Billion-Dollar Mindset: Navigating Today's Hospitality Investment Landscape

Hello, everybody. Thank you for joining us today. I'm thrilled to have Richard Fertig, who is the founder and chief investment officer of Stomp Capital. You all have loved the episodes with him so far. I'll link in the show notes where you can hear some of our past conversations. Those have done really well. You've enjoyed learning from him. We're recording this at the end of 2023. And so to get a sense of what's going on in the world of investment in hospitality, I wanted to invite Richard back on. Richard, thanks so much for taking some time to talk with us. Oh, it's my pleasure. And thanks for having me back. I really appreciate it. Look, I think as we close out on 2023 here, it's evident that we're still in a little bit of pain and there's still more to go, but the Federal Reserve seems to have paused and that's sort of what the futures market and the forward markets are looking like is that nobody's anticipating any additional raises, interest rate raises, that is. And so, you know, from my perspective, we're not out of the woods, but we've kind of survived the worst part of it. We've anticipated this at the portfolio level. Some of you may know, but I have a capital markets background. And so we anticipated this happening. We position the portfolio very conservatively. We only have 20 million dollars worth of debt. We have 50 million dollars worth of equity and that's forward-looking and we positioned for this. And now as we take a look at the opportunities going forward, we're in a very strategic position because we have a lot of strength and a lot of opportunities and a lot of the people that are perhaps reacting to this are not as well positioned. And so we're anticipating that we're going to see some really wonderful opportunities, but we make our own opportunities is the other reality. I it's interesting to hear that and I do encourage people to go back and listen to some more of your story because you've spent a long time working in capital markets. You are very dialed into what's going on on a macro level. And so it's interesting to hear that, you know, we have to be aware of what what is what is going on, but I'm very interested in this notion of how do you create your own opportunity? And how do you decide, you know where you can move forward? I'm curious as we head into a new year into 2024. What's on your mind these days in terms of opportunities that you see on being able to move forward in this environment with everything we have going on. Yeah. So the first thing I would share is I was fortunate enough when I graduated Wharton. I was recruited by the Blackstone Group and I was the first person recruited into what's known as Blackstone Alternative Asset Management at the time. It was 1.1 billion dollars of the founders capital Steve Schwartzman and Pete Peterson and I'll never forget Steve sat us down on day one, you know here. I'm a newly minted MBA day one of my employment and he's like here's 1.1 billion dollars of hours. And here's the goal. We want equity like returns bond like volatility and under no circumstances don't lose money now for any of the listeners that are listening like that's the Holy Grail if you can do that, like you'll be a billionaire. So it's a tall order. But what that forces you to do is to think very differently than everyone else. And so consequently what I've come to realize through a lot of discussions and conversations and acknowledging some of the gifts that I have is I just I kind of live in the future, right? So I don't see things for the way that they are today. I kind of see things for what they could be or what they should be or what they might be. Whereas I find that a lot of people very smart people very successful people either live in the present like this is the rules and this is the reality and this is what it is. And then there's some people who I believe are less fortunate that live in the past right like oh the best was behind us and so on. I always say and you've seen in my tweets and so on like the best is yet to come. I literally believe that right because like everything that I look at is underutilized has a lot more potential. We can unlock this we can discover that we can recreate we can build so that's sort of the lens that I view and that's the only way that you can do that tall order which is equity like returns bond like volatility and never lose money. And so if I give you a couple of examples, maybe it'll help the largest position that we have and the biggest opportunity that we have is we're the second largest landowners on Hatteras Island. We own about 50 plus acres primarily of waterfront land on Hatteras Island Hatteras Island was only accessible via a bridge. It was built in 1963. It was guaranteed by the US Army Corps of Engineers for 30 years for safe passage until 1993 when I got out there in 2017. I had no interest in real estate land Hatteras Island. I just wanted to go learn how to kite but what I quickly discovered was that the land had just dropped in value because the bridge became one of the least safe bridges in America moms wouldn't send their kids over the bridge for school. And so there's lots of reasons that people have to sell real estate. Death divorce taxes kids moved out of the area, whatever, but there's no reason that somebody has to buy land or homes on an island that you can't get to safely. And so consequently econ 101 more sellers than buyers prices just kept going down. And so for like 20 years, you can watch this free falling valuation. I came in with a differentiated lens and looked at it and said wow, this is spectacular. We're the second largest landowner behind the US government 95% of the island is preserved in perpetuity as our nation's largest seashore. So finite resource scarcity. They're not making any more of it. And more importantly, I saw a second bridge being built because in the state of North Carolina tourism and tax revenue is the primary source of tax dollars. So they built a brand new bridge over those 20 years cost about a billion and a half of capital commitments. It's built for a hundred years. They tested seismically every quarter and infrared and all sorts of things to make sure that their annuity doesn't get shut off. And all I had to do was say gee, they can't give this dirt away and on the other side of the bridge. It's trading at five six seven times more and relative to the Hamptons or any other seashore. It's dirt cheap. And so when you get that like underhanded softball pitch, that's when you get aggressive and you swing away and we bought literally everything that we could and consequently, we're now the second largest and by the way, I'm not saying that I cause this but I'm just saying if you look at the price data, we put in the low like it stopped falling after we came and started buying. We bought the low and if you follow the data, it's just started to trend up and the bridge is now open and everything is, you know, moving in the right direction. But here you have millions of people who are passing this same land and the same opportunity and didn't have the knowledge of the conviction or the forward-looking foresight or the resources or whatever the right limitation was. They didn't have what they needed. I looked at it and in a matter of minutes was like, holy, this is incredible. Like we buy it all right and I think that's what makes your work compelling to me Richard and you know that that's why I've invested in your fund is this combination of the macro view the opportunities that you see but also you mentioned living in the future. I think to illustrate that this is not just you talking. I encourage people to go look up Edge Camp Sporting Club and some of the story behind that because you mentioned going there because you're interested in outdoor adventure sports and kiting, but you built this property, right? And then it generates incredible revenue, you know, it's this incredible business credible hospitality story, but I think what is also interesting is I feel like now at the end of 2023 a lot more people are talking about outdoor adventure focused hospitality, but you were doing this years ago and I think so you connect all these threads and if you're a very interesting person to talk to about what the future of hospitality and hospitality investment can look like because I think it requires connecting all of this, right? It's not just having an idea or even just being a good investor. I think you need to combine all the threads here and also by the way be able to read the tea leaves and adjust and so on. So many people followed me early on. I started a YouTube channel. I don't call it six seven years ago and it took me forever to get to a hundred and then it took me forever to get to a thousand and then I haven't made a video in 18 months, but we're at about 76,000 today. We're about to relaunch it. So everybody should go check out. It's called today the short-term rental University Channel. We're rebranding it launching a video in the not-so-distant future like in December. It'll be next-gen hospitality by Richard Fertig. So the point is we got early to Airbnb and the investments and the opportunity and I was teaching people how to do it properly and to diversify and don't put all your eggs in one basket and regulatory risk is the single largest risk like people get that today back then everybody didn't really understand it. They were just buying whatever but here's what's kind of interesting and to connect the dots that you just mentioned. So my original investment thesis was around short-term rentals being a larger play in hospitality and in lodging stays going forward. Obviously been very correct on that. But if you take a look at what we're investing in in Stomp Capital, we have very little in the way of traditional single-family homes that are short-term rental zone and that's because I believe that that zoning and that regulatory risk exists today. So in the places where we do have single-family homes like the Outer Banks of North Carolina, we own it all we wrote the HOA. We created the laws that say that it's short-term rental friendly. And by the way, we will never vote against ourselves. So like that's grandfathered in and perpetuity the vast majority of what it is that we're buying and you have to take a look at our properties in South Hampton. Take a look at our property that we have under contract now in Crested Butte, Colorado. We have properties in West Palm Beach, Florida and in Palm Springs, California. They all have upscale zoning that's grandfathered in and has been operating forever. So boutique hotel bed and breakfast zoning with light labor. So we're using a lot of the knowledge and belief that we have in sort of the do-it-yourself model, but we're using it with grandfathered zoning so that our business can operate in perpetuity and we reduce or remove that regulatory risk. Now, what we're actually doing is combining the both of the luxury hospitality and the do-it-yourself Airbnb. So the legacy model, traditional hospitality, my personal belief that I'm a world traveler. We travel frequently. I think there's a time and a place for it, but it's not every time or every place. And then Airbnb, I think is really wonderful. It offers tremendous opportunities, but it's incredibly inconsistent. And if all things go really well and you're like really happy with your location and your host in the house and the cleaning team and everything and it's still like completely empty and doesn't have any resources and you can't add stuff on and so where we believe the future is is in the best of both worlds where we have a la carte amenities and we have services and programming and if you want daily housekeeping, you dial it in and it's on your time as opposed to traditional hospitality where they knock on your door and they're like, hey housekeeping. You're like, can you come back in 10 minutes and turn down service and you're like, hey, I'm not gone. I'm going to dinner. So the point is it's much more about the guest experience. It's kind of using traditional regulated allowable zoning to do a little bit more of the on your own with a la carte type amenities. And so that's changed since we launched the YouTube channel and many people I believe would get married to a certain thing like oh, what we do is Airbnb and then just stick with that in five short years. We've continued to navigate and leapfrog and jump ahead and see the future and continue to design towards that. I am very excited to see the relaunch of the YouTube channel. So I'll link to that encourage people to check that out when it relaunches. I wonder Richard if we could talk a little bit about the Crested Butte project because it seems like a lot of investors are sort of sitting on their hands right now seeing what way the winds are blowing. I think you know from getting to know you and and talking before we were recording. I think a big piece of how you operate is building relationships over time, right? And you sometimes those create an opportunity. Sometimes they don't but you're laying a groundwork that could produce opportunities. Tell us a little bit about this project how it came to be just just to illustrate this. Yeah, look I think at the end of the day being a good steward and being a good person and creating relationships and having a positive outlook and being an optimist and you kind of create your own luck right? So a lot of people would look at me and say, oh, he's quite lucky and I don't want to minimize that at all luck is tremendously important being in the right place at the right time. But if you're standing still you're not in the right place and it's never the right time. So you have to be moving and active and being a good person actually really rewards these relationships and people I find believe in us and want to help us and show us opportunities and beyond just money, right? It's not transactional its relationships and the same thing with our guests. We're not trying to have a transaction where they come in and we take their money and they leave and churn and then the next one it's all about building these relationships as it relates to the Crested Butte deal in 1991. So we're going back, you know decades here when I graduated college. I moved to Crested Butte, Colorado. I always wanted to be sort of like that ski bum at least for a season. So I skied a hundred years. It's a great mountain. It's a skiers Mount. It's extreme. They've held extreme skiing competitions there. So like if any of you are extreme skiers, this is the place to go that and where I currently call home, which is Jackson Hole, Wyoming. Although I'm not there now that I'm in New York State if you see in the background here. Anyway, I moved there in 1991. I waited tables at night. I skied a hundred plus days. I fell in love with Crested Butte. We always wanted to return and then in 2015, my ex-wife and I decided to buy a house there and use it occasionally and short-term rent it. So at the time that we got there, there was no limit or regulations on the short-term rentals. So we bought this house and we were having success short-term renting it. And again, it's the same another example. I diverge but I think it's illustrative of the way that I view the world. We found a house that hadn't sold for years. And the price seemed very high and when you look on Zillow, the price per square foot was very high and it was evident why it didn't sell. That piqued my interest. So I wanted to go look at it and understand why is this price so much higher than everything else? And here's what I discovered. It had a fully built-out basement, but it didn't have legal egress. So that wasn't considered legal square footage. So if you see it in person, you recognize the square footage. But when Zillow and MLS marks it, they can't count it. So the price is twice as high as in reality. So I immediately start thinking and contact an architect and every engineers and so on. And it turns out all we have to do is punch a hole through one of the bedrooms, put a fire escape if you will up and then something to cover the snow so that it couldn't get covered and the whole thing cost about $40,000. But in doing that I made about six or $700,000 of added value to that same house. And so we bought it and then ultimately made that profit by just seeing it slightly differently and then, you know, activating it by spending $40,000. Anyway, I got to Crested Butte in 2015. We bought this house. We were short term renting it and I continue to love the location and Crested Butte and wanted to return. I thought about living there when I moved out of New York City, ultimately picked Jackson Hole so I could have a totally fresh start, but I've always been going. My fiance and I have been there now four or five times in the last three or four years and we're constantly looking for opportunities and couldn't find anything. It's so small. But then we had a really wonderful opportunity, a relationship that we had met years earlier, showed us a deal that had not gone to market. We were the first and only people to see it and because we knew the market and what we wanted and what we were looking for and regulatory risk and our framework is really clearly defined, we pounced on it. And so we're now under contract and we'll be closing hopefully in 2023 or early 2024, but we'll have one-third of all the legal keys in the town of Crested Butte, which is highly regulated. They'll never be more and so on and so forth. There is one little lot that may be developed at some point in the future that's zoned for it. We looked at it in 2020 and we actually passed on it because I didn't like the user experience. What they approved to build, I didn't think I would want to stay in and so consequently we passed. But we've been hanging around the hoop since 1991 and 2015 and coming back and building the relationships and waiting and then when we saw the opportunity, we pounced. And I'm excited to see what you create there. It's all about playing the long game, right? And I think that's how you went in this business. I am curious as you're talking to investors out there about this project or in general, what you're hearing. I'm very curious on the sentiment questions or kind of like what you're hearing out there from people. You know, what I would share with you is I think it's very different than what most general partners or people raising capital are hearing. There's no doubt that it's harder and it takes longer and the tickets are smaller and I don't want to suggest otherwise, but I do think that the average person is concerned about commercial real estate and multifamily and maybe industrial and self-storage and like the traditional sort of investments and maybe even hospitality to a degree. So I think the average person right now is concerned or nervous or sitting on their hands or not investing and so on. That said, what we're doing seems to be really striking a chord with prospective investors and existing investors and in most of our deals about a third of the investors are reinvesting and it's because I think it does a few things. One, I think it's logical. It makes sense like this missing hospitality, this next gen of hospitality resonates. This is the way that they would like to travel. So that's one. Two, we're going upmarket or affluent people with disposable income and we're striking a chord with their passions, which is their sports, their activities, what makes them like feel alive, what energizes them. So whether they're a skier, a surfer, a kiteboarder, golfer, we're focusing on areas that are, you know, limited in resources. There's really wonderful like one-of-one locations. We're combining that with the zoning and so intellectually it strikes both from their heart, what they want to invest in and what they want to be doing and also intellectually from their brain. It's like, no, this makes a lot of sense. You're buying it cheap and you're rolling up your sleeves and you're doing the work and you know, you're building from the ground up or you're gut renovating and you're activating it. So that's the second thing. And then the third thing I would share is when there's this much negativity in the world to the extent that you find somebody who has a different lens and is optimistic and things are going well, and by the way, they're credible, like not, there's plenty of people who will lie and tell you, you know, yeah, this is great, but do your due diligence, do your work, right? Like I'm not saying just because somebody's optimistic that you should invest with them, but it's a compelling story. It hits the heart and the brain and we have a long, you know, multi-decade career of investing professionally on behalf of some of the most intelligent, successful people on the planet, whether they be at Blackstone Group or they're our clients for pensions and endowments and foundations and universities. And so we've been looking for these differentiated views for decades and done so successfully. And by the way, as much as I love hospitality and travel in these passion sports and so like I'm building it for myself. Let's just be really clear. Like I don't have a long lineage of hospitality. It's not like my family's been in this and so this is what I was born to do. This is my personal passion. I've got 20 million dollars in the fund alongside limited partners. This is where I'm expressing my views where I think I'll get outsized returns. But for me, this is a combination of everything that I was trained to do professionally like look for moats. Look for reasons why it's protected. Look for reasons why it's scarce. Look for regulatory risk. Like take the other side. Everyone else is out there buying Airbnbs. Look for boutique hotels. And by the way, this connects to what you said earlier, which is go watch my YouTube channel. I love the fact that it's time-stamped. It's really easy for me to say like, oh, this is what I've been thinking and this is why our portfolio is positioned so conservatively with only 27% debt and 73% equity. But just go to YouTube. If there's a time stamp on it, look at my predictions. Look at what I was sharing in real time, you know, years ago, see how many of them have proven true and correct. And we just anticipate that going forward what it is that we're doing in this experiential hospitality with light labor and twice the profit margins will be worth far more in the future than it is today and more and more people to your point. Josiah are catching on wanting to invest finding this is interesting are looking at sports looking at experiences where two years ago when we were talking about it, they're like, I don't know. Maybe I don't know. I don't get it. Yeah, fantastic. Richard. Well, I'll link to all those places the YouTube channel your website social media profiles on the show notes encourage people to check that out.