occupancy would take another hit as peoples’ fear of travel and public spaces bring back a new wave of lockdowns. For the foreseeable future, strong balance sheets, cost cutting, and cleanliness marketing are the only means of survival for players in the hospitality industry. However, after the panic subsides, higher inflation caused by government stimuli will benefit the industry due to their flexible pricing structure.

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Ryan Morfin:                    Welcome to Non-Beta Alpha. I’m Ryan Morfin. In today’s episode, we have Greg Friedman calling in from Atlanta Georgia. He’s the CEO of Peachtree Hospitality Group. He’s going to talk to us a little bit about the V-shape recovery coming back online for select limited service hotels and what he sees in the future of travel and the hospitality sector. This is Non-Beta Alpha.

                                           Greg, welcome to the show. Thanks for joining us today.

Greg Friedman:               Yeah, thank you for having me.

Ryan Morfin:                    Well, the hospitality industry has definitely been newsworthy over the last few months. Would you mind sharing a little bit about your organization and where the sector was prior to the coronavirus and what’s been happening over the last few months in your business?

Greg Friedman:               Yeah, basically our organization, we’re in the hotel business, we’re Peachtree Hotel Group. And we have a hotel investment management platform that invests something down the capital stack because it relates to premium branded, select service, limited service, compact full service hotels. So, we invest both on the debt and equity side of hotel properties mostly within the Marriott and Hilton franchise systems.

                                           And we own multiple companies that service the investments, so we own a hotel property management company that operates everything we invest in on the equity side. We have a development company that develops and renovates everything that we invest in on the equity side. We have a lending platform called Stonehill that’s originating, [inaudible 00:01:52] and managing, servicing the debt investments that we make in the hospitality space. And finally, we have an asset management company set up to really optimize and drive the returns of the different fund vehicles or investment vehicles that we’ve created.

                                           Really, with that said, pre-COVID the hotel industry itself was really at a peak, so we were performing extremely well. When you look at the fundamentals on a macro level across the hotel industry, everything was performing extremely well from a [inaudible 00:02:24] and average daily rate perspective. And we had record, [inaudible 00:02:29] par levels within our industry. And we were in a really good place when you looked at what was happening from just the main growth as well as supply growth. Everything was relatively in check across the board, so we were in a very, you know.

                                           Fortunately, the industry had really strong fundamentals. Unfortunately for us, because we’ve made investments over the last several years but it was extremely challenging to find new acquisitions and it was challenging even to make debt investments to a certain degree over the last couple of years because the market was extremely efficient although we were still able to find some really attractive opportunities.

                                           Since COVID, COVID’s been very impactful to our industry and it’s created a huge dislocation within the hospitality space given the fact that hotels are really the tip of the sword as it relates to this event. So, COVID-19 has, without question, disrupted our ability to drive back [inaudible 00:03:28] a lot of our hotels. So, going back the middle of March, our hotels went running at these record occupancy levels to really dropping close to 0% occupancy. The last 60 days or so, we were extremely aggressive over the last 60 plus days on really playing defense as an organization, so effectively we went in and cut a lot of expenses both corporately as well as in our properties to manage the impact from COVID-19.

                                           Fortunately, what we experienced over the last 30 days, we’re starting to see an uptick in occupancy. So, going from being 0% occupancy back in March, we’re now portfolio wise, running around 40% occupancy levels across the 50 hotels that we currently own and operate. And when you look at the 70 or so debt positions we have on different assets, all those combined are running roughly about a 40% occupancy level and it’s climbed. So, we’ve probably in the last 30 days we doubled the occupancy across our portfolio from 20% now being closer to 40%.

                                           And we’re very optimistic. As you look down the road over the next six months or so as we sort of get through what’s happening with COVID-19 and these government mandated lockdowns, as they’re being lifted, we’re finding occupancy is returning in the different states. A good example is down in Florida, we’ve seen a huge spike in occupancy at our hotels that are located in Florida. Like our hotel in Navarre Beach, we have a Marriott Springhill Suites on the beach in Navarre Beach, and that hotel’s been running close to 80-100% occupancy nightly versus in the month of April it was running close to 20% so we’ve seen a huge spike upwards as these lockdowns have been lifted. And we think that’s going to continue to occur as these lockdown are lifted.

                                           And so, we’re optimistic that there will be a rebound. Unfortunately, as we get out of this COVID, this pandemic experience we’re going to end up into a recession, an economic recession so that’s going to have an impact on our business. And we’re seeing a huge amount of investment opportunities just given how steep COVID-19 has been to our business and given the fact that we are going to be in a recession, we believe, for an extended period of time that’s going to allow for us to file a lot of distressed hotel assets or buy assets from stress hotel groups that [inaudible 00:06:02].

Ryan Morfin:                    And so, is it right to generalize this comment, you guys are more focused on the limited service side versus, we’ll call the higher end of the market?

Greg Friedman:               That’s correct. We are more focused on limited and select service hotels. Traditionally, we’re focused on the Hampton Inns, Hilton Gardens, Marriott Courtyards, Marriott AC type branded hotels. These tend to be select service or limited service hotels that typically have very minimal F&B outlets. And it’s truly relying on driving revenues from selling rooms.

Ryan Morfin:                    And so, you’ve got Marriott and Hilton branded hotels. Have they both been team players or what have they done to try to help owner operators with the cost reductions? Have they continued to charge their franchise fees or have they pushed some of those or how have they been working with the industry?

Greg Friedman:               They’ve been great from one respect in the sense that they’re helping where they can as a company. They are ultimately the franchisors and they’re really the marketing machine to help drive business into our hotel, so they’re doing, I believe, a really good job of getting the message out to consumers, giving that confidence to travel and that our hotels are going to be safe and sanitized so when people are traveling they can have confidence to stay at our hotels.

                                           With that being said, they are working with us from a standpoint of helping where they can on deferring out potential fees that need to be paid. Ultimately, most of their fees are really generated off a percentage of revenues. And with revenues dropping, naturally fees that we have to pay to them are reducing because of the reduction of revenues. And so, a lot of it is just naturally there but in other cases certain fees they’ve been good about either reducing or deferring out and trying to work with Franchisees like us or other groups to help everyone make it to the other side of this pandemic.

Ryan Morfin:                    And so, you guys are interesting. You’re a lender and an operator. When you’re making these loans are you originating new debt at just higher interest rates. Is this bridge financing or are you buying distressed debt from people who have a negative outlook and need to give the keys to somebody who can actually step in and operate it?

Greg Friedman:               We’re actually doing both. We are originating new loans. We do originate new loans where we provide a first mortgage position to refinance an existing hotel or maybe someone’s acquiring a hotel. And in today’s environment, spreads have really expanded out so we’re able to get a really high spread or ultimately, a high interest rate relative to the risk that we’re taking. So, we feel like we’re getting risk adjusted, we’re getting a really good return lending money today on hotels because there’s a limited amount of debt capital available.

                                           But we’re also buying a lot of … and we historically as a company, we bought a lot of distress debt on hotels back between 2010 and 2013. We had bought about 40 first mortgage positions on different hotels assets. And we’re aggressively today working towards buying a lot of distressed loans because there’s a lot of mortgage REITs, a lot of debt funds that are not really committed to the hospitality space that don’t want to have to deal with asset management headaches in front of them so they’re willing to sell their positions at discounts. And we feel like, obviously us as a company, we have our operation platform, we have our development and renovation company so we’re able to basically do anything we need to to these assets.

                                           We ultimately have to take them back. We have the ability to operate it, stabilize it, renovate the asset if we need to. And so, we’re very comfortable in buying these loans at discounts and ultimately we’re buying them at a really nice discount to the actual intrinsic value of these assets. So, that’s something we’re more focused on today is really buying discounted loans versus even originating because the yields we can get in a lot of cases are well north of 20%.

Ryan Morfin:                    And so, what kind of credit shift has there been in terms of spread? Is it 100 basis points, is it 300 basis points? How much more expensive is it for a newly originated hotel loan?

Greg Friedman:               We believe spreads have probably … Going pre-COVID, the typical loan that we were originating was in that Libor plus 400 to 600 range. I would say today the loans that we’re originating are in that Libor plus 800 to 1,000 range. So, spreads pretty much close to double where they were pre-COVID. So, it’s been a pretty wide expansion in yields and that just shows we went from a very efficient investment market and we were extremely efficient in 2019 from an investment perspective in our space to there’s a huge inefficiency in our market place and that allows us to get these outsize returns today.

Ryan Morfin:                    It’s interesting. So, prior to this pandemic, would you say breakeven occupancy was somewhere in the 60-80% occupancy range?

Greg Friedman:               I would say it was probably, for select service, limited service hotels, when you include debt service, you’re a fixed cost which includes debt service, property taxes, insurance and so forth. Your breakeven’s probably closer to 50-60% occupancy levels. And that’s where we’re at today. I think ultimately, if you can operate in that 20-30% range you can pretty much breakeven on your operating costs. But when you exclude your debt cost, your property taxes and insurance and so forth. So, across our portfolio we’re pretty much breakeven on operating costs excluding our debt service and property taxes today. And we’re heading towards being breakeven there as well, which we expect to be in that position in the next 60-90 days.

Ryan Morfin:                    That’s great. There is somewhat of a V-shape recovery in occupancy it looks like, coming from some of the data that you’re seeing. But obviously if there’s another outbreak or another wave. I know there’s another set of closures you probably see. The occupancy come back down again? Is that your expectation?

Greg Friedman:               That’s correct. If there is another wave that could technically have a huge impact on our industry, it could have a huge impact on a lot of industries. But it’s something that could, depending on how that second wave occurs and depending on if they have these government mandated lockdowns, that’s going to be the … because that’s really the bigger piece to it all. I think as long as there’s not a lockdown on travel and it’s government mandated lockdowns on travel, as long as that doesn’t occur, I think we’ll still be able to be in a pretty good position. We probably won’t be in a great position, but if we do back into these lockdown type scenarios, I think that could have a very negative impact for us over the next six months.

Ryan Morfin:                    Yeah, no doubt. I think it could be some choppy waters ahead but it’s great to see that the occupancy is coming back in June and we’re starting to see normalized breakevens start to hopefully see some light at the end of the tunnel. Who’s traveling today? Who are the types of consumers that are on the road? Is it national guard? Is it healthcare workers? Who are the types of occupants that are coming into hotels today/

Greg Friedman:               Sure, so across our portfolio we’re seeing a surge in demand from the leisure segment. Leisure segment without question is probably the strongest today especially in the states that have lifted these lockdowns. I think followed by the leisure traveler, you’re seeing a lot of travel from healthcare professionals, from different, I call it government type business. If it’s national guard, first responders or whatever the case may be, so we’re seeing a lot of that business as well still coming to our hotels. And then you are starting to see, although the corporate business is not by any means strong but you are starting to see some uptick of different types of corporate business or other related type business that’s coming into our hotels.

                                           And a great example is, like I mentioned before, our hotel down in Navarre Beach, it’s running 80-100% occupancy, that’s all leisure demand for the most part. Versus, we have a hotel in El Paso, Texas it’s a Home2 Suites, which is part of the Hilton franchise system and that Home2 Suites has been running around 80-90% occupancy for the last 30 days. And what’s really driving the occupancy there is a lot of government business. There’s some corporate business there at the hotel but a lot of it’s just government driven type business with different projects and things that are taking place in El, Paso. So, we’re starting to see some return of normalized business.

Ryan Morfin:                    It seems that your segment is going to be probably the first to come back, that’s what I’ve been seeing as well from other platforms that we’re invested with. How long do you think it takes for the business traveler and the resort market to open back up? How much longer do you think it’s going to take for those to take footing?

Greg Friedman:               I think without question, select service, limited service is going to lead the way. It always does each time you have a downturn. The group business, the meeting business is the tougher one to come back and I think it’s going to be even more challenging this time around just given the fact that most guests, our industry has shifted from this everyone wanted high touch, high service, now everybody wants low touch, low service because of the concerns as it relates to COVID-19 and just germs in general.

                                           So, if it’s very well that low touch, low service model fits extremely well for select service, limited service hotels versus these full service or luxury hotels. And so, I do think it’s going to take some time for business to return back to that segment. I think it’s going to take time for people to really, especially given the fact that we are going to be in an economic recession and I do believe that recession’s going to extend for a period of time, probably more than most people expect. And given that, I think that’s going to really hurt the group and meeting business segment. And that’s going to hurt these larger full service hotels on being able to rebound because they really rely on that business to drive the occupancy of those hotels.

                                           Ultimately, although I do think in 2021 you’re going to see a lot of these conferences and conventions start back up in 2021 and 2022. But as they start back up in 2021 and 2022 the attendance at these different conferences, they were at record highs in 2018 and ’19. My gut is it’s probably going to be a lot of these conferences are going to have a real large decrease in attendance which is going to impact performance of a lot of these larger full service hotels.

Ryan Morfin:                    And not to get political, but what do you think … The president and the government of North Carolina have been fighting about the convention. I guess, do you think it’s wise for both parties to have a political convention this summer? I know a lot of hotels were counting on that business in Charlotte and Milwaukee but what are your thoughts on people … Can those types of larger events be held today in your opinion in a safe way?

Greg Friedman:               Yep. I personally think they can be held. I think we can take certain precautions, I think you’re starting to see … and I think it’s one of these things that we need to be extremely careful and be very thoughtful about how we’re letting attendance occur at these political conventions or whatever the case is. I think we need to think about if we’re doing temperature check, are we doing what level of testing, whatever the case is. We need to be extremely cautious but I do think there’s ways and there’s technology out there today that would allow for these political conventions to take place and I think it’s something that’s part of our system both when you look at the democratic and republican side.

                                           And by no means am I pick a political side one way or the other. I’m very thankful for our political process because I think it allows us a lot of freedoms and it allows us the ability to by … If by us being one side or the other allows us to express our opinions, which is great. We have that freedom to do it but ultimately I do think the political conventions are important, from my perspective, to have at some level. And ultimately, again I don’t have a crystal balL but assuming COVID-19 is under control, towards the end of the summer I think it’s something that should occur and I think it’s something that, assuming that it’s under control and it does happen, personally I believe they just need to take their precautions and maybe consider having certain measures that may limit how many people can attend given social distancing and different things like that.

Ryan Morfin:                    I’m sure you guys are all over the new cleaning procedures and all of that. One of the things I’m sure consumers are going to be worried about when they start going back to hotels is what is the new regimen of cleaning in the hospitality industry? What’s going to be very different than … obviously, a clean room was important on reviews but now I’m sure it’s going to be an elevated sense of cleanliness. How is the cleaning regimen going to change?

Greg Friedman:               Candidly, a lot of it was already happening. It’s just more about the messaging of it. There’s going to be additional protocols utilizing masks for the team members, making sure we’re cleaning probably on a more routine basis. A lot of the common area elements of the hotel like the lobby, the fitness center, different areas that are going to be utilized pretty heavily but as a company and really as an industry we already had protocols in place that required a pretty rigorous cleaning protocol within the rooms as well as in the lobby area. But I think it’s one of those things that ultimately, it’s not going to be doing a lot of things differently. It’s probably just adding more touches than what was happening before to ensure that the guestroom is sanitized and it’s safe but also making sure we’re really cleaning thoroughly the lobby area where everyone’s stepping in.

                                           And I think shifting gears on what you’re saying, I think what we’re going to find too that’s going to change within the hotel industry because guests, again, want really that low touch experience now. So, I think it’s going to change where the guest is going to start utilizing things like check-in through their phone versus checking-in at a front desk just to stay away from having to interact with another person or even have to touch the counter and so forth. So, I think things like that are going to happen to help keep the guest safe from any interaction with germs.

Ryan Morfin:                    Now, I’m going to share a video with here with you to show you. I just came across this. A friend sent it to me. He just traveled from LAX to Beijing last week. I don’t know if you can see the screen here but the pricing’s gone way up for international travel. But what’s interesting about it is that it’s a one way ticket for $4,900 but you’ve got to add a hotel fee for food for the 14 day mandatory quarantine. And what’s interesting is I think there’s a lot of people who, for whatever reason, need to go back to China, need to go home, you’re probably going to see this a lot in Europe too but packing their stuff up and leaving the U.S. but what was interesting is these people all are wearing these hazmat suits on the plane, you can see here.

                                           And wearing goggles, which is important. I got my pair of goggles, people look at me crazy when I go to a grocery store, but hazmat suits, N95 masks but they’re going to be there for a fairly long flight. And what’s interesting is that the stewardesses now are starting to take everyone’s temperature for the next two to three hours. And what was interesting about this is that they’re having these planes all land at different provinces, not so close to major cities so they can quarantine out in the countryside but it was unfortunate. There was about 26 people on this plane, it was 100% packed that ended up getting sick with fevers through the flight.

                                           And so, it just shows you that people were probably trying to get back to China to get treated in their home country. But then they had to go sit down through border control, so waiting for another four to six hours to get blood tested. And they did the PCR there so they basically took the blood drawn to see if these people had active IGM infection rates. But if you were anywhere near that passenger on the plane and they were sick you get put to the sick hotel, which is probably not a place you want to check-in to. And then if you had no symptoms you had to go quarantine at the clean hotel. And they bust everyone there.

                                           So, the reason I’m showing this is, this is international travel, and this is in China where they’re a lot more aggressive than we will ever be because of civil liberties, thank god. But that being said that’s the future to China. And I was just talking to somebody who’s trying to get over to China. I said, “You do not want to go international right now if you don’t have to.” I just showed him that clip. I don’t know, you are closer to the travel industry than a lot of us because the hospitality industry and the travel industry are very much entwined. What metrics are you guys watching? What data points are critical for the hospitality industry and what is the beat on the ground from your standpoint about what is the new normal going to look like from a travel industry standpoint?

Greg Friedman:               Yeah, so from a travel standpoint as it relates to hotels, I think again, it goes back to making sure you have the right protocols, making sure you’re giving that confidence to the consumer that’s checking in to the hotels that you’re doing the correct things. And that’s why I do think you’re going to find that Marriott and Hilton branded hotels and even InterContinental and Hyatt as well, we invest in some of those brands as well. I think you’re going to find that those four brands are going to get a lot stronger through this experience because they have huge marketing budgets, they’re really good about setting the protocols and really requiring the franchisees like us to do certain thins to ensure the safety of the guest.

                                           And they’re going to really advertise, market that, come up with new initiatives and continue to come up with new initiatives to protect the guests. And that’s going to cause anyone that’s traveling to prefer to stay at those hotels, be it Marriott, Hilton, InterCon or Hyatt branded hotels versus some of the other brands or even independent hotels or even when I say hotels, even some of the non-hotel type properties that are available for rent through like Airbnb and so forth.

                                           I think people are going to be a little bit hesitant to go to those kind of properties where you don’t know what’s actually happening. You don’t know what cleaning protocols may be in place and so forth. So, I think from a guest perspective I think you’re going to see a large movement from, and when I say guest the consumer is you’re going to start continue to move towards these stronger brands as I mentioned. So, I think it’s going to play well for our focus. I think just from a metrics perspective, some of the stuff we’re looking at, we’re constantly tracking how many people are actually going through and traveling on a daily basis. Clearly you’re seeing a tick up of travel, which is correlating to us seeing more occupancy in our hotels.

                                           You’re watching people travel through the TSA checkpoints and so forth. It’s nice seeing that continuously growing. The other component too, I think you’re going to see happen across our space is a lot of people are not going to be flying. There’s going to be a lot of drive-to business. And if you’re in a drive-to type location, which fortunately for us, most of our hotels are in these locations where they are drive to because we’re typically in a secondary type market if it’s like San Antonio or … like San Antonio or a Jacksonville or so forth or Daytona.

                                           And so, in these kind of markets people typically … A lot of business come through the car versus through the air, and I think you’re going to find that type of business is only going to get stronger as people are going to look for ways to go to hotels versus traveling through the car versus flying through the planes given the concerns. But ultimately, we’re looking at a lot of different metrics when we’re seeing what’s happening and the decisions we’re making. But the biggest thing for us always has been and will continue to be is how do our forward bookings look although the booking window’ getting compressed. But we’re always very much from a revenue management perspective, we’re constantly looking at what’s happening on a forward booking perspective over the next 30, 60 and 90s. But also, we’re taking in consideration the different … because a lot of our hotels are near locations where there’s a lot of special events that drive business throughout the year.

                                           So, if we’re in the college market, a good example is all the college football games that happen. A lot of times that drives a lot of business into our hotels, so we’re constantly watching what the impact’s going to be from some of these special events given COVID-19 how … some of these football games may not be played. It’s still up in the air at this point.

Ryan Morfin:                    Yeah, I think 2020 and 2021 are going to be all about the retro National Lampoon’s Family Vacation. Vintage. Getting to be doing camping and driving to go get out of the house a little bit. Are you guys changing any of the contracts or forms you come in and you sign at check-in? Are there new identifications or legal paragraphs being added to contracts about “Hey, if you catch COVID it’s not our fault.” I mean, you’re seeing that at nail salons and barber shops. You’re going to start seeing it offices, right? When you have guests come into the office to see you, we have people checking in now, getting their temperature, your oxidizer level of your oxygen blood levels. And also signing their name, they’re coming in at their own risk. Is the industry moving there and have you seen any litigation? Has anyone blamed a hotel for getting sick at this moment?

Greg Friedman:               At this point we have not seen anyone blame a hotel for getting sick. I’ve heard of cases where people have checked into hotels with COVID-19 and have stayed at hotels and there’s certain, like at our properties, we have certain cleaning protocols in place that if there is a guest that checks in and we find out they have COVID-19, there’s different thing is that we do in order to ensure the safety of the guests and making sure we’re doing things to clean the hotel correctly and doing a thorough cleaning to make sure that there’s no exposure to COVID-19.

                                           But with that said, I think the standpoint of forms and stuff, we’re not seeing … I mean I’ve seen it at the barbershop and so forth them requiring you to sign a waiver for liability in case you do get COVID-19. We’ve not seen that implemented at hotels. It’s something that we’re monitoring and watching. There’s some questions about the legal side of it by requiring it how enforceable those documents are as well. So, I mean there’s some issues as it relates to that piece but it’s not to say that we wouldn’t do it at a later date, but it’s not something we’re doing right now.

Ryan Morfin:                    Yeah, I think OSHA and labor law is going to be very interesting around this issue. Speaking of labor laws, I mean most hotels that we know have furloughed a lot of workers. And then maybe you can talk a little bit about how has it been to keep workers in orbit, maybe to come back as occupancy level starts to drive up again. And did the PPP program help the hospitality industry in your opinion?

Greg Friedman:               Yeah, the Payroll Protection Program absolutely helped our industry. I think it probably wasn’t enough. I think there should be additional dollars given to the hospitality industry just given how steep it was for our industry compared to some other industries and other businesses that did receive it but that’s neither here or there. I’m very appreciative of what happened and how it was bipartisan support of that program. So, really appreciative of what congress and the president and everyone did to make it happen.

                                           But with that being said, as great of a program as it is it did create some issues that came out. Some of that legislation as well, some of the stimulus bills just given how they added additional money for unemployment insurance. And so, effectively in a lot of cases our team members were getting paid more money by being on unemployment versus coming back to work because as our occupancy levels … because we did receive the Payroll Protection Program, we did bring back some team members because we had the ability through these forgivable loans through that program, we were able to bring back some team members and they were working at the hotel even though maybe occupancy levels didn’t support them being there but we did have them there to help. Make sure we were being very strategic as business started to rebound.

                                           And as business has rebounded we needed them to be back anyway and we’ve struggled to add other team members back into the property given what I was saying before. A lot of cases, they’re making more money via unemployment so they’re not wanting to come back. And that has created some issues. Fortunately, we’ve done a really good job with staying in touch with anyone we did furlough off at the properties because most of our employees at the property level are hourly employees, so we’ve made a huge effort beyond just the hourly employees, any of the salary employees we furloughed off as well, we constantly stayed in touch, constantly are communicating with them, giving them updates and doing different things to not lose that touch and lose that connection. And fortunately, in most cases we’ve been able to get the team members we needed back into our hotels and the labor market is at a point where there are still a lot of people searching for opportunities and we’ve been able to take advantage of that as well and add some new team members to our team as well.

                                           People that we were trying to bring on to our team that we just couldn’t in the past because they had other jobs and they wouldn’t want to leave. And fortunately been able to add some team members as well beyond just the Payroll Protection Program helping us, just as business has ticked back up we have confidence to bring the other people on the team.

Ryan Morfin:                    Yeah, and I don’t know if you’ve seen some of the footage coming out of Vegas this week but it seems like it’s back and people are flooding the casinos again. It’s amazing to me that’s happening so quickly but I think people are just frustrated of staying home. As it relates to the staffing of the hospitality industry though, you guys have obviously learned to do a lot more with a lot less. Do you think the cost structure’s going to shift in the future? Is it going to be a lot more lean business or was it already a pretty tight margin, type operating expense budget business?

Greg Friedman:               I think any time you go through this type of experience and every time we go through a recession or a black swan event for instance like 9/11 back in 2001 as well as the great recession or even the S&L crisis, we’ve always as an industry been able to find ways to cut expenses and this event has been extremely steep so we were able to cut a lot of labor expense and some other expenses.

                                           So, ultimately our costs have compressed downwards considerably over the last 60 days. And I think a lot of those savings are here to stay for an extended period of time. I think you’ll find that some of the savings may be ultimately permanent. And savings that are even greater than what we experienced in some of the past downturns, just given how the guests expectations are changing. You’re going to find that the consumer, the hotel guest is going to probably … Again, going back to what I was saying before that they want that low touch experience now.

                                           A lot of them are not going to want to have, like for instance, at a typical Hampton Inn will offer a breakfast buffet and the cost of that breakfast buffet is roughly about $4.20 a room per occupied room to offer a breakfast buffet. And most guests are probably not going to want that breakfast buffet anymore. Those breakfast buffets have slowly become very elaborate. And within our limited and select service hotels you’ve had this amenity creep over the last several years that cause these buffets become more expensive as well as some of the other services. But in the example of the breakfast buffet that cost may go away permanently and ultimately may be replaced with a simple piece of fruit or maybe it’s having a croissant or whatever the case is but it’s going to be something that’s probably going to be a lot cheaper than offering that buffet.

                                           I think from a standpoint of once a guest checks-in to a room they want to know their room has been sanitized, they’re not probably as willing to allow other people enter their rooms, they don’t want strangers in their room so ultimately, if they’re staying for three or four nights, we’re finding a lot of guests don’t want housekeeping coming in every day, so maybe something that certain guests wants to have that housekeeping experience, they may opt in to it and a lot of other guests may just opt out of it given the concerns they don’t want to be exposed to foreign individuals that are walking into their room that they don’t know they’ve had any germs or had any exposure to COVID-19. So, it’s something that I believe you could ultimately see housekeeping expense drop dramatically as well.

                                           And it costs, again, roughly about $10 per occupied room for housekeeping daily, so I think that’s another cost that could probably potentially be cut 30-50%. So, we think there’s a lot of savings that’s going to come out of it beyond just cutting staffing as guests even just utilize technology, utilizing check-in through their phone. You’re not going to have to staff the front desk and so forth, so I think a lot of those expenses are probably here to stay at least for the next year or two and may be permanent just as the guest expectations have been reset within our industry.

Ryan Morfin:                    Random question, what is the proper daily tip amount to give a housekeeper at a hotel? What do you think’s good policy?

Greg Friedman:               [inaudible 00:38:30].

Ryan Morfin:                    Yeah. So, I just pulled up some slides from McKinsey about … I’ve been watching China and how they’ve been coming back, because I think it’s a good day to point they’re about two, three months ahead of us in the U.S. and it looks like, here’s some numbers about spending and about the recovering rate on number of … like the impact of level impact of reduced travel on different holidays, but also just shows you a little bit about hotel occupancy rates here from January to May and it’s exactly what you’re saying. It’s starting to creep back up.

                                           Although, one interesting graph here is that what I thought was fascinating is the economy in the mid-scale hotels, which is the sector you’re in have been a lot more resilient to the shock in terms of getting to that 50, 40% level. I think it’s the exact same thing playing out here and we’ll continue to watch that but as you look at the future going forward at the hospitality industry, and we start to see this V-shape recovery form for occupancy, and knock on wood, no further second wave or at least it’s more manageable this time because at least we have more data to make decisions, I guess the question is how has valuation on these properties been impacted? Is it too early to tell or is anybody selling properties right now? And what kind of cap rate expansion will you see in the year to come given that the demand has been damaged, at least short term?

Greg Friedman:               Sure. I think it’s still a little bit early but the reality is I think we have a pretty good handle on where it’s headed. We believe valuations are going to be … Again, not all markets are equal so it’s more of a range than giving a precise number of how much has dropped but we believe values have reset probably 20-40% a day depending on where the asset’s located. We believe the cap rates have probably expanded out a good 100-300 basis points depending on what sub market the asset’s located at. So, we’re seeing most trades, there are still some trades happening today and there’s just not a lot of trades but there are some trades happening today. And most of them are happening 20-40% discounts pre-COVID.

                                           And a great example is we bought a debt position on a hotel that we closed on Thursday and we bought it roughly … It was a first mortgage loan that was roughly about $20 million dollars. We bought it for a 30% discount so we bought for a little over 30% discount. We bought the [inaudible 00:41:28] for about a little over 13 million and the total development cost was roughly about 37% so we bought it at about 40% of the original development cost and that’s just an example. But a note trade, what we’re doing, our business. And then simultaneously, we are looking to buy and right now we’re in the running, it’s between us and one other group, we’re looking at buying two hotels, [inaudible 00:41:53] branded, the Hilton Garden Inn, [inaudible 00:41:55] Suites branded hotel.

                                           And it’s well located in a really strong sub-market. And this is probably one of the few assets that have come out to market post-COVID. These assets were not for sale pre-COVID but they did come to market after COVID. Given the fact that the seller is looking to shore up some liquidity and it’s a REIT that’s looking to sell these assets. And in the case of these assets, ultimately they paid roughly … I mean, it’s going to ultimately trade at probably about a, call it about a 25-30% discount to what they paid for this asset going back in 2014. So, it’s trading at a pretty nice discount to what they paid in ’14, it’s probably going to trade at about a, call it a 30-35% discount to what it would’ve traded if it wasn’t for COVID-19. So, traded back in 2019 it would’ve probably traded about 35% greater and that’s probably par for the market right now.

Ryan Morfin:                    What percentage of keys in the country do you think will go dark and not come back on line ever.

Greg Friedman:               Yeah, I think it’s a great question and it’s still a little bit too early to tell so this is a total guess on my part. Ultimately, I think there’s probably going to be about 10%, I would expect about 10% of the supply may not come back as a hotel and may come back as some other use or may get torn down. That percentage could increase because we are seeing a fair amount of hotels that are getting considered to be converted to other use if it’s maybe turning it into apartments in some cases. We’ve seen other cases like for senior living or senior housing.

                                           That’s another use that some of these hotels are being converted into. And some are just going to be torn down because they sit in really good locations and probably redevelop into some other use or maybe ultimately come back as a hotel as well. But we expect 10-15% of the supplies probably at risk. And mostly it’s going to be these older hotels and I wouldn’t be surprised if some larger whole service hotels that are especially older in age didn’t return either just given the cost to get these assets back up and running and it doesn’t even make sense to invest capital back into it.

Ryan Morfin:                    Do you think the Hiltons and the Marriotts are going to relax some standards on the PIFs for property improvement plans in the next 36 months?

Greg Friedman:               Yeah. They have already. They are relaxing. Anyone that has PIFs that are due right now, like if you bought a hotel recently or if you owned a hotel for a period of time and you had a PIF that needed to be completed by a certain timeframe they are extending those deadlines out. And no differently than what’s happened the last couple of downturns and other cycles. They tend to be very flexible through these periods where they don’t force you to make certain renovations or make investments back into the property from a cap X perspective.

                                           And so, they tend to allow you these grace periods and ultimately, if I had to guess the next 24 to 36 months it will be relatively lax from that perspective. In a lot of cases though it is, I think, certain assets. And then one thing we’ve learned from the past couple of cycles, just us as a company, it does make sense to invest capital back into the hotel, especially during these soft periods if you can afford to do it and get your property to a level where it can compete or be in a position to really out-penetrate its comp set. And because the guest typically prefers to stay at the nicest hotel within its comp set.

                                           So, if you’re a Hilton Garden Inn they’re going to be comparing you to the Marriott Courtyard and the Hyatt place that’s right next to you and maybe some of the other properties that are similar scale. And if your property has not been renovated, you’re just running it into the ground and not investing capital back into it, a lot of times that’s going to hurt you as you try to come out of this type of event and it can backfire on you. So, although we may defer some renovations out through this period of time just to manage liquidity, ultimately we do plan to renovate a lot of our assets going in towards the end of this year as well as [inaudible 00:46:14], we’re probably going to be renovating several assets that we anticipated renovating this year.

Ryan Morfin:                    And can you talk about just the pricing of rooms today? How do you price a room with demand so shallow? Is it just the break even cost or how do you guys think about ADR today?

Greg Friedman:               ADR is drive profitability, right? You want to get the highest rate you can, so it’s all revenue management strategy, but ultimately it’s a balance too. It’s what kind of business is out there today, so each sub-market is a little bit different. And for instance, our Navarre Beach hotel, we’re running at $250-$300 per rate or higher on a daily basis. When you look at all the rooms that are being rented that’s on an average rate basis right now.

                                           And so, ultimately we’re driving the rates as large as we can as long as the consumer will keep on booking. And so, it’s really just more of a revenue management strategy. At other times for instance, using that Home2 Suites I mentioned earlier in El Paso or even our HomeWood Suites in Buckhead, both those hotels are running an average daily rate of roughly about $100 and that’s really a function of just those markets and the type of demand that there’s. That just doesn’t … typically, both those hotels, like the HomeWood in Buckhead, should be running a rate closer to $150 today but it’s roughly about $100. And part of the reason it’s much less than where it is right now is just the type of business that we have to discount in order to drive business into that hotel right now.

Ryan Morfin:                    Can you talk a little bit about development? It would seem crazy to me to start a new construction project but are some of the ones that are maybe 50% there, are they going to continue to deliver in the next 12 to six months?

Greg Friedman:               The projects, because we do have a lot of development projects in different stages, we have a lot of projects in opportunity zones, we even have some non-opportunity zone development deals. And all our projects that are under construction, we are continuing to move them forward. The ones that are under constructions, we do anticipate them opening. I could see in certain cases, other groups and we’ve heard of stories where lenders have stopped funding. Certain borrowers where they just don’t have confidence in their ability or maybe they’ve run over budget or something’s happened, there’s going to be some busted construction projects out there is that we expect to see and we’re looking at some of those projects and if there’s an opportunity for us to take advantage of some of those opportunities, we may step in if we can get in at a basis that makes sense for us.

                                           But I also expect just given what’s happened with COVID-19 and given the fact that we’re going to be in this recession I keep talking about, we’re expecting and we are starting to see some softening of construction costs. We haven’t seen a huge drop like we experienced back in 2009, 2010 where costs dropped a good 25-30%. I’m expecting costs to drop as the year goes on. So, we are delaying some of the projects we have not broken ground on given the fact that we believe we can go back out to market and rebid those projects later this year and probably receive substantial savings.

Ryan Morfin:                    Yep, that makes sense. But, at least I don’t think so, nobody’s going to say “Hey, in the next three months let’s go start a new development project.” You don’t see that?

Greg Friedman:               Yeah, on a macro I don’t think that’s going to be a macro-strategy. I think historically, this is the time to start getting entitlements and developing hotel because if you can break ground and say, six to nine months from now you’re opening probably 18 months thereafter and you’re probably going to be ramping up at the height of the next … at least when the market has turned, and heading towards the height of the next cycle. And that’s when you want to be opening because then you can go typically sell your asset and get a really good reversion of value when you sell the asset.

                                           So, this I the time period you want to ramp up development. But it’s like everything else, right now is the right time to invest, from my standpoint into the hospitality space because this cycle has created so much dislocation but everyone’s concerned and they’re fearful just of the future because there’s so many unknowns. But with it all being said, this is no differently than 2001, 2008, 2009 or even during the S&L crisis back in the early 90s. This is the time to step up and start looking at development deals. But I wouldn’t break around today. I’d probably wait six to nine months.

Ryan Morfin:                    Got it. What are you optimistic about in the hospitality industry or what are you optimistic about in the U.S. economy?

Greg Friedman:               Yeah, I think from a standpoint of just the U.S. economy, I think when you look at what the current administration has done from a standpoint of, you look at the FED, they really just backstopped this economy, so for all investors no matter where you’re investing they’ve almost given us all downside protection because they’re willing to do whatever it takes to keep this economy afloat.

                                           So, I think from that standpoint you look at what all these stimulus bills, how much liquidity that’s providing into the market place and how it’s helping the consumer. The reality is, is there is going to be a lot of distress within our space, I don’t want to discount that piece of it but it’s a huge benefit for us because we can take advantage of it. But then on the other side of it is I do think we’re going to have a relatively quick recovery. I think this time around, the FED, what it took them six years to do they’ve done in three months. They’ve put so much liquidity into the marketplace, the FED has.

                                           I think there is going to be a decent amount of inflation risk, which isn’t horrible for our space, for our industry because with inflation, we reprice daily so we’re able to take advantage of it and drive average daily rates. We haven’t really had inflation at a great level over the last 10 plus years in our space, so I think that’s going to be a huge benefit. I do think this sets up for us to be in a position when we wake up three to five years from now that asset values are going to be extremely high within our space. So, I’m very bullish that we’re basically setting the state for a really strong run, but I do worry when we look out five years from now what’s ahead because I think we’re setting ourselves up to save ourselves today but ultimately, I think five years from now the FED’s going to have their hands full trying to figure out the next move as we go into the next … From my estimate I think we’ll be in another 2007 type scenario.

Ryan Morfin:                    Yeah, I think the FED’s done a great job short term. I think the bill will have to be paid at some point and hopefully we can grow our way out with technology investing and productivity gains. But your industry, this was a very, very near death experience for the hospitality industry and unfortunately for some operators it was a death sentence. What is your industry talking about? Did the World Health Organization let us down? CDC? Do we need to have, in your opinion a department or an agency that is focused on pandemics because I think with all the urbanization going on globally and the fact that we’re a globalized economy, this could happen again. What is the hospitality industry talking about in terms of putting maybe new checks in place and new infrastructure to monitor the future?

Greg Friedman:               So, I do think we need something that helps manage these type of pandemics in the future. I just don’t think we were prepared as a country, even our industry, we’ve never been in this type of situation before, so this was really unprecedented. I do think going forward it’s no different [inaudible 00:54:26] unfortunately what we experienced after 9/11 is having a playbook to deal with this going forward in order to quickly be able to handle these type of situations and adapt to the new world.

                                           And so, ultimately I do think our industry, we’re well positioned. We’ve dealt with these types of black swan events and we’ve always been able to evolve and adapt to ensure we can really give that confidence to the consumer. And I’m bullish just in our space and our industry, especially on the select service, limited service side because ultimately what gets me really excited is just seeing what’s happening right now because we’re still in this pandemic, we’re still under a national state of emergency. A lot of states are still under some level of lockdown and there’s still fear in the consumer eyes of even traveling.

                                           So, even with all that being said, with all those headwinds, our portfolio’s still running 40% plus occupancies. We still have hotels that are even running 80-100% occupancy as I mentioned. I do believe as we get to the other side of this event there’s so much pent up demand that there’s going to be … I think we do have the makings of a lot quicker recovery than a lot of people are projecting because I think the average industry analyst that covers our space, they think it’s going to take a good 36 months. But I do think there’s the opportunity that this thing could recover extremely quickly just given how much pent up demand’s out there in the market right now for travel.

Ryan Morfin:                    Does this type of shock, does it really devastate Airbnb and these type of asset sharing platforms? Because you have certain brand standards to live up to but what’s stopping Mr. and Mrs.Smith from not cleaning the Airbnb residence for the next guest?

Greg Friedman:               I personally think it does. This has got to … A great example is I traveled just recently to California, I had to go to Los Angeles to look at the note we were buying on this hotel property. Actually flew out to California because I always look at every investment we’re making as a company. And I flew out there on Sunday this week, earlier this week. I flew out there and the reality is because normally I might’ve taken an Uber for instance, I’ll use Uber as an example. But just give the concerns of jumping in an Uber not knowing where this person, the driver of the Uber, where he’s been previously, who’s been in that car previously. I just ended up deciding just to rent a car.

                                           And I think I hadn’t really rent a car probably in a good five years because I’ve gotten so accustomed most of my travel taking an Uber or taking a Lyft or whatever the case is. I think the same holds for Airbnb. I think anyone that’s staying somewhere where you just don’t know who’s been in the car, you don’t really have the ability to sanitize it before you get there and there’s no protocols, there’s no protections, you don’t know who’s staying next to you, you don’t know if they’re being checked on and following the same protocols.

                                           So, I think ultimately I think this really bodes well for our industry and for brands that people can recognize. I think it’s going to be the same for the restaurant industry, the hospitality industry, the travel industry. I think you’re going to find that brands that everybody trusts. They’re going to probably thrive on the other side of this type of event. And I think you’re going to see that in the airline business as well.

Ryan Morfin:                    This has go to be a nightmare for Germanophobe just living in this environment. This is esoteric question and if you don’t have a data point that’s fine because not a lot of people are thinking like this but have you done any research on the Spanish Flu and what happened to the hospitality industry back in the late 1919, 1918 vintage?

Greg Friedman:               We really haven’t done much research because the hotel industry wasn’t as robust as it is today. It’s just totally at a different level and the data tracking wasn’t as strong as it is. Really the data tracking has really improved over the last 40 years in the hospitality space for different reasons but up until then it really wasn’t that strong just because there wasn’t as many ways to track it.

Ryan Morfin:                    Got it. Are there any books you’re reading right now that are of interest that are on your radar helping you shape your thinking today?

Greg Friedman:               There’s no books I’ve at least read recently. I’ve been so focused on our business. I always loved reading books and stuff but I just haven’t had a chance to do that. Part of it, it seems like I probably watched a little bit more TV just when we were during the lockdown, so going back about a month ago. Now, I’m back at the office. We actually reopened our office, so we started having people come back in the office on a daily basis. But up until then I was working from my basement and I was watching some documentaries and stuff so there’s been a lot of just different cool documentaries I’ve watched. So, besides that I really haven’t read a lot of books recently.

Ryan Morfin:                    Any documentaries you recommend us picking up?

Greg Friedman:               Yeah, so The Last Dance, the Michael Jordan one. I think it’s a great one to watch if you’re a sports fan and it still really translates back to the business world as well. So, you can point it back to our industry and really everyone’s industry, just leadership. I thought it’s a great documentary, it’s like 10 episodes but it’s well worth watching.

                                           Another one I watched that I really enjoyed was The Food That Built America which is about all the different food companies, the large ones that have really thrived over the last 100 years, how they got started and it’s really interesting just watching the history of these different entrepreneurs that set up those companies and the challenges that they faced to create the different great companies that we all know today.

Ryan Morfin:                    Absolutely, well Greg I appreciate you joining us. We’d love to have you back in a few months as this continues to unfold and thank you for your time in talking to our viewers.

Greg Friedman:               Thanks for having me and I look forward to rejoining again soon.

Ryan Morfin:                    Thanks Greg. Thanks for watching Non-Beta Alpha and before we go please remember to subscribe and leave us a review on Apple Podcast or our YouTube channel. This is Non-Beta Alpha and now you know.

Speaker 3:                        All price references and market forecast correspond to the date of this recording. This podcast should not be copied, distributed, published or reproduced in whole or in part. The information contained in this podcast does not constitute research or recommendation from Non-Beta Alpha Inc, Wentworth Management Services LLC or any of their affiliates to the listener. Neither Non-Beta Alpha Inc, Wentworth Management Services LLC nor any of their affiliates make any representation or warranty as to the accuracy of completeness of the statements or any of information contained in this podcast and any liability therefore including in respect of direct, indirect or consequential loss or damage is expressly disclaimed.

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