With 37 full-service and select-service hotels across 22 markets in 16 states, Chicago-based Arbor Lodging knows the hospitality industry. Vamsi Bonthala, co-founder of Arbor Lodging and CEO of Arbor Lodging Partners, the investment arm of Arbor Lodging, spoke with Hotel Business about the state of the hotel industry, as well as his company’s story-driven approach to business.
The hospitality industry, by nature, is cyclical. One of the biggest questions on everyone’s mind is an impending recession—when it will hit, how deep it will be, etc. What’s your take on this subject? While a couple of weeks ago I would have said it’s not clear, I think a recession in the near term is more likely with the spread of the COVID-19 virus. Even if the U.S. economy as a whole does not fall into a recession, the impact on demand in the hotel industry as a result of concerned leisure travelers, corporate travel restrictions, convention cancellations or delays, and cross-border travel restrictions/quarantines will, I believe, result in recession-like circumstances for hotels.
That being said, I am hopeful that the impact will be shorter term versus longer term, and that travel patterns will return to normal levels later this year.
What kind of an impact is this environment having on the way your company approaches deals? Arbor Lodging Partners is generally concerned about changes in the climate and its impact on the environment. It is no different when we look at deals as well. We are thoughtful about climate-driven changes in travel trends and how that can impact demand and value in the long term.
Are there any specific markets or segments where you’re seeing a lot of opportunity? How do you see this evolving moving forward? We are very “story-driven” in our investment approach and generally stay away from macro views regarding opportunity. We are focusing more on larger markets because of the diversity of demand and liquidity of assets, but outside of that, we are looking for unique opportunities in which we believe we can take advantage of a special set of circumstances or that we have a unique way of adding value.
Tell me a little bit more about story-driven investing. We look for asymmetric opportunities in which we believe there has been some dislocation in pricing that allows for limited downside with attractive upside. This could happen for a variety of reasons. It could be as simple as an off-market transaction, or a more complicated scenario in which the market sees a hairy situation and overprices risk, but we’re able to buy at an attractive price because we are willing to do some dirty work and get comfortable with how we can add value. At the end of the day, we don’t employ a one-size-fits-all strategy that looks at things big picture. We need a “story” in which we have conviction that we have bought right and that we can add value to an asset.
In what ways does story-driven investing offer up a tactical advantage for you? It is a tactical advantage when an investment opportunity has upside but is “not worth the brain damage” to other market participants. If the underlying fundamentals are sound, we often like to run toward complicated situations that others may be running away from for the very same reason.
Looking at the hospitality industry as a whole, are there any common trends you see with regard to deals and investment strategies? In talking about deals and the overall market with industry friends and colleagues, one common trend has been the challenge to underwrite deals in a slow-to-no-growth environment. With expenses continuing to rise, it is hard to make a deal pencil unless you can get comfortable that you can increase revenue (which is difficult to get behind in most cases these days).
Do you see any mistakes being made or causes of concern? The reduction in demand related to decisions being made around COVID-19 is the top concern right now.
What first attracted you to this industry? I absolutely love travel. I love taking vacations with both family and friends, exploring new places and cultures, experiencing great hotels, and meeting new people. I even like being at the airport. That’s what first attracted me to the industry.
As an investor and operator, I think hotels present unique investment opportunities because they are operating businesses wrapped in real estate. Real estate fundamentals need to be understood as they underscore the base value of a property, but mastering the components of operations is where the true value-add opportunity lies.
What do you find most appealing about your job? I could really do anything as long as I am surrounded by great people. Life is short and we spend a lot of hours working—it is not worth it if you are not working with great people. I am incredibly fortunate to be surrounded by an amazing and passionate team at Arbor Lodging.
Is there any advice you’d give to someone just starting out in the field for how they can achieve success in this industry? Take the time to really understand operations, be patient and don’t take on too much debt. HB