Investing in Hotels on Major College Campuses

EMS:

Hi Gary, thank you so much for being with me today.

Gary Brandeis:

Thanks, Elana. And nice to be with you and thanks for having me.

EMS:

Absolutely, Gary. So, to kick off the conversation, tell us a little about yourself and how you got to where you are today.

GB:

Sure, thank you. So, I started out my career after college as a CPA. I did that for about three years and had a lot of real estate clients and that's sort of what piqued my interest in real estate. And so, for the last 30 years or so, I've been a real estate investor and developer, and over the last 15 years or so we've been really focused on hospitality assets. So, we're a real estate investor and we're also an owner operator of hospitality assets, hotels. And we've selected this very specific part of the industry where we look for assets close to major colleges and universities.

EMS:

Gary, that segues nicely into the follow-up question I have for you. Given your focus on investing in hotels and hospitality assets near major college and university campuses, I would love to hear your high-level outlook for this space.

GB:

So, typically hotels are considered a riskier type of commercial real estate class, riskier than, let's say apartments or industrial warehouse or retail. So, one of the things that we looked for as we invested in hospitality assets was how do we mitigate risk? How do we take some of the risk out of the investment? And when you look at what we call these major college towns per se, smaller communities with big universities, and you look at the long-term data, these communities tend to be somewhat recession proof. And so, we felt that if we own high-quality hospitality assets that were close to major college universities, we can eliminate or reduce and mitigate a lot of the risks associated with traditional hotel investing. So that's what we've done. And as a smaller owner operator, we felt that we could find best in class assets in these smaller college towns per se. But if you think about it, there's about a dozen communities in the U.S. that are smaller communities with big public universities.

And so, we're a very focused investment company and we've been fortunate to find really great opportunities to invest in those types of markets.

EMS:

Gary, I'd love for you to touch on what are some of the greatest specific opportunities you see in your space and why?

GB:

So, if you look at these, again, these smaller communities with large public universities, the inventory of hospitality assets, hotels and restaurants and other types of hospitality are let's say a little bit behind the times. So, if you are a student at the University of Georgia in Athens, the hotels there are not as good or a modern or new as they may be in other traditional markets. And so, I would say that cities like Athens, State College, Pennsylvania; Ann Arbor, Michigan; these smaller communities with big public universities, the inventory or the quality of hospitality assets is not great. So, therefore there's an opportunity if you can find good either land to develop on or existing assets that we can redevelop to build high quality assets in those markets is a really nice opportunity. They're hard to find, but when you can find them, there's a pretty short path from acquisition to development to what we think would be success.

EMS:

Gary, on the other hand, what are some of the greatest challenges you face in your investing space and why?

GB:

So, the greatest challenges, well, the challenges change depending on the economic climate. Today, some of the challenges are cost of capital, interest rates are a lot higher than they were a few years ago. Two, lenders, banks and other lending institutions are a little bit more cautious than they used to be. They're a little bit tighter with their money. So, loan to value where a few years ago we could get 70%, now we're getting 55%. So, that makes it a little bit harder for us to achieve return opportunities or return goals that we have. So, there's capital challenges, but there's also deal challenge, finding the good opportunity. In these smaller towns with big colleges, there's only so much land and so many properties that are within close proximity to the university. So, I think today there's a dual challenge. One, finding the actual opportunity and then two, making it work economically with the high cost of capital, limited capital, and also construction costs are high, labor is still hard to find. And so, there's multiple challenges right now for us.

EMS:

Gary, with ESG top of mind, I wanted to see how your firm is addressing this timely and important topic.

GB:

So, I thought about that before I came on the podcast, and I would tell you just to be transparent, it's not something that we do purposefully. But the good news is we actually do it by accident in a way. So as a real estate company, when we make investments in new construction, we're making sure that we have high efficiency equipment, mechanical equipment, plumbing equipment, electrical. We're making sure that the envelope of the building is environmentally tight, meaning it's environmentally sound, it's well insulated. Our roofs are green or white reflective roofs. So, as we build new properties, you can't build a B Class building. So, when you build a new building, you're automatically going to have the latest and greatest mechanical equipment, the latest and greatest construction material. So, kind of by chance if we're building new, we're getting a very efficient building. When we're building and we're renovating and we're replacing windows and roofs and mechanical equipment, we're buying that new equipment.

And so, I think from an environmental perspective, just by being in the real estate business and building and renovating, we're automatically getting environmentally sound products and properties that are energy efficient. And that's really important to us. Besides real estate taxes, utilities can be our second or third-highest expense at the property level. So, it's really important. Social, again, we're in the hospitality business. Our goal is to provide great experiences for our guests. So, we have to do the right things. We have to present a really strong business plan, but we have to make sure that we're being sensitive to the market that we're in and that we're doing the right things in the community. Being a good community partner in sponsoring events, supporting local charities and doing good things for the community, that's really, really important to our business plan. And then governance, just as a result of borrowing money from big banks, having investor capital, we have to be very, very, very stringent and very focused on making sure we have just good governance around safeguarding our assets and safeguarding our investor capital.

So, I think although we don't necessarily have an ESG plan that I could send you as a document, we are focused on those three things sort of as a natural part of our business plan.

EMS:

Gary, we've covered a lot of ground today and wanted to see if there are any final thoughts you'd like to share with us.

GB:

I think what's really interesting about hospitality, and especially in these markets that are dominated by large public universities, is that when we went through the pandemic that was a very, very significant economic tornado for us. When I think back on my 30-year career, when I think about the recessions that I had to work through in the early '90s, late '90s, et cetera, they seem like a walk in the park compared to what we had to go through during the pandemic. The good news for our business right now is that our hotels are performing well ahead of pre-pandemic levels. And so, we've been able to recover really well coming out of the pandemic. I think you're seeing that across the board in a lot of hospitality investments and markets. So, I think that's good news for our business, and I think that's going to continue.

EMS:

Gary, I wanted to thank you so much for sharing your perspective with our listeners.

GB:

You're welcome. Thank you for having me. I appreciate the opportunity. I'm a big fan of your firm, and I think you guys do great work. So, thank you.

EMS:

And thank you for listening to the EisnerAmper. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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