Matt Talks Hospitality Ep. 22 - Hospitality investment strategies with Joe Pettigrew

Hi everyone, welcome back to Matt Talks and this time Matt talks to Joe and I invited Joe because he's a speaker at our upcoming News Unfold conference on the 27th of April and I thought it would be great to introduce him to you and also to also invite a different perspective into the room because often I talk about the technology and I talk to people that are living in hotels but Joe comes out of L&R Hotels or Properties where they own and manage a number of properties across the globe and he has a very different perspective from almost a helicopter view looking at hotel operations and I thought it would be good to invite Joe into the podcast this week. Joe welcome. Thank you very much for having me, Matt. Do you want to maybe give us a little bit of background on what made you like who you are today in your role, so what's your education, what are the jobs that you did before? Yeah, sure, so let me maybe start from the back and then maybe go back in time. So today I serve as a Group Chief Commercial Officer at L&R Hotels which is a global private real estate investment firm. We have about 10 million pounds worth of assets currently under management which are wholly owned by Ian and Richard Livingston. We have about, we have 115 hotels globally ranging from an extended stay hotel to mid-scale to iconic luxury hotels all throughout Europe. I'd never heard about L&R before until I went into the website and I started looking at the names like, oh I know a bunch of these hotels that I'd run into before, yeah. Yeah, yeah, so we do own and manage quite a wide range of hotels here which is quite unique. What's your favorite one in the collection? If I were to pick, I would have to pick Chuton Glen which is actually one of those hotels that consistently get picked as the best British hotel in every magazine, competition, you know, every single year. It's one of the very first luxury hotels in the countryside of the UK. It's I believe the very first luxury hotel that had indoor pool and spa as a part of the hotel experience. It is steeped in history, it's served lots of, you know, iconic folks and visitors throughout its time. It's really the one that kind of kick-started all the luxury country house scene. What's one thing that they do that excites you, like is there something specifically that you love about this hotel personally? So it probably goes a little bit counter to what you do for the industry but it's actually quite old school in the way that when you go and stay there. Not the product is old school, it's very modern and the product itself is very nice but they do believe in the old school human touch, that white glove service, just making you feel very welcome. You go there and stay there even as a guest staying at our standard room, you feel like you're getting a VIP treatment that, you know, maybe the true VIPs, only the true VIPs get elsewhere and so, yeah, it's a true old school, good old hospitality that you get there. So that's pretty cool. We're actually going through a lot of renovations this year, renovating all the public spaces and then some bedrooms so it's going to be an incredible transformation so we can't wait to nail that. I completely took you off track. This is L&R. What did you do before L&R? So before L&R, I was at Starwood, I served as the Chief Commercial Officer for the Hotel Asset Management team where I probably worked on over a thousand hotels in my career there It's incredible. With brands and platforms that are category-defining, I would say. Can you name one of the brands that you think was category-defining? Yeah, so stuff like Yotel, which was kind of in the micro-hotels, Extended Stay America, which is the leader in the, obviously, the Extended Stay hotel markets in the U.S., the One Hotel brand, which is the sort of the eco-luxury hotel brand, the Baccarat Treehouse and together forming the SH Hotels and Resorts, soon to be, you know, rebranded as the Starwood Hotels and Resorts, a revival of that. Like as in the original founders of Starwood Hotels and Resorts are starting a new brand is what you're saying? Yeah, so Barry Sternlich, who is the Chairman and CEO of Starwood Capital Group, was also the CEO of Starwood Hotels and Resorts. So then Barry started these three brands, one, Baccarat Treehouse, under the name of SH Hotels and Resorts. And then I think within the next month or two, I think those are, he's rebranding the SH Hotels and Resorts back to Starwood Hotels. Yeah. Is he doing anything? The struggle I have with brands today is that they're all, like, they're all the same to me. Like the Sheratons, the Hiltons, the Marriotts, I don't know what the difference is. Do you think he's going to do something different this time around? Or is it just going to be another brand that we add to the mix that just feels the same? So I don't know what the future plans are. So it's obviously been about a year since I left Starwood Capital. But if you look at the three brands that they do have currently, they are very unique and distinct. The experience that you get is not like what you get elsewhere. So I think, you know, that's where I drew a lot of inspiration about, especially when you think about, like, loyalty. When people think loyalty today, we think about, like, the CRM or points, perks and things like that. But, you know, a brand like One Hotel didn't have any loyalty program, really. But it gets so much, like, real loyalty from the guests. Genuine. Like, I want to come back because of the brand, not because of my points. Yeah. And also not because it has, like, a thousand hotels in its network. It had, like, three. You know, when we first started and people still were coming back because of that, that differentiated experience that they were getting. And also because what that brand stood for, which was very sustainable, sustainability first, eco-friendly experience. So yeah, I would say. As we talk about loyalty, is there a loyalty program in the world that excites you, that you think actually works? Or is true loyalty the future of hospitality, where the brand does something so unique that people just want to come back for that? So I think, and this is just my personal opinion, but I think the brands that really do the loyalty correct, I think are the ones that really focus on the guest experience part. And I think those are all mostly independent hotels, actually. So I think what brands do very well is that they identify who are the cohorts of guests that frequently travel. And if you just kind of take this back to sort of first principles, well, who needs to travel very frequently? They would have to be business travelers. I mean, leisure travelers, they might travel once or twice a year. But when they do travel once or twice a year, they're either going back to the same location every year because it's like the family tradition. But barring that, you're probably not going to the same destination or the same hotel every year. You try out different areas. So if you're a brand, you're probably putting all your strategic energy and resources to capturing the business share of the frequent travelers who tend to be business travelers. And so I think that's what they do really well. They're not really enticing somebody to come to and stay at my hotel multiple times a year. But since you are already coming here multiple times a year, book at my hotel rather than that one, because I'll give you the points and perks and all these other things. Because if I look at the L&R portfolio, there are some that have the big brand names on them, and some of them are independently branded. Is that often the reason that if this is a hotel and a corporate destination, you would put a major brand on just to get access to the corporate machine? And then if they are in a unique location like the hotel you mentioned, then actually you might not need the brand? Generally speaking, yeah. There will always be some exceptions, but I do think that it also depends on what kind of investor you are. So if you have a very discretionary patient capital like we do, because we don't have lots of investors and we don't run a fund. This is private capital that we have access to. You can invest in a destination or a hotel to try and transform that property and then hold that property for a very long time to make sure that you are really truly delivering a vision that you had for that hotel. And if you're doing that in a remote, hard to get to destination, then you probably don't need a brand because what you're trying to do is establish that property as the destination. And so in that way, you actually want to create something very unique and differentiated. And so then by definition, brands are less appealing. But if I were in the same shoes and then you ended up with this asset, but now if I'm more of an opportunistic or a value-add investor and I have a much shorter hold period, I am now thinking about my exit plan as I own this hotel. And so then I have to think about, well, then how do I exit? Who's going to be my next pool of buyers? Would they want to convert this into a branded hotel? Because they may not share the same ideas and values as me. And so then I might run it as more, set it up as more generic and more turnkey ready state where my technology stack may be fairly similar to what the brands have. I'm not trying to go crazy with any of these systems because I know in three years' time, I'm going to sell this and then the next buyer may want to turn it into a brand. So there are lots of things to think through. I guess the one key thing that I should mention is that I've only been at L&R for three months. And so I'm still learning about the history of all of the transactions and the ownerships of our assets. Nice. Yeah. I guess what I just talked through is sort of more general thoughts. And did you study hotel management or did you come more from a finance background? Like what was your growing up kind of your mission? Yeah. No. So I actually went to college wanting to study computer science at University of Washington, which is the state that I grew up. And I actually changed my major three times while I was at the UW until I realized that I still didn't know what to do with my life. And then I started working at a nearby Marriott in downtown Seattle as a front desk agent and realized that I could probably do this. This is fun. Like I had a lot of fun working at the front desk and dealing with people and solving problems. And so my manager at the time... We were just talking about SOPs yesterday internally and I said, I remember the SOP. I had to use the guest name three times. I had to mention two facilities. I had to tell them the breakfast time. That was the check-in procedure. And I said, I think SOPs are disappearing now and we're looking for personality. Did you guys have this really strong SOP culture back then when you were at the front desk? No. No, we didn't. I mean, okay. So it's been more than 20 years, right? So I don't remember down to that detail. But what I do remember... The only rule that I remember is I think what was called a 15-5 rule. So if a guest is 15 feet away, you smile. And when the guest is within five feet, then you acknowledge and say, Hello, what can I help you with? Sort of thing. That's the only real rule that I remember from my front desk days. If you're at the desk, always look up and acknowledge them with your eyes. And I was like, I've been in many queues in hotels, and this rule has clearly been deleted from the SOPs nowadays because they never acknowledge you. Yeah. No, but I think it is true that... I think you're absolutely right. I think some people just have more aptitude to being in that kind of front desk slash hospitality roles because you just like helping people. And you get enjoyment out of making that guest smile, right? And then there are some people who are just not into that stuff, and they're just kind of in the wrong roles. But I don't think... If you have the right people, I think you definitely can provide that hospitality with less rigid SOPs. Yeah, I think so. I think less allows for freedom and hopefully more creativity to do something special. Yeah. And the biggest chunk of your career sounds like it's been with Starwood Capital. You said you worked there for 12 years. You've touched on about 100 hotels in that lifespan. What's something that you've left behind as a legacy? What's a thing you implemented or that you really stood for that helped Starwood develop one of the brands or really make hospitality better? One thing that I have learned out of that process is that actually the biggest uplift in any hotel's performance tend to be just doing the basics right. So it's not the fancy PR marketing. It's not the amazing 360-degree view of your customers and implementing some fancy CRM system. It's actually mostly about serving your guests right and then operationally, making sure that nothing is broken and rooms are clean and your guests are happy and your team members are happy. And then beyond that, when it comes to this arena of commercial, it's really just about the right pricing strategy with the right inventory management. Make sure that your foundational data is correct. So otherwise, it's garbage in and garbage out. And then that just messes up your entire strategy. And then once you've got that right, you move up and look at the next thing up the funnel, which are your channels typically. So are you getting the right distribution channels? How is your sales team handling things? And then only after you get all of that right, then you look at the upper funnel, which is the whole PR marketing, social, brand, all of that. But that sort of tops it out. But even if you get all of that right at the beginning, if your pricing is all wrong, then no one's going to ever book at your hotel. Or if you don't have any rooms to sell, then no one can book at your hotel or the website. With Muse, we acquired Atomize just two months ago, the revenue management system. And we started then looking at data. I was like, how many customers don't have a revenue management system today? And it's more than 80% of hotels worldwide that don't have a revenue management system. But if you go off the categories, obviously, the larger hotels and the branded hotels tend to have one. But why do you think that so many hotels don't have a revenue management system today? That's a really good question. I don't have a really good answer for you there. Because I would also say 99.9% of the hotels that I've had the privilege of working with all had an RMS version or another. It's like a no-brainer, right? Yeah, it really is a no-brainer. If I were to take a guess at why some hotels don't have it, it would be, A, they're just not aware of the upside potential of having an RMS. Or often, that hotel is managed by a few senior leaders who's been there for 10, 15, 20 years, who's actually been doing what they've always been doing. And actually, the property has been very successful as a result of it. Probably because of, again, the great experience that they're able to deliver. Yeah. And they just never thought that there would be any more need to try and push the boundary. That would be my only guess. But you don't know what you don't know. And if they've never been exposed to here's what an RMS can do for your hotel, and until they see it in action, I don't know if they even know what they're missing. Yeah. Like the resistance I often hear is like, I know this market so well. I can't imagine a system having the context that I have. And I trust that you do, but you can also leverage the added benefit to your knowledge of this algorithm that helps set the pricing. But it's a very polarizing discussion I'm finding, because they're very passionate people that are like, no, no, I make the decisions on pricing. I want to control that versus the people that... And I think it's often the hotel owners that are very happy to embrace the innovation. Whereas the hoteliers who have worked and managed these things by hand are the ones resisting it. And how do you think that role of the owner in that conversation is? Like, how much should they have to say about how the hotels are operating? Well, generally, the owners have a lot of say in technology. Well, ultimately, because the person who is paying for any expenses at the hotel are the owners, right? And so, yeah, the owners would have a ton of say in that. Suppose it's, you know, how sophisticated is that owner to know and understand the impact an RMS can have in transforming your revenue upside? That would be one thing. But I think, again, if any sort of the sophisticated institutionalized investors all see the value of having great technology and RMS being one of them. And so I would imagine any hotel that managed for some institutional investors, they would all have a RMS in their hotel. So I can't imagine why not. And if you look at the performance of one of your hotels, what are some of the metrics that you would look for to judge performance? Because the traditional REF PAR, I'm assuming, is one of the metrics that you have access to. But are there other things than REF PAR that you look at to show whether a hotel is performing or not? Yeah, so it's fairly old school for me on my part as well. But I obsess over the bottom line number, the NOI. And I obsess over that number for many reasons, not the least of which is because that number is what drives the valuation of the asset. So as a, you know, as a hotel investor, that is the only number that you should really care about, right? But it also removes so many distractions in focusing the team's efforts. So for instance, I talk about this all the time with the people that I work with, but profit over profitability, meaning I can get to 100% profitability if I wanted to by taking the business and not servicing it. I cut out all the expenses and, you know, like it's easy to make my profitability to sit at 50%. Yeah. But it means nothing to me if my bottom line number is $5,000, you know, where I need to be, say, $5 million. And so that means that depending on the hotel and where they sit and what the needs are and where the opportunities are, we all need to work very flexibly and not have any dogmatic view of, for instance, direct booking versus non-direct bookings, or how do I service the cost to service guests from these sets of channels versus those sets of channels, or how much money I'm going to get, what my ADR is for my suite versus my standard room. A dollar is a dollar. And if I can get another dollar, I want that dollar for as long as we're able to service them. And so that sort of really unifies the commercial team and the operations team and the finance team to, you know, really just maximize on your profit. And I think that really sets the culture and the tone for the entire hotel team to drive forward. So I really focus very heavily on the NOI. And then you look at it per square meter, or like, how do you evaluate whether the output is good? Like, what's the context? So yeah, so you mean like, how do I know that that NOI... Yeah, versus what someone else would have done with that property, for example. Yeah. So also, I think, so there's a few different examples. So I suppose just as a general rule of thumb, you would have had to, what is a good NOI number kind of derives from the valuation of that hotel, right? Because I bought this hotel for an X price. And when I bought it, I had my business plan. And that told me that 10 years from now, it needs to be valued at Y in order for me to then generate my return. And in order for that to be, if it needs to be valued at Y, then it needs to then have an NOI of Z, right? So then that gives you an NOI number, in my mind, about what a good NOI number is, or at least target where I need to run towards. That's a very general sense of how people attach, what does a good NOI look like? It kind of comes from that logic. I love that. But what's the timeline generally, like when you're looking for that exit moment, like seven years, 10 years? So that's different for every investor. So you'll have core investors who just want a very steady income producing assets that they can hold high quality assets for a long period of time. And they're looking at 10, 15, 20 years. So that investment horizon would look very different to someone who's more opportunistic, who comes in, say it's a five-year hold. It's a very distressed situation. So I'm going to buy this, put loads of CapEx into it, put very transformative plans into it, maybe a different brand, different management team, the way that we, you know, different technology, and we're going to transform the asset and then exit in five years. So that, depending on that, your exit target's very different and therefore your NOI target's different. So that could be different. When you come into a property and you say, okay, this is my NOI at exit, you know what the gap is that you have to bridge. What's the next first thing that you then do? Whether you pick, whether it's branded or non-branded or you start looking at the tech stack, like what's the first next step that you then start taking? So when you are sort of in your due diligence period of before acquiring that asset, you would have to think about all of those things at first. So when you, the point that you buy the asset, you have a good certainty that when I buy this asset, that I've got this business plan that I can execute right away. And so you're not buying the asset and then trying to think about what I need to do sequentially when you buy the asset, I am putting all that business plan in action almost simultaneously. And yeah, and so in that, so during that stage, if the assumptions that I'm making gives me a certain ROI uplift, if that number doesn't pencil out to the return that I need to get, then I'm not buying that asset. And you guys know, like, okay, a Hilton is gonna have this return, a Merit's gonna have this return, an IHG is gonna have this return. How do you know what the brand would bring? Would they tell you this or you just have a rule of thumb that you have? Yeah, so the brands will tell us what they think it will do. And then we would have our own internal view of what they will do. And then we would make an internal decision using what the brands tell us as a reference. But yeah, we would ultimately make that decision. And then when you then go with a brand and then you get the choice, okay, do I do franchise, do I do managed? How would you make that choice? Again, it's very similar to, so when the brands tell you, they come to you with sort of a pro forma on, hey, if you were to brand that as a, my brand, this is what, this is how we think your property will perform. And that is a full P&L that goes all the way down to the NOI. And then we would also do the same with management companies. And so we'll say, hey, if this was a franchise and then we hired a third-party management company to come and run this, give me your best estimate at how my P&L will look when you run this hotel. And then they will also put forward their best estimates. And then you compare the two numbers. Again, we would take all of those as a reference and given our experience of owning and managing the hotels throughout our career, we would then make the best decision using those reference, but ultimately it would be our projection that we would use. Because if you were to go with a hard brand, most of the time technology is being given to you, like this is what you're gonna use. Whereas if you go with a soft brand, you get more freedom. Whereas if you go independent, you have 100% freedom of what you wanna do. Can you take that tech decision into consideration or actually the impact of technology is so minimal that actually you don't really look at that at that stage? So if we're looking at an asset that really needs to deliver something truly unique and different, then I would say technology plays a much bigger role. So for instance, if we were buying a hostel, we would look at technology stack very differently to say a commodity hotel in a city center location to a luxury resort out in the middle of nowhere. Like those three, even if they're all independents, we would think about technology very differently across those three assets. And so it can play a very big role. But you're right. If we were to brand a hotel, flag it as one of the global chains, then actually technology is really not much of a decision. Are you across your properties seeing any applications of AI today in the frontline in the way that guests are being served or is this being worked on? So we have tried a few. It's mostly to leverage the large language model of the LLMs that are out there, right? So stuff like online reputation management. So AI actually doing the responding and giving you the insight of what people are saying to provide better service at the hotels. We've also tried having like a chatbot looking thing on the websites that kind of act as an FAQ service almost. If you have any questions or whatever, you talk to this AI chatbot and then it tells you more answers. It's much better than the chatbots of the old times. The old times three years ago, yeah. Like it's funny how quickly that changed, right? Yeah, yeah. So this thing, yeah. So I think we do see a lot more engagement and stuff like that out of the LLM chatbots. Then obviously you have AI in your revenue management systems, depending on which systems. But I'm sure everybody says that it's AI because before that it was machine learning. So yeah, so that's another application that is used quite frequently. What is something in a hotel that really frustrates you that you're like, I wish people would fix this from a technology point of view that really just bugs you? So I have really two big pet peeves. So because we are on the road constantly, and I'm always, I'm your prototypical business traveler who travels quite frequently. And I have yet to master the art of packing my dress shirts so that when I unpack it comes out nice and it's got creases all over. So iron and ironing board is like the number one most important thing in a hotel room for me. Good hotels now have the steamers in the rooms because I don't even want to iron the board. I just want to hold the steamer against the clothes and then just like... Yeah, or steamer. Steamer is great as well. But then you check into some hotels and they don't have neither the steamer nor the iron and ironing board in the room. It's only available upon request. And my biggest pet peeve is that's fine. But then in order for me to get that ironing board, I have to call the front desk, wait like 10 minutes for somebody to actually pick up the phone and then say, I need an ironing board. And then it takes half an hour or sometimes it doesn't show up and you have to call them again to follow up on your request. Meanwhile, I've got a meeting that I need to be in in 30 minutes and I'm still waiting on my iron and ironing board to show up. My pain point is this, that why can't there be like deliver room? Why can't I just hit, I want iron and ironing board and it gives me instant feedback that says, okay, we got your request and someone is on their way and then, you know, knock on your door. That we can fix. Yeah, and some hotels have... And there are technology providers and that do have that. I just don't know why that can't be more widely adopted. It seems like a no-brainer. And then that could be applied to room service or anything else. Just don't make me wait. I don't want to pick up the phone like to any stranger nowadays. Like I find like when I get a call on my phone or like I'm not supposed to hold it to my ear. Like the idea of like speaking on the phone traditionally is just really strange to me, especially in hotels. And like, so our point of sale, for example, you have a QR code that you can just have on the table in the room. So you can just start ordering room service. So you don't have to speak to someone and tell them what I'm about to eat. Like it feels like a very antiquated experience. Yeah, yeah. And yet these hotels are spending millions and millions of dollars or these brands or chains or whoever on everything else. Yeah. Like RMS, the CRS, the CRM and all of this fancy tech, you know. Nice. And then, yeah. What was the other, yeah? Yeah, two things that this thing needs to fix. But like what's the other thing? So the second one is also similar. So I always say that I would love to check into a hotel that makes me feel like I am going to my distant cousin's house for a night. Yeah. And what I mean by that is when I go to my distant cousin's house, it's a little bit awkward still because like I'm not very close to that cousin. But when you go there, you know, you're greeted at the door, you open and you go, oh, hey, you know, you give each other a hug. And then he would like show me, it's like, oh, this is your first time here, right? Let me, let me give you a quick tour of the house. This is your room. Let me know if you need anything. Oh, you'll find whatever stuff in this drawer and that drawer. And then, you know, and come down, we're going to have dinner at six or whatever it is. That kind of arrival experience, you don't get at hotels, even though you feel like you can. So when you walk, the moment that you arrive at the hotel today, you have to, everything is so transactional. The moment you arrive, you arrive. And then the, you know, the guy's like, what's your last name? Are you valet parking here? You know, it's $30 a night or whatever. Here's your ticket. And then you go to the front desk and they're like, what's your, give me your ID and your credit card. And oh, and by the way, I'm going to authorize your card for extra $100 a night for incidentals, put in your pin number, you know, sign here, elevators that way. Yeah. You know, it's so transactional. Like that is not. Honestly, it is not necessary. Like the technology exists for people to transform it. And it is why we started Muse 12 years ago, Richard and myself, we were working at this hotel and we're like, we don't want a reception desk because it was almost the idea of the desk is the antithesis of what hospitality is. It's like means I have to, as a guest walk-in, I have to find the desk and then I have to queue up and wait till someone looks me in the eye to acknowledge my existence. And we said, we're not going to buy this desk for this hotel. And then you're like, well, what do we do? And there was no technology at the time that would work on a tablet so that the host can welcome you at the door. But this hotel concept, the Emblem Hotel in Prague was exactly that where we'd have hosts walking around beautifully dressed with a tablet. And the first thing is come sit down in our lobby. We'll get you a glass of water. I hope the trip was okay. And then there are still some admin at the time. And now even today we can get rid of that entirely. So I think Hotelier just needs to get a little bit out of that comfort zone of the reception desk because there is no need for it. And it is possible to solve it, but it's quite a departure. Yeah. But you're right. I mean, it can be done. Like I can think of various systems that you can pull together to make that happen, right? And Muse included. But it takes a will and power and some focus and energy to deliver that. And it's not going to happen at any of the hotels that are part of a brand or a chain unless it is part of their initiative. Otherwise it'd have to be an independent. So you by definition need an investor who is willing to take a risk of identifying an asset that could work as an independent hotel. And then layer in another risk of assembling a set of tools and technology and defining your guest experience in such a way that this thing could happen. I'm looking at the clock. I've really actually thoroughly enjoyed it. So I'm excited to catch up when we meet in Amsterdam in April. But thank you for joining me today and thank you for all of these insights. It's been a really enriching conversation for me. Yeah. Thank you, Matt. It was really good to be here and apologies for the fire alarm that just went off. No worries.