Podcast

Assessing the Likely Future of the Hospitality Real Estate Sector

2Q20

Insights from a hospitality investing veteran on managing an opportunity zone asset, the state of the acquisition marketplace, and the emerging areas for opportunity in the sector.

Read The Transcript

In this episode of Real Wealth Real Health, we turn our focus to the hospitality real estate sector, and what its recovery may look like. Join AdaPia and Daniel in speaking with Jeff Finn, co-founder of Artist Guild Hotels. Jeff has overseen major hospitality sector investments for more than a decade. We talk about his current transaction in Hollywood, which is in an opportunity zone area, how they connected with Midnight Mission in Los Angeles and the charitable underpinning to every Artist Guild Hotel project.

Jeff’s amassed wisdom will be incredibly valuable as we emerge from current crises. Over the course of this conversation, he gives us an honest and very candid viewpoint on hospitality assets, the impact of COVID, and the ongoing changes to corporate & personal travel, as the outbreak continues to affect major cities. We also speak about which areas within hospitality are already starting to see major increases in business. Jeff walks us through the differences between boutique and flagged hotels, and how hospitality assets compare to other commercial real estate assets, specifically multifamily. Finally, we learn what makes a hotel deal’s structure unique, and how to assess its risk.

Key Insights

  • A look into the future opportunities that may arise in the hospitality real estate sector
  • Learning how to be flexible and adapt to the circumstances and specifics of each deal to find the best transactions
  • Understanding the state of the acquisition marketplace for the hospitality asset class
  • Navigating the inherent volatility of hospitality assets as an owner or investor, and understanding the difference between volatility and risk

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Guest Bio

Artist Guild Hotels creates bespoke hospitality experiences tailored to the unique identity and character of each of its projects and their surroundings. AGH collaborates with best-in-class designers, builders and food & beverage operators to create special places that truly engage its guests.

Prior to co-founding Artist Guild Hotels, Jeff Finn was a Managing Director and Co-Head of the Real Estate and Hospitality investment banking team at Imperial Capital. Finn has 15 years of experience executing a broad range of corporate finance and capital markets transactions with a specific focus on coverage of real estate transactions for hospitality companies, commercial and residential real estate owners and developers, REITs and homebuilders. Finn has advised clients in financing transactions throughout the capital structure including senior and subordinated debt, preferred and common equity and special situation financings. Mr. Finn received a B.A. in Economics from UCLA.

Resources:

Real Wealth Real Health

Alpha Investing

[email protected]

Artist Guild Hotels

Podcast Transcript

Speaker 1:

Welcome to Real Wealth Real Health. The show that empowers you with insights, information, and inspiration to achieve your version of financial wellness. Learn how to balance living a full life today with planning for the future. This podcast is brought to you by Alpha Investing, a real estate centric, private capital network that provides exclusive investment opportunities to its members. And now here are your hosts AdaPia d’Errico and Daniel Cocca.

AdaPia d’Errico:

(Music) Hello, welcome back to another episode of Real Wealth Real Health. Today, we’re speaking to Jeff Finn, co-founder of the Boutique Hotel development firm, Artist Guild Hotels. Along with his partner and team, they specialize in Bespoke Hospitality experiences with an eye to craftsmanship, artistry, and design. Jeff has 15 years of experience in corporate finance and capital markets with a focus on real estate transactions for hospitality companies, commercial and residential real estate owners and developers, REITs, and home builders.

AdaPia d’Errico:

Prior to Artists Guild hotels, he was a managing director and co-head of the real estate and hospitality investment banking team at Imperial Capital. So obviously, the focus of our conversation today with Jeff is on the hospitality sector of real estate. We talk about his current transaction in Hollywood, which is an opportunity zone area, the charitable underpinning of every Artist Guild project and how they connected with Midnight Mission in Los Angeles.

AdaPia d’Errico:

Jeff also gives us an honest and very candid viewpoint on hospitality assets, the impact of COVID and the ongoing changes to corporate and personal travel as it’s affecting major cities. We also speak about which areas within hospitality are already seeing major increases in business. Jeff walks us through the difference between Boutique and Flagged Hotels and how hospitality assets compare to other commercial real estate asset classes, specifically multifamily. We learn what makes a hotel deal structure unique and how to assess its risk. There’s so much to learn about the hospitality industry, hotels, hotel development, and opportunities in this episode. Hi Jeff, thanks for joining us on the podcast today.

Jeff Finn:

Thank you very much for having me.

AdaPia d’Errico:

We’re really looking forward to the conversation based on our pre-call. And it’s fun to see you right now because with this COVID we’re doing this on Zoom, of course. If you’ve got all these-

Jeff Finn:

Yeah.

AdaPia d’Errico:

Surf Boards hanging over your head and finding-.

Jeff Finn:

Yeah, I get relegated to the garage.

AdaPia d’Errico:

Yeah.

Jeff Finn:

It’s one of the better places in the house to work, actually.

AdaPia d’Errico:

And like me you’re in Southern California, you’re in Manhattan beach. But you know, Dan? And so that’s how you got connected to us was through Dan, and you’re on our podcast today because you have this incredible background in real estate. And specifically we’ll be talking about hospitality as an asset class. And what we’re also really excited to talk to you about is the company that you formed with your partner, Danny, and what it’s all about. So before we jump into hospitality, which of course at this moment in time, in end of May of 2020, looks like zombie land due to COVID. As all really good real estate entrepreneurs know, there’s always opportunities. So I’m really excited to dive into all of that. But to begin with, can you tell our listeners a little bit about yourself and your company Artist Guild.

Jeff Finn:

Yeah, absolutely. Thanks for having me. So my background is mostly finance and I spent about 15 or 16 years in investment banking prior to starting Artist Guild with Danny. And the vast majority of that time was real estate focused. And a lot of what I did was distressed or special situations focused. And that’s actually how I got to know Daniel, back when he was an attorney. And a lot of our niche was doing sort of corporate level financings or financings or advising on mergers and acquisitions that trended over into hospitality quite a bit. And that’s eventually how I met my partner, Danny.

Jeff Finn:

And we started looking at transactions together. He has a really deep background in Boutique Hospitality development and redevelopment, and has done 20 plus Chic hotels primarily in Southern California, and primarily kind of high dentistry markets of Southern California. And his real niche, and his former company’s real niche still is sort of finding underutilized assets and re-envisioning them in a way that maximizes the cashflow that you can generate from that product And very good at doing it. I think what made them be unique was not only sort of bringing a boutique and artistic touch to what they did and what we now do also, but also doing in a way where we have a really distinct focused on controlling costs and making sure that we do something that is impactful, but it was also something that, from a cost basis standpoint, that makes sense for our investors.

Jeff Finn:

And a lot of what my background brought to the table was also looking at that and saying, “Can we be more impactful from a situational perspective? Can we find assets and acquire assets where we’re not competing at the highest per key cost basis? Can we find unique transaction structures? Can we find…” And this was hard up until a couple months ago. “Find assets that maybe there’s a capital structure issue, or where there’s some distress that’s involved.”

Jeff Finn:

And Dan and I started looking at things together. The one thing that I think kind of, we both were really interested in when we first started talking about forming Artist Guild and on the side kind of creating a platform of Boutique Hotels and sort of leveraging a lot of Danny’s hospitality redevelopment expertise, was doing something that had some type of double impact to it. And we both live and have lived in Los Angeles for a very long time. And so in California for a very long time. And in particular, when we started looking at what’s our project in Hollywood, it was a long time ago. We started looking at that project sort of middle of 2017, I think.

Jeff Finn:

And Hollywood, in downtown LA, but all over LA, are an area where you see a tremendous amount of homelessness. And as we started looking at our building, our kind of thought started to shift to, “Can we do a great project for our investors? Can we create an asset here that’s interesting and iconic? But can we do something that also impacts the community more broadly?” And for us, the sort of real obvious way to do that was to do something where there was a tie into homelessness. And we kind of, after brainstorming on it for a really long time, sort of thought there was kind of something poetic about the hospitality industry as a hotel partnering up with the homeless services organizations that are in any city, but in Los Angeles in particular for us. Because you do have, fundamentally when you think about hospitality and hotel, do you have a visitor coming to a city for a night or several nights, when a resident of that city may be homeless.

Jeff Finn:

And so this concept of a traveler being sheltered here, we thought could translate to what were their opportunities to create shelter for someone in this city who was a resident who doesn’t have it. And we sort of, over time started reaching out to a couple of home, different homeless services organizations in the LA area, had a lot of really good conversations, like a group called midnight mission, that big clap to midnight mission, they really did a great things in the city of LA, and have been continuously operating their homeless shelter down in Skidrow in downtown, I think it was 1907. I’ve certainly heard some really impressive – It’s been well over a sort of a hundred years that they’ve been operating that thing 24/7. And so we felt like they were a really natural partner for us, and came up with this idea of doing what we’re calling sort of a night for a night, where for any individual that stays at our hotel, so we have a guest there, we donate proceeds to help the person at the midnight mission for a night in downtown LA.

Jeff Finn:

And that sort of initial concept it’s something we’re trying to tie throughout the rest of the projects we’re doing as Artists Guild. It’s something that it was really important because it’s fun to go to work and work on real estate projects, but it kind of gives you this a little bit broader sense of purpose when you’re doing something like that. I think it’s been a huge motivator for us to kind of, when you’re having a tough day on a project and you have setbacks or whatever it is, you kind of feel you have a little bit broader of a purpose. It motivated us to, and in addition to hopefully it’s something that has an impact in the city, and we’re actually hoping that other hotel or hospitality operators do more of that, and kind of steal the idea. We’d love to see sort of it become sort of a de facto standard in Los Angeles or in hospitality. We’re going to partner with, it could be any sort of charitable cause, but I think there’s something for us that sort of rang true about homelessness that made us focus on that.

Daniel Cocca:

First off, and we’ve talked about this before, huge congrats on making the move. Hopefully you’ll have the opportunity to buy that piece of your soul back you gave up as an investment banker for it. I’m working on it myself as well, but it’s an awesome story. And at one of the things we want to chat about first is this whole opportunities zone investing and what that means? It’s been in the media for years and you and I have talked about this separately. There’s a media cycle in real estate and opportunities zones really got hyped up for a while. They definitely provide some interesting tax incentives for certain types of investors. Your project interesting to me was located two blocks from where I lived in a brand new class A building in Hollywood. So not exactly that true opportunity zone as people might think about it, but Hollywood is an area that’s undergoing a lot of change, a lot of development and whatnot.

Daniel Cocca:

And so just as a first step would love to hear your perspective on opportunities, zone deals, why they make sense, who they make sense for, why you guys thought this project fit into that category, all that kind of stuff?

Jeff Finn:

I would say our involvement in opportunity zones was unintentional. When we, I think I mentioned, when we first started looking at this asset when it was first for sale, this was the, I think summer of 2017, the tax cut jobs act wasn’t actually passed, I think until late December of 2017. So our sort of interest in this asset kind of predated the actual formation of the legislation that led to the opportunities on program. And I think that background kind of fundamentally described sort of how we think about opportunities, which is if you have a great project and something you really like and think fundamentally makes sense and is a good location, great project, great team around, it’s nice to have the opportunities on benefits. But I would always generally think about as kind of a nice to have.

Jeff Finn:

And in our mind it doesn’t make a reasonably a good deal, a very good deal. It doesn’t really make even a good deal, a very good deal. It’s kind of something that’s sort of just a little bit of a cherry on top of what should be hopefully a really good cake. And I think that’s kind of how we look at it. It wasn’t a motivating factor all to us getting involved in this particular project. And then just generally speaking, I don’t know if it’s helpful to just kind of quickly summarize what the opportunities on program is or isn’t? But generally speaking, if the tax deferral program and the idea is that an investor with capital gains of any type, they could be short term longterm, they can be from any type of asset, they don’t at all have to be a real estate generated capital gains transaction. It could be from the sale of stock. It could be from a piece artwork or car. You can defer that capital gain until December 31st of 2026, I believe. And reduce that gain by up to 15%. And then any new gain from the new investment is cap gains tax free when that capital gain event is triggered in the future.

Jeff Finn:

So it does provide someone who happens to be sitting on a capital gain. Maybe you’re sitting on large gains and equity. And you say, “Look, the market’s rebounded tremendously from sort of the COVID lows, I want to take some dollars off the table here, but I don’t necessarily want to have to pay cap gains tax, particularly if it’s short term cap gains.” If you find a really good project that you otherwise wouldn’t invest in and think it’s a great project, at that point in time I think it’s worth thinking about all the things being equal, and opportunities on project is beneficial for an investor in that context. One thing I would caveat though, is, there’s a loss of liquidity when you’re doing that, right? You do this and that project will be held for 10 years. And for some people that doesn’t make a lot of sense, right? But generally I think if you’re going to be acquiring real estate, you shouldn’t be thinking about a whole period of less than 10 years in most situations anyway. So that’s sort of our thoughts on it, how we got involved. It was really mostly an accident quite honestly.

Daniel Cocca:

And then I think another important component about opportunity zone deals is the redevelopment component. You’re not investing in your typical kind of value add, we’re going to spend 10K a unit doing renovations. This seems to be a heavy lift. And in your case, the project you’re working on is perfectly suited for that. If we could just chat a little bit more about exactly what you guys are doing.

Jeff Finn:

So we have a, what’s about a 1920 and vintage office building on Hollywood Boulevard, just a few blocks West of the “W” at Hollywood and Vine. And we’re taking that 1920 office building and converting it into an 85 kind of boutique hotel. And the general premise is to renovate that project. We’re actually adding a few stories to the project. So it is a significant renovation. We’re keeping all of the historic exterior of that building which is what we think is a visually interest building that is a contributor to an historic district in Hollywood. So we’re really excited about doing something that not only, is an opportunity zone program, but in our minds kind of contributes to some of the historic fabric of Hollywood, the neighborhood we’re in. And the idea is to create a product there that, maybe a little bit up market and kind of what exists there today, but there’s a higher end luxury boutique asset there that’ll have some, hopefully some great F and B outlets and some things like that that makes sense, given the location in Hollywood.

AdaPia d’Errico:

Is the project near any of the new public transit that was coming in as well?

Jeff Finn:

It’s located right next to the Hollywood & Vine Metro station. That Metro station has been there for quite a while, but is an important Metro station in LA. I think it’s one of the highest traffic Metro stops that’s there. That Metro station sort of just below sort of the W Complex there, we’re a block and a half West of that. So it’s a good location from a public transit standpoint, and we also happen to be sort of on the walk of fame there in Hollywood to get a lot of pre-COVID, got a lot of pedestrian traffic through that portion of Hollywood. And the art building happens to be sort of in a view area where you do have tremendously interactive use of a Hollywood sign, particularly as we’re adding some stories to that building. We think it will have some very special new corridors and some opportunities for… We are in Southern California for, I mean, outdoor experiences that are pretty unique relative to what someone traditionally gets in sort of a normal hotel room.

AdaPia d’Errico:

And just out of curiosity, how did you go about finding the building, outside of it being an opportunity zone? Because like you said, it became an opportunity zone or it got zoned that way afterwards. But how do you go about finding a property and putting that deal together?

Jeff Finn:

It’s a good question. I would say this is a real kind of case study, sort of our typical acquisition. It’s something that generally usually takes a really long time and is usually it’s either something that came about because there was some situational distress, whether or not it was just a great asset with a bad capital structure, whether or not maybe there was a lawsuit surrounding it. And this is a lot of what we look at and a lot of what we, particularly today, and that was the case with this asset in Hollywood, sort of what I would describe as a busted sale process. And we see a lot of those where someone goes to market with something, with sort of price or some sort of structure in mind, and it’s just off market. And that was really, really typical, particularly in that time that got it going into 2016, 2017.

Jeff Finn:

And, pre-covid, was the case 2018 and 2019 as well, where you just had sellers whose views with respect to market values were not in tune with what buyers were willing to pay. And that was sort of the case with this asset. It got listed for sale and was up for sale for quite a long time. Didn’t ever transact. We put in a couple of bids to purchase the fee that were significantly, significantly less than what the asking price was, and didn’t get any traction there and the assets would continue to sit. And then the owner there, for a lot of reasons, ended up having some issues that the asset has started to have some tenants leave largely because he just wasn’t maintaining the asset. I think it’s when you decide, “Hey, I’m going to put this up for sale.”

Jeff Finn:

The idea was, “I’ll put this up for sale. I can kind of take my foot off the gas.” And it just didn’t sell quickly. And it led to some erosion of a tenant base that was there at the existing office building, left him with a lot of vacancy. That vacancy sort of oddly enough transitioned into there being some squatters at the asset. And the asset sort of evolved in the situation that there were just some problems around it. And we ultimately decided to go to him and offer to ground the building instead of actually purchasing the fee. And so we sort of went to what became sort of a transaction with a little bit more hair on it over time and what was sort of a different transaction structure than I think what the owner was ideally looking for, but something that ultimately enabled us to take control of the asset.

Jeff Finn:

And now we don’t own the fee to the building. We actually have a 99 year ground lease on the asset that allows us to redevelop it and hold it for quite a long time. And functionally should, from our standpoint, our investor standpoint, really these sort of the equivalent to the ownership in the asset. But was really the only way we could tread back at an economic level that made rational sense in terms of generating good returns for our investors. And then there was, as we were doing that, sort of this deterioration in the building itself from our standpoint as a potential buyer was pretty useful. And we’ve looked at a lot of assets that are like that, where there’s just something that sits for a while, where an owner has an idea about value and you can come to him and be creative and outside the box and say, “Look, maybe we join venture on the asset. Maybe we’ll ground lease the asset from you.” And then we look at stuff that is more outright distress, right?

Jeff Finn:

And some of that’s not only market driven, some of that’s capital structure driven. Someone who happens to be in default and now we’ve seen assets. And we’re working on asset right now here in Southern California, that’s going to receivership because an owner refused to comply with some orders to make some fire code changes from the city. And it got so bad, the asset ended up in receivership. So we kind of look for situations like that. I think one of the things that’s really made us a little bit different, and particularly in kind of the boutique world is we don’t necessarily say, “Look, we’re creating this boutique brand. And every asset that we’re going to work on needs to fit in this box that we created.” That’s sort of been a strategy a lot of people are following. Some people very successfully will say, “Look, this is what a Artist’s Guild asset is. And they’re all going to have the same name. They’re all going to fit this formula. And we’re going to do our first one here in New York, and then maybe we’ll do a second one New York. Then we’ll go to LA. Then we’ll go to Portland, then we’ll go to Austin, and then we’ll go to Nashville for Daniel.”

Jeff Finn:

And that has worked really well for a lot of people. I think for us, where that hasn’t worked so much you tend to sort of force yourself into finding a transaction and needing a transaction that isn’t exactly a certain way. And the best opportunities we see tend to be more organic, where you have to adapt to the transaction. I think that’s something fundamentally that Danny and I are sort of have always agreed upon is to not let sort of our desire to create something exact and make every asset rhyme with the next one, overrule our desire to find really good transactions.

AdaPia d’Errico:

I think when I hear you say that, and I’m thinking about, obviously you’re in the boutique hotel industry, as opposed to, I don’t know if you call it branded or is it flagged, the sort of larger brands? Is that the right word?

Jeff Finn:

Yeah. I just flagged a good way to put it.

AdaPia d’Errico:

Okay. That it seems contrary to try to take a boutique brand and force that brand into an asset. At least for me, and maybe I have more of an artistic bent, but I think that, especially if you’re working with assets like the one in Hollywood that is in a historic location, that preserving some authenticity in that building serves you and provides actually a much better experience for your guests. So I like your approach that you’re not trying to force your idea on to an asset.

Jeff Finn:

We felt that was really important as we were trying to kind of create the fabric of what is Artists Guild and try to be flexible and creative, not just in terms of what we bring and create at the asset level, but also in terms of how we approach actually acquiring an asset and to put a certain amount of kind of artistry to the actual deal structure itself and to how we think about things. And I think fundamental to that was just being creative and trying to be opportunistic. And like you mentioned, not really kind of forcing a certain agenda onto a certain type of asset.

AdaPia d’Errico:

Well, I would love to continue talking about all things design and brand, I love that kind of stuff. I actually think it’d be a really great time now to transition into hospitality as an asset class, because obviously we’re in this, it feels like a zero point. There was the really in hospitality there was before and there’s going to be after, as it relates to the pandemic. Whereas, as Alpha, we invest in a lot of multifamily and there’s not this big distinct before and after.

Jeff Finn:

Right.

AdaPia d’Errico:

But it certainly seems to be that way in the hotel asset class. So can you talk a little bit about the hospitality asset class and the impact that COVID has had on it at least thus far?

Jeff Finn:

I mean, it’s been obviously a tremendously negative impact, hospitality and hotels broadly. I mean, if you look sort of across the market, just talking in US generally, you had RevPar levels that decreased by 80% going into a lot of April in the earlier weeks of this month. And that started to stabilize somewhat. I mean, I think that the last sort of statistics I saw on average across the US sort of for the first, I think a second week of this month, second week of May. On average assets were running in kind of a low thirties from an occupancy level. And that’s better than it was sort of the last two weeks of April. So you’re actually seeing sort of a trend of less bad data happening, which is good. I think as you sort of seen over the last week in particular more, reopenings kind of getting into the early part of summer.

Jeff Finn:

I think some assets will actually start to see a rebound. And I think what happens from here is going to be very directly tied to whether or not you sort of see a second wave of the virus. I think that will not only stop people from traveling. I think that will make the recovery from that point forward, when that second wave then is much slower. Because I think having a kind of don’t go through the virus twice will be much more damaging to sort of longterm confidence than going through it once, and people sort of be able to look at and say, “That’s something that’s behind us now, that’s something that’s not necessarily going to kind of keep spiking up.” And I think that confidence will be really crucial to sort of a full scale recovery in the sector. But just generally the impact that, kind of hotel perspective was pretty catastrophic. It’s one of the probably worst events, as a hotel owner, operator, that you could probably imagine happening.

Jeff Finn:

And granted it, it will be hopefully relatively short in duration and the recovery out of it, I don’t think will be sort of V-shaped, but I do think there’ll be winners and losers, but I think for some assets in particular, I think that there will be a reasonably wrap and pack back to at least operating profitably. I think there is that sort of recover… It’s going to be interesting to see, but I think you kind of have seen it to some extent precursors to that, at least that we’ve been hearing anecdotally. I think any place that’s a fly to market that’s really dependent upon really regular airlifts, something like Hawaii, you’ve seen those markets be the most impacted at the most major markets.

Jeff Finn:

I think probably a lot of it is probably the most impacted kind of maybe top 30 market you’ve seen in the past from a hospitality standpoint. And I think unfortunately that you will see a longer path to recovery there. I think there have been drive to markets, we focus mostly on the West Coast and most of my examples would be sort of West Coast based than California based, but drive to market, particularly with beach access here, from people we know who are owners in markets like that, and operators in markets like that, so actually weekend traffic, the last two or three weeks has been much better than you would have expected when you’re kind of looking at national occupancy models in like the 30s.

Jeff Finn:

So I think this theme of outdoors, be it a beach location, or sort of a mountain location is going to play really well. I think the theme of drive to location where you’re in close proximity to any major city, I think will be really helpful. And we’ve seen sort of the luxury segment sort of, it seems potentially be leading out. I think you have a lot of people that, maybe are reasonably well off who advocation planned early in the summer, or through your kind of spring that have deferred those plans now saying, “Look, we’re going to do something for the next two or three weeks. That’s now sort of large and extravagant.” And there’s also the concept of a lot of luxury assets tend to be assets by nature that have more detached hospitality units, have larger units and feel less crowded. I think that’s going to be really important to people when they look at and say, “Would I rather go stay at the Four Seasons in Manhattan, or do I go stay at Amangiri in the outskirts of Utah?” And I think you’ll see those sort of isolated retreat based places that kind of offer an exit from an urban scenario, play really well and recover sort of faster than some other assets will.

Daniel Cocca:

Well, you’ve definitely revealed how bougie you are with Amangiri three grand a night reference, real casual. But it looks like an awesome spot. I hope to get out there at some point. I have a buddy who just sold the company and he’s, “That’s where I’m going for a week.” And so it seems a cool spot. Nevertheless, what I wanted to chat about is, as an acquisitions guy, as an investment banker, as someone who pays attention to how to finance a deal, how do you coming into a new project in this environment decide what an asset is worth? And are you seeing a bigger gap between buyer and seller valuations? What is the marketplace for acquisitions in the hospitality asset class look like today?

Jeff Finn:

Honestly, I think it’s almost nonexistent over the last several weeks and months. I don’t think that there’s really a fluid market in hospitality at the moment at all. I think there are people who were considering selling assets pre COVID that are going ahead with those assets sales now. And I think those prophecies are being elongated and there’s a lot of price discovery going on there. I don’t think it’s an easy question to answer broadly, and valuations are obviously going to go down, but how far? I think it really is going to be incredibly situational because of things we sort of just discussed a little bit. I think if you’re talking about a high end luxury asset that can prove that they weathered the COVID storm better than others, to some extent, you may see premiums for assets like that when they do transact.

Jeff Finn:

And I think most owners are, at least right now are thinking or hoping that the impact will just be temporary, and if they don’t have to sell today they really aren’t. And you’re going to have some foresellers that for capital structure reasons are going to end giving back assets to lenders. You’re going to see some of that, hopefully not a tremendous amount, but you’re going to see some of that, but I don’t think I haven’t seen that really play out yet. I think you’re still early enough into the impacts that most lenders are… Most assets that are having really acute issues and had high leverage on them are in forbearance periods with lenders right now. And I think you’re going to continue to see sort of the can get kicked down the road and lenders starting to really be constructive as much as they can. I don’t think anybody would want to step into the shoes of an owner of an asset that was really impacted heavily by COVID.

Jeff Finn:

Well, where we have sort of seen some opportunity, and then it honestly was quite short lived, was in acquisitions, CMBS debt, sort of. I guess that was probably the earliest parts, and then maybe middle of March and maybe towards the end of March, you really had some foreselling that you saw there. And for anyone that was quick enough to acquire liquid positions there, I think that was a really interesting place to deploy capital for a pretty short time. But you haven’t seen that sort of transition yet, that distress, that you kind of saw momentarily in a liquid market hasn’t really translated to the private market in terms of transactions. And I think most people would argue of probably seeing there as sellers who were thinking about selling, who are saying, “Well, we’re just not going to sell now.” And then assets that are in distress situations, going through a period of forbearance and work out with lenders. And I think you’ll have to… Credit take us three to six months sort of before some of those things actually become transactional more opportunities.

Daniel Cocca:

So as someone who is a real estate investor as well, expanding outside of hospitality, where’s the opportunity in this COVID environment as it relates to real estate or other alternatives? What do you think is interesting these days?

Jeff Finn:

I think that there’s growing that corporate debt, from a real estate perspective, but it’s just thinking on a macro perspective, there’s going to be some really interesting opportunities. I think you’re going to see… You have seen a rebound in that market, but I think you’re going to see sort of a softening. I think you’re going to have some really interesting opportunities to deploy capital into corporate capital structures and into operating businesses that are in distress. I think you’re going to see a fair amount of that happen. In real estate specifically, I do think that the best opportunities will be in hospitality. I think that it’s an unfortunate situation and it’s going to lead to some turnover and ownership on a lot of assets and some opportunities to create a unique basis and assets that you may, otherwise not have an opportunity to.

Jeff Finn:

And I think maybe kind of talking, because I mentioned it earlier, but something like Hawaii, right? I mean, it’s very, very, very difficult to get assets zone in approved really anywhere in the Island, particularly when you’re talking about something that’s close to the water, and there’s an extraordinarily high barrier to entry market. When you look at today, where some of those may distress in terms of operating performance has been the worse, it probably within Hawaii or a market like that. I think those opportunities you’ll see some really smart investors make some acquisitions of assets like that, that 10 years, 15 years from now look extraordinarily smart in hindsight.

Jeff Finn:

I don’t think we really see that sort of translate so much to multifamily. I think multifamily, from what I’ve seen generally speaking and I’m sure case by case is very different, but I think rent collections really haven’t been kind of impacted yet in a way that I think a lot of people thought they would, or would otherwise be if you sort of gave someone sort of a headline, 20% unemployment numbers. That what do you think vacancies are going to do if you have 20% unemployment? Right? And I think a lot of it is because hopefully we don’t have to sustain 20% unemployment, right? Again, hopefully we rebound rapidly to where we were and all PPP loans and other things and other stimulus measures that the government put in place will really do act as a bandaid to allow people to continue to pay rent, and maybe landlord take a couple of haircuts for a couple months, but it doesn’t actually end up being sort of a longterm situation that causes any significant impact from an investor’s perspective to multifamily.

Jeff Finn:

AdaPia, you asked something a little bit earlier that’s kind of an interesting thing that we can touch on a little bit, which is just sort of hospitality outside of COVID as an asset class relative to other real estate asset classes is kind of a unique one. And, maybe we’re spending a little bit of time on COVID, something that kind of tends to be treated kind of bastardized form of real estate generally speaking.

AdaPia d’Errico:

Definitely. Let’s talk about that.

Jeff Finn:

I mean, it’s something obviously we like a lot and I think the general perception, I think from a lot of real estate investors perspective and maybe even your collective perspective, is hospitality is an area to avoid as a real estate asset class. And generally the justification you would you’d hear from most people is that, “Hey, it’s too close to an operating business, right?” There’s operating components to that that make it more complex. And there’s inherent volatility because of the short term nature of, what you would think of about the leases, but certain nature of stays at hotels, right? And so it’s not the same as multifamily where you have your long leases or retail, you’ve got five-year leases in your office where you can append your leases and no cash. There are longer contractual cashflow streams that are associated with the asset.

Jeff Finn:

But that’s sort of generally what everyone, the kind of the consent is I think most people look at it. I think our view on that is, but those things are true, there is an operating component to any hospitality business, and there’s a lot of volatility, can be a lot of volatility because you’re dealing with something that you’re essentially leasing for a night, right? Then you’re saying you stay here for a night and then maybe you have to change the rate tomorrow. Maybe you don’t show up at all tomorrow. For us, I think that kind of creates a lot of the opportunity, and I don’t think we fundamentally view risk as sort of being synonymous with volatility. I think that’s kind of the one thing that from our perspective is a little bit different about hospitality and hotels that a lot of people kind of tend to write off when they can book. It’s not a great place to invest because there’s volatility. It’s the first asset that reacts in an economic downturn and you don’t have any credit support around leases, you don’t have durational leases, things like that.

Jeff Finn:

I think the way we look at it is that risk isn’t necessarily the same thing as volatility. And while you may volatility in cash flows to us, we conceptualize risk is more of the probability of kind of having a permanent loss. And when you think about holding an asset for a longer period of time and avoiding loss, things to us, things like maybe you have a seasonal asset where in the summer time you can have be running 85 or 90% occupied. And in the spring or fall, shorter seasons, you’ll be running 20% occupied. So an asset where there’s an inherent tremendous amount of volatility in it. To us that doesn’t necessarily mean that asset is more of a risk to an investor. Because of the way we look at risk, is that what is the probability that you actually lose money?

Jeff Finn:

And when we think about risk and thinking about other asset classes, you guys are obviously doing a tremendous amount of multifamily, and it’s picking up on multifamily a little bit. One of the reasons that generally real estate assets fail in our experience, really isn’t because there is an operational issue as the asset, as much as there’s a capital structure issue. And half of it is over leveraged. And probably even 90% of what I’ve seen in terms of failure in real estate, and actual what I perceive as risk, which is loss of capital, comes from an asset being over leveraged not from there being operational volatility in the cashflow stream. And so when we think about that, multifamily comparing with hospitality in asset class that’s because it’s lower yielding, generally you traditionally see people be much more aggressive with leverage. And I think when you look at sort of creating all in equivalent levered return using generally what’s the leverage on a hospitality asset and more leverage on a multifamily asset to kind of achieve the same levered return, I think a lot of times you’re actually taking more risks in a multifamily scenario, even though you may have an asset that is inherently less volatile. I don’t know that you’re significantly reducing the probability that you have kind of a capital impairment, a loss of the asset.

Jeff Finn:

So that’s kind of how we think about it. And then one of the reasons we like hospitality is because there is this volatility, but if you manage around that prudently, there’s higher yields that are associated with it that allow you to generate returns without necessarily using the same amount of leverage. And it’s an asset that because of that volatility, there are great opportunities to enter and exit assets that in something like multifamily, you may not have, because if it’s an asset that’s the category that can be incredibly crowded, incredibly competitive. And because, residences and homes in general are a little bit more of a commodity product and not always, right? But just generally speaking, there’s a utilitarian part to having a home and having shelter. It’s something that is a little bit more of a commodity driven market, sometimes in our view. And obviously that’s not always the case. There are multifamily developers and multifamily operators that are very, very, very good at what they do and have tremendous track record multifamily proved. For us, hospitality is a space that is a little bit less crowded and sometimes creates more opportunity. And I think for us, in certain situations better risk adjusted return.

AdaPia d’Errico:

I had never considered it that way. Maybe I’ve never invested in hotels. And I know that we don’t, but that’s really interesting when you’re talking about it being more risk around the capital structure and there’s going to be some opportunities for purchasing at markdowns soon. So it kind of sounds there’s going to be opportunities to buy assets. So that’s one thing. And then I’m thinking about all of the changes that are happening to our behavior as consumers and as a society. And the latest one, because I had never even considered how things worked. I feel like this whole pandemic just blew so much stuff in our faces. Everything from how supply chain works, to the hospitality industry. I was just reading the other day that the fashion industry is basically calling off fashion week. The creative director at Gucci basically said, “We’re not doing fashion week anymore.” A, because they’re kind of taking it as an opportunity because it’s draining their creativity. Anyway, doing these five shows a year it’s a traveling circus for three months out of the year for them.

AdaPia d’Errico:

But what’s interesting to me about this is the amount of money that the fashion weeks bring to those cities. And I’m thinking that it’s 600 million for New York. It’s more than Superbowl. It’s the amount of money that fashion week brings. And lack of… People pulling back on conferences and doing a lot of summits online. And so where I’m trying to go with this is, protest. And if people aren’t traveling for all these bigger events is it’s going to impact hotels. And we still obviously don’t know how it’s all going to play out. And then you have maybe boutique hotels that are going to be able to do better than luxury hotels because they can… It’s almost like you feel you’re more socially distant then in something that is a little denser as it goes.

AdaPia d’Errico:

But I just think there’s the asset opportunity and then there’s going to be, what are you going to do with it with all of these changes that are happening? I think it presents this both things happening at the same time to try to come up with what are you going to do with the asset if you buy it, beyond the capital structure, but from a cashflow perspective?

Jeff Finn:

I mean, it’s a really great question there. Without question will be significant… There has been significantly larger impacts to larger convention style or group travel dependent assets. I think those are going to be… We kind of talked about locations in terms of product size in hospitality. June is definitely going to be worse, at least for the foreseeable future. And I think business travel, and group travel, and convention-focused and large event focused, is really going to have a really hard recovery. And then the question becomes, do we know that assets recover? And if not, if you had a 500 room convention hotel that four years from now, you’re still operating this thing at 40% because it’s so large and people are – years from now, saying – ‘Look, we’ll do some group events, but they’re going to be smaller events. And we’re going to run them over a larger number of days and have less participants,’ things like that and more interaction virtually. I think it’s going to impact conventional assets significantly.

Jeff Finn:

And then you’re kind of seeing this in retail too. The question becomes when those assets structurally end up being broken, is there a better and higher use for them? People are looking at indoor malls today and saying, “Can these things be demolished to create housing? Can they be reinvented as entertainment type assets? Can they be reinvented as logistics facilities?” I think you’re going to see probably not to the same extent you’re seeing that happen in retail, but I think you’re going to see some situations where people look at larger hospitality assets and think creatively and say, “Look, this thing for the last five years post COVID really is only been able to recover to half COVID peak, is it better if I go in here, acquire this on some multiple of trailing cashflow and reinvent it as multifamily and create a multifamily asset as a hotel?”

Jeff Finn:

And I think you may see some conversions like that longer term, particularly in areas like California, where you have huge need for housing. I think those things would be looked at really positively, from most of a kind of city planning standpoint and from a general public perception standpoint, particularly if that use ends up being affordable housing, which to some extent, hotel assets largely are better suited to create into, affordable style housing than they are sort of traditional style housing, just because the room sizes are traditionally so much smaller. And so I think you will see that. I don’t think it’s going to be a huge portion, but I think there is some part of the hotel supply that exists today that five years from now will be and/or should be sort of reinvented potentially as multifamily or as for sale housing. And I think particularly in areas where housing itself is incredibly unaffordable and supply for traditional housing is really constrained. I think you may have some transition on that.

AdaPia d’Errico:

I mean, I’m really glad he went there with that. Because I was really curious what your thoughts were on the redevelopment of it, especially given it’s different because you’re going from an office to a boutique hotel with your opportunities zone in Hollywood. To me, we’ve talked about this on other episodes with other guests too, is that real estate is fundamentally a creative industry. People get really creative and solutions oriented. And I, for one, I’m actually really excited to see how we come out of this in a few years, what gets restructured literally to serve some needs. Like you’re saying here in Southern California, we have a housing shortage. We still will for a really long time. So it’s the work that developers do like you to take an asset like you’re doing with that office and making it into a hotel, boutique hotel in Hollywood and maintaining it. And it’s great work that you’re doing and all of your insights today were really wonderful. I got a total education on hotel and hospitality and I’m really looking forward to A, I’m going to go drive and see your building, when I can. And just where your projects are in the future, and of course we’ll share the link to your website and some links so that people can go in and find you and see what you’re up to.

Jeff Finn:

Awesome.

AdaPia d’Errico:

Well, thanks so much for your time today, Jeff really appreciate it.

Daniel Cocca:

Yeah. Thanks Jeff. Great to have you.

Jeff Finn:

Good talking to you guys.

AdaPia d’Errico:

Thanks for tuning in to Real wealth, Real health. We hope that you’ve enjoyed today’s episode and found it both informative and insightful. We welcome all your questions and your feedback about today’s episode, and especially we welcome your questions about specific topics that you would like us to cover. So shoot us an email at [email protected] And if you have a moment, we really appreciate ratings and reviews as it helps us grow our online community and our interactions with you. And we’ll also be linking to a number of relevant articles on topics that we might have touched on during our conversations. Some of them are broad, some of them are technical, but we’re always aiming to provide information that helps you better understand the mechanics of building this healthy financial foundation especially if you’re looking to do this with real estate