Latest posts by Joshua Lau (see all)
- Baker Program Miami Trek Visit: 13th Floor Investments - May 6, 2020
- Russ Shattan (SHA ’04): The Hotel Industry Has Always Functioned with Uncertainty - April 23, 2020
- Time for a Resurgence of Rental Apartments in Toronto - January 16, 2020
The good and the bad in hotels usually comes down to their lease structures. Unlike sectors such as industrial and office that provide investors with some of the longest leases and lowest yields, hotels present an opportunity for savvy and aggressive investors to capitalize on an industry built on travel destinations. On the one hand, leases that run on a nightly basis can be extremely volatile and naturally create a lot of operational uncertainty. On the other hand, this dynamic nature of hotels also embodies an extremely resilient attitude toward adapting to ever-changing trends and situations, such as the one we are experiencing in this COVID-19 world.
This past Thursday, Russ Shattan (SHA ’04), Executive Vice President of Acquisitions & Development at MCR, joined the Baker Program for its weekly Distinguished Speaker Series, albeit virtually in a crowded Zoom session. MCR has invested in and developed 119 hotel properties operated under 14 brands, and today the company owns and manages more than 12,000 guestrooms in 29 states and 65 cities.
Dressed comfortably in his home attire, Shattan addressed the uncomfortable situation that much of the world is experiencing, most especially the lodging sector, in which his company has worked tirelessly over the years for the prominent recognition of being the fifth largest hotel owner-operator in America. Unique to its business is also the fact that MCR manages all of its hotels, and this vertical integration has been a value driver for the company. A proud Hotelie, Shattan worked for a hotel REIT in Florida for a period of time after graduating from Cornell’s Hotel School in 2004. His longing to return home eventually prevailed, and the native New Yorker found himself working for Starwood Hotel & Resorts before meeting Tyler Morse, the founder of MCR. When Shattan joined MCR in 2011, he was only the second employee, and together with Morse, grew the company portfolio from six properties to over 100 today.
Of the more than 100 properties, limited-service hotels have stood out the most in MCR’s relatively short but very successful history. Shattan recalled the early trailblazing days of MCR, when the company targeted many of the brands like Hampton Inn and Courtyard, years before they became attractive to its competitors. Boutique hotels like the W are famous for their amenities like craft cocktail bars, DJs spinning records in the lobby, and where celebrity-spotting is sometimes a less advertised feature. These hotels work within a very niche market. Limited-service hotels, however, target a more modest demographic that cherish the free all-you-can-eat breakfast. There are two basic variations of the limited-service model. The first is the transient hotel that closely follows the business travel cycle over the week. Tuesdays are always the peak with most hotels fully booked. Demand usually tapers off into the weekend but builds back up again on Mondays. In that sense, the volatility becomes slightly more manageable, and daily rates understandably surge on Tuesdays and drop on weekends to attract non-business travelers.
The second type of limited-service hotel is the extended-stay hotel, which is represented by brands like Residence Inn or Homewood Suites. These rooms come standard with kitchens and living rooms, and are typically intended to emulate a home. As a result, guests stay a little longer than they do in a transient hotel, which allows these hotels to flatten the fluctuating occupancy during the week. Comparatively, extended-stay hotels charge lower rates but generate higher occupancies, and overall have higher RevPARs and operating margins than do transient hotels. Thus, they remain attractive for long-term investors like MCR. This is an important distinction because in a crisis where leisure/business travel has essentially come to a halt, extended-stay hotels have been holding up comparatively well. As explained by Shattan, because hotels have the flexibility of scaling many of their expenses to their occupancy, limited-service hotels are still able to break even at as low as 20% occupancy versus 60% at full-service hotels. Additionally, while MCR has had to fully close a significant amount of its hotels since March, none of these closed hotels have been the extended-stay hotels because suites with kitchens provide guests with the amenities they can use while staying indoors. Needless to say, MCR’s early conviction in extended-stay hotels has lent the company a sophisticated hedge in unprecedented times like these.
Since closing multiple properties, MCR, like many other real estate owners, has had to negotiate modifications with its lenders. Real Estate is a relationship game, and Shattan highlighted the importance of forming a strong direct connection with lenders. For example, MCR would work with a banker from Bank of America, and the same individual would oversee the origination, funding, and servicing, and payoff of the loan. With each cycle of successful loans, the relationship between MCR and its lenders has grown stronger. These strong relationships with bankers have allowed MCR to successfully modify its loans, where necessary. Conversely, this process would not have been as easy with CMBS lenders because of the lack of any relationship the borrower has with the servicer. This is the reason why MCR traditionally shies away from CMBS loans despite their popularity in the lodging sector. MCR’s relationship-building extends beyond just lenders, and the various “Top Partner” awards it has received from franchisors like Hilton and Marriot speak to its priorities of cherishing relationships with investors, lenders, partners, employers, and customers.
In conclusion, Shattan re-envisioned what the world of hotels would look like on the other side of this pandemic. He predicted that air travel would not initially be as popular as car travel because cramming passengers into planes goes against the new realm of physical distancing. As a result, Shattan is optimistic with respect to road-side hotels, which in fact have spiked in demand recently as Americans leave dense cities and travel by highway. Shattan ended by noting that, while no one can say how the future will turn out, the hotel industry is no stranger to uncertainty. The same resilience, adaptability, and creativity that has carried hoteliers through previous ups and downs will provide the unwavering strength and persistence needed to emerge from the current conditions.