ATLANTA—Ravi Patel was always in the hotel business, living and working in hotels owned and operated by his parents for as long as he could remember. From the front desk to maintenance to every position in between, he learned from his father the importance of hard work, integrity and hospitality.
Then he went to college to study the business of hotels and returned to teach his father a thing or two.
“My dad was like, ‘We build these things to hold them forever. You’ve got to make sure you build it so you can keep it for 100 years.’
“And then I got involved and I said, ‘You know what, we’re building a lot of these institutional assets and we should flip them within three years,’” he said.
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It wasn’t an easy conversation to have, said the 29-year-old Patel, who now serves as president of his family-owned Hawkeye Hotels.
“It was me pushing my dad out of his comfort zone pretty aggressively. And there would be lots of very, very vocal and heated conversations,” he said.
“But now that he has bought into the philosophy and he knows it works because we’ve done it two or three times, he’s all about it. … And overall, our net proceeds are a heck of a lot higher than continuing to retain all these assets,” Patel said.
The generational divide
Patel’s experience is familiar to many second-generation hoteliers. Led down a trail blazed by their parents, they’ve faced some strife and internal conflict in their attempts to chart a course with more strategic priorities in mind.
“Our fathers and mothers were in the industry and really the folks (who wanted) to be in hotels,” said 30-year-old Samir Lakhany, VP of Superhost Enterprise. “We’re a generation that has really taken it from a strategic standpoint, and now we’re looking at it from more of an institutional level where we’re having that leadership role not only of managing one property but managing a corporation and an organization.”
“They did the hard work; they did the grinding. … They gave us that foundation that we needed,” said 24-year-old Arzu P. Molubhoy, CFO of Atlantic Hotels Group Limited. “Now we’re taking the technology that we have, the education we obtained and all that great stuff and pushing the box, pushing it to the next level.”
Day-to-day operations still matter, Patel said. His father instilled that lesson into his DNA early on.
“My dad, every time we underwrite a deal, says, ‘You’re not even building the damn thing unless we can underwrite it to keep it for 100 years,’” he said.
But the exit is just as important, Patel said.
“I look at every disposal through an institutional lens. What’s my cap rate going to be; how do I maximize my proceeds out of this?” he said. “We look at it from both lenses, and I think that works out really well. Dad’s a little more old school. We make sure we can cash flow forever and ever and ever. And I look at it like, if we build this property and stabilize it within three years and get a 7.5 cap rate on it, we can get this kind of delta and margin on it.”
Old school also can mean risk-averse, explained 31-year-old Robert Jensen, principal of the investment division at Kensington Investment Group.
“Growth takes risk. And I think what you’ve all seen with your folks is as they got older, it was hard to trade out these things. There’s risk, there’s capital gains taxes. And it takes work,” he said. “And I think when I started to become more involved in our company, there was a stagnant period where they needed new energy that has the appetite for risk.”
Education and technology shaped much of that prodding and perspective, all the hoteliers agreed. With better tools comes more clarity and different ways of doing things.
Next can be first
Herb Glose, age 28, pointed out that while not all of today’s emerging industry leaders come from that first- to second-generation family business dynamic, they’re still facing the same issues.
“What’s being discussed has more to do with family businesses and first-generation to second-generation as opposed to our industry as a whole,” said the assistant VP, hotel performance support, B.F. Saul Company. “For B.F. Saul Company, which has been in the hotel business for almost 40 years now, those analytic processes have been going on for quite some time. … I’m not sure that it’s a millennial thing versus a boomer as opposed to family businesses evolving and going from first-generation to second-generation.
“The Saul organization is a family organization,” he added. “It’s just they started in the 1890s as opposed to the ‘50s and ‘60s like we have for most of this room.”
Doug Denman, the 36-year-old president of Worth Hotels, shared a unique perspective as well.
“We’re first-generation hoteliers. I’m learning here on the fly. I have had a lot of opportunities to learn, do the maintenance, clean the rooms, and I’ve had an opportunity to do that a little later in life. … Where these guys got to do that as kids, I’m getting to do that now,” he said, indicating the other hoteliers in the room.
Adapting to change
Regardless of their upbringing, next-generation hoteliers agreed that most share a more analytic approach to running the business—and that approach can create tension with more tried-and-true operating practices.
Jensen’s parents, for instance, used to rotate capital-expenditure spending to tackle one key project each year.
“This year, they do the carpet. Next year, we’ll do the kitchen. Next year, we’ll do the light fixtures. Whatever,” he said. “The problem is you can’t do that with the way the models are set up today because you replace the carpet and the (property improvement plan) comes out, there’s a good chance you might change the carpet anyway.”
Now those improvements are viewed within the context of exit strategies.
“If you look at it from an investment standpoint, how to maximize yield, it’s hard to put a $2-(million) or $3-million capital injection into the investment every five to 10 years. The model kind of forces you to do it and make the exit and use your money somewhere else. It’s not the way my folks did it originally,” Jensen said.
Exacerbating the issue is the pace of change itself, participants agreed.
When Sam Suleman, principal and executive VP of Equinox Hospitality, was a child, hotels represented the cutting edge.
“When people would go to a hotel room, specifically a full-service hotel, they would see something they’d never see in their house. They’d see this TV or some type of channel or design that would be five, 10, 20 years ahead of what they had in their house,” the 37-year-old said.
Now the hotel industry is in a perpetual state of catch-up. Innovation, often through brand mandates, is slow to roll out, Suleman said.
It’s also costly, Molubhoy added. She reserves 2% to 3% of funds to reinvest in technological upgrades at Atlantic Hotels Group.
Patel prefers to amortize a piece of debt over a shorter time frame to fund such expenditures.
However that capital is allocated, participants said hoteliers young and old can agree they’re crucial to continue to serve the changing needs of guests.
“(It’s) not only the comfort of your bed and what makes you feel like you had a good night’s rest, but it’s also technology has become such a large part of how we live our lives that it needs to be incorporated,” Lakhany said.
The next generation of leaders is tasked with making sure they’re focused on incorporating those things that have the biggest impact, Lakhany said.
“It’s very important as leaders within the industry to focus on key technology points to help us move forward. … It’s picking those key essentials,” he said.
Because at the end of the day, some old-school lessons still apply. Whether talking brand refreshes, CapEx or transactions, costs are costs, and that’s something every generation can appreciate, Jensen said.
“There is a rule we have we maintain to this day. We always start looking at a deal with basic math on the back of a napkin. And typically, if it doesn’t pencil on the back of a napkin, there’s a good chance it won’t pencil,” he said. “So as much as there is technology and I can get into pro formas and get into the analysis process as much as you want, at least for us, we can quickly figure out if it’s going to work or not. I don’t think that’s going to change.”
This story is part of Hotel News Now’s 2015 Special Report “The Now Generation takes charge.” The special report was produced with the IHG Owners Association’s Emerging Leaders Council and is sponsored by Access Point Financial.