Transcript: Episode 187: Fixing the Curve
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[00:00:00] Susan Barry: This is Top Floor episode 187. You can find the show notes at topfloorpodcast.com/episode/187.
[00:00:14] Narrator: Welcome to Top Floor with Susan Barry. This weekly podcast ride up to the top floor features tangible tips and excellent stories from the experts and characters who elevate hospitality. And now your host and elevator operator, Susan Barry.
[00:00:32] Susan Barry: Welcome to the show. Michael Blank has spent his career in hospitality from hotel operations to investment banking, and now hotel ownership. Despite coming from a family of attorneys after hotel school, he worked at the famous Willard Hotel in Washington, DC. And his career has included third party advisory consulting, investment banking coverage for lodging REITs, and working on acquisitions for major hotel ownership groups like Host Hotels and RLJ Lodging Trust. As Principal of Woodmont Lodging, Michael owns and asset manages a portfolio that ranges from boutique hotels to large branded properties with a special focus or fondness on extended stay. He's passionate about challenging industry norms from AI's real impact to maximizing hotel revenue beyond just room sales. Today we are going to talk about all of that, the evolution of hotel investment strategies, the real impact of AI, and why the industry might need to rethink how it generates revenue. But before we jump in, we need to answer the call button.
Call button rings
The emergency call button is our hotline for hospitality professionals, basically anybody who has a burning question. If you would like to submit a question, you can call or text me at 850-404-9630. Today's question was submitted by Melissa, and here's what Melissa has to say. What is a pet peeve that hotel owners have that hotel employees might not realize? I think this is such a good one, as someone who comes from the days when brands still owned and managed some of their hotels. I really never got to know what it was like to have an owner until the very end of my on property career. So maybe this will help somebody like me out there. What do you think, Michael?
[00:02:42] Michael Blank: Yeah, it's interesting having worked in hotels and now owning them. You know, it's hard to bifurcate the two lenses. You know, working at hotels are hard. But understanding what people want or need can be pretty straightforward. I think of it, career is working as a waiter and then working in housekeeping and front desk. I think the little things is, as an owner, right? It's implicit in the name. I own the property. So I treat it as my home. And what is a pet peeve for me is when employees may not fully embrace that they too, or can be quasi owners of this property. And, you know, this is a hard industry, but the industry is a service industry and serving the guests. So, you know, I'll take a typical example when I do a walkthrough of hotels, if I see trash in the hallway. Right? I always pick it up. Even if I'm on a site visit of another hotel, I will pick up the trash and you know, guests notice those little things, right? They wanna walk into a hotel where they feel safe, secure, the bed is comfortable, the water's hot, the internet is cranking. And when they see little things like trash in the hallway, you know, I think that it takes away. Even incrementally tiny, it takes away from the experience.
[00:04:25] Susan Barry: Absolutely true. And that pickup club point that you just made about everybody's responsible for picking up trash. I was talking with a hospitality student about this recently, and I'm like, I don't know if that's still exists, but that was such a thing in my early days in hotels that I do it everywhere. If I site now, I will be on a site tour with a hotel employee as a client, and I'm picking up trash before they will. It's so ingrained in me. Do you think, do they still do that?
[00:04:58] Michael Blank: They do. I mean, if you ever walk with a GM, a GM is always picking up trash, right? They're picking up cigarette butts in the parking lot and so forth. I think some of it is just a relationship that between the hotel itself and the employees. And maybe it's not the same degree of respect, love, and partnership as maybe it used to be, but there are still the trash picker uppers in this world, and maybe I'm a little dating myself, but I do think.
[00:05:30] Susan Barry: No. Now we just don't work in the hotels. We're just random weirdos picking up garbage.
[00:05:35] Michael Blank: You will see it. I mean, every GM I walk with will always pick up trash.
[00:05:39] Susan Barry: Good. I'm glad to hear it. Well, what drew you to hospitality in the first place, besides your love of picking up garbage?
[00:05:47] Michael Blank: Well, you know, as you noted in the intro, I don't come from a background of hotel people. I've stayed in a few, but I really, what got me into this space was the love of food more so the love of eating food and you know, the occasional going out to dinner, which made me think, gosh, this would be great to be a chef and own a restaurant. I could not cook. So mind you, I was probably 11 years old when this fantasy started and then proceeding forward. My grandfather had gone to Cornell in a different major, but he mentioned this hotel school concept and I thought that would be really cool. Mind you, I'm still only 15 at this point, but you know that I could own a hotel with a restaurant, cooking it, get all the food I wanted, fortunately I fell into a career that that was just a passing fantasy, but something I love. But that was, that was really the path that started the whole trajectory of where I am today.
[00:06:49] Susan Barry: So you were just hungry basically.
[00:06:51] Michael Blank: I was just hungry.
[00:06:51] Susan Barry: Which is what you were saying.
[00:06:52] Michael Blank: I was a teenager that liked to eat.
[00:06:54] Susan Barry: So I know you've worked in operations, acquisitions, and now ownership. What do you think out of those areas of the industry, what has had maybe the biggest impact on your approach as an investor?
[00:07:09] Michael Blank: So I know that a lot of students skip this today, but the operations is still the most fundamental part of this business. And students coming out of hotel schools, business schools, regular schools, treat it like any kind of other real estate, and ultimately then just a math equation, you know?
[00:07:33] Susan Barry: Mm-hmm.
[00:07:34] Michael Blank: What does it do on the top line? What can I make it do on the bottom? And is it worth the price to pay or worth the price to build? This is an operating business that's complex and dynamic, and it is so much more than a math equation. And if you never spent the time tasting, touching, operating, you don't know all the levers, you can't appreciate all the levers and all the pitfalls that come along with running a hotel. So yeah, I still say that everybody that invests in hotels needs to work the front desk for a little bit, you know, work in a restaurant, whatever it is, but just to understand how the machine works to be able to really, then.
[00:08:15] Susan Barry: I love that answer.
[00:08:16] Michael Blank: Translate it.
[00:08:17] Susan Barry: I think you're right, but I also think that you're giving yourself a gift 'cause it's fun to work in the operation. Like it's much more fun or it can be more fun than doing math problems. Like, listen, I like math as much as the next gal, but it is really exciting to be on the frontline in a hotel, I think. I think it's fun. When I questioned you about your interest in investing in extended stay hotels, I was like, are you sure? You know, because as a podcaster I clearly am here to give investment advice. You said that you think extended stay hotels are one of the most insulated segments in the industry, which I thought was super interesting. Why do you think that is so, and ultimately, why do you think they are a still a smart investment?
[00:09:09] Michael Blank: Yeah. You know, I think about this a lot. Obviously it's kind of a pet project of mine, but in extended stay hotels are this unique hybrid between multifamily or apartments and hotels. And I'll tell you why I first liked it. So I have two boys who were much older now, but when they were younger, extended state hotels was a great traveling vehicle for a family, right? Because you had more space. You still had the breakfast and sometimes even the dinner, and it was just so much more attractive as a traveler for families. So, okay, that's one segment. But then you look at the broader segments of the world and there's, you know, millions of shortfall supply of housing. So extended state then represents a proxy to housing. Right. So then it's another demand that say you know, a typical Hampton Inn or Courtyard can't satisfy. And then there's just a whole segment of the population that most people don't know that travel for business on extended periods of time, right? Nurses, the consultants and so forth who don't want to eat out to dinner every night, right? And want a living room to stretch out and so forth. And you know, that space was regularly an undersupply and untapped. And look, I know there's a lot of commentary now that are we now over tilting the math equation?
[00:10:42] Susan Barry: Mm-hmm.
[00:10:43] Michael Blank: And there are a lot of people who are smarter than me that could probably debate why that is the case. I firmly believe that is not the case for two main reasons. One, I if you looked at the percentage of extended state travelers staying at non extended state hotels, that percentage is fairly large. So you know, I don't have the math in front of me, but let's say over 40%. So 40% of extended state demand is not being met or staying at different types of hotels. Then if you look at the total supply of hotels that are. Extended stay. It's a small percentage of the overall inventory.
[00:11:22] Susan Barry: Mm-hmm.
[00:11:23] Michael Blank: So we have a long way to go before I think we kind of seesaw the other direction. One other thing to think about with Extended Stay and why I like it is, I’m sure many of your panelists have talked about labor and how to be more efficient and how to drive more to the bottom line. And extended stays by its design operates more efficiently than a traditional hotel. So you have guests staying longer that require fewer cleanings, right?
[00:11:55] Susan Barry: Mm-hmm.
[00:11:56] Michael Blank: You'll have guests that don't want the breakfast. Extended stay hotels, most guests rather just have breakfast in their room or outside. They don't want the breakfast that's served every day. So you can operate with fewer employees, few less overhead and higher operating margins. And so to combat, in some ways, the inflationary environment we're in extended stay becomes the default choice to figure out how I can maximize my profit. In whatever environment I'm in.
[00:12:27] Susan Barry: Okay. So that was the first of your counterintuitive takes. I'm gonna ask you about the next one. What do you think are the most unrealistic expectations that people have for artificial intelligence in hotels?
[00:12:44] Michael Blank: Well, yeah, I think I'm contrarian on this. I love technology and I love the potential it can create and I the revolutionary change it's creating and will continue to create. There's a lot of talk about what it will do to the hotel industry that I think is premature or maybe just won't happen at all. And I think there's a couple reasons for it. The first and foremost is we are a people industry, right? We operate in a service model. People expect that service model now, maybe less so than before, and maybe we're training them to, you know, want less. But there's a human element in hospitality that is always gonna be there. And we talk about AI, it's replacing that human element when it really can't, at least it's not in the model that is today.
And so I think there are elements in AI that will make certain aspects of this business more efficient. How we communicate with guests who have random requests, and we use chatbots, which exists today, how we set rates or revenue manage, right? But AI is not gonna clean a room. AI is not gonna deal with an angry customer. And so there are huge intrinsic limitations. And then you add the bucket of cost, right? And the cost to implement. I hear, you know, panelists talking about the implementation of it, but then I think about the owners who would have to implement it, who run a 65 room unbranded hotel that charges $75 a night. They are not gonna allocate $10, $15, $20,000 to some AI platform. And so there's this highly fragmented industry that is capital constrained, and so the limitations of them investing the capital just will prolong that implementation or adaptation into the space.
[00:15:02] Susan Barry: I think that's the part that people neglect to consider in any conversation around AI and hospitality. Also, just sort of the basics of like the cost of compute. It costs money to run a large language model, right? All the time. Like it's not free. And I think people think it's free because you can buy it for 20 bucks a month right now or whatever.
[00:15:26] Michael Blank: And AI is not, it doesn't problem solve it. You give it a base of information and it responds, but it doesn't adapt. And so if there was a changing environment and that AI isn't designed to account for that, right? It's stuck.
[00:15:46] Susan Barry: Right? It's like how revenue management stopped working in the pandemic because revenue management tools are based on looking at history.
[00:15:54] Michael Blank: Right.
[00:15:55] Susan Barry: You have said that hotels should not be thinking in terms of revenue per available room like RevPAR necessarily, but should be maximizing revenue per square foot. What are some creative ways hotel owners can do that?
[00:16:13] Michael Blank: Yeah, so we talk about hotels as a real estate asset class. But we don't measure it. Anywhere close to how we measure every other asset class. So when you talk about, you know, office or industrial or retail, we talk about it, everything on a square foot per square foot basis. When we build it, when we operate it, we measure it. For some reason, this industry loves the per room measurement. Now, developers will start out on a per square foot basis, but they'll end up on a per room basis. And if you say that the average hotel has, and I'm throwing out numbers, just say 25% of its space is not a hotel room. Well, we're not maximizing our revenue. Really, we're only maximizing three quarters of our revenue because we're only maximizing the revenue per that room. So, you know, I think that we're doing ourselves a disservice focusing only on, well, how do I get people to pay a dollar more instead of it for my room night? Versus how do I get them to spend a dollar more on something related to being physically in my hotel? You walk in a shopping mall and you see kiosks every six feet, right? Because they realized that they had these big walkways. And they could monetize them. Well, you know, I had a conversation with a management company today and I said, and then we were talking about how they compare to other management companies.
I said, well, you ever thought of measuring your productivity per square foot? You know, does a convention center hotel with 30,000 square feet of meeting space generate the same revenue per square foot as a courtyard? Or is another convention center hotel? And if not, does it mean that they're not maximizing that convention center space ride? Should they be doing something else? So that's kind of how I started thinking about it. And then, you know, from a select service standpoint, which is where I am spend most of my time, I think about, you know, here's an example, right? If you stand at the front desk long enough, you'll see 20 DoorDash guys come in, gals come in with different food. Those customers are ordering food from my hotel. Your hotel, anybody's hotel, and somebody else is getting some revenue from it. Now, what if I figured out a way to partner with the DoorDash or the restaurant, or whatever it is? Maybe it's the most common pizza joint that delivers 30 pies at night. And say, look, I'm gonna send an email or a text to all my guests at five o'clock because I know that at 5:15, 60% of orders come out to you and I get a dollar for every pizza order, $2, whatever it is. I've just created money for my business out of thin air, but I'm maximizing my square footage. I'm not adding more space or whatever. There's other things to do. If you think about hotels with indoor pools, right? That pool sits vacant empty most of the time until some family comes in, or school group or sports team. Well, you know, there's a lot of hospitals that do water therapy, right? Why am I not reaching out to those hospitals and say, Hey, you can rent out my pool to do water therapy Monday through Friday, or Monday through Thursday. I've just created revenue from nothing.
[00:19:59] Susan Barry: Mm-hmm.
[00:19:59] Michael Blank: From a, a free amenity.
[00:20:01] Susan Barry: We like to make sure that our listeners come away from every single episode of Top Floor with specific, practical, useful tips that they can try in their businesses or their personal lives. Michael, you use your 20 room independent hotel as sort of a testing ground for new ideas that you come up. With with, I know you own a bunch of different hotels, so why is this one serving as your laboratory?
[00:20:31] Michael Blank: Yeah, good question. What I think a lot of people don't understand is when you own a branded hotel. The reason you're doing it is there's, for the consistency, but there's also limitations and the brands put limitations in terms of the standards that you have to follow and the rigidity of going outside those standards to try something different. When you own a independent hotel, you know the sky's the limit, and so I'm able to try ideas and not have to worry about going through a brand approval process or a waiver or trying to figure out, you know, who will let me do what, right. Just if I want to change the couch from blue to pink. Right. So, we use this independent hotel and look, I have investors and partners, so I still need some buy and approval on these ideas. But, you know, as a testing ground for things that I think can be very productive. Financially, operationally for that hotel, and hopefully I can extrapolate it into other properties.
[00:21:37] Susan Barry: Have you had anything yet that you've had to take to the brands and be like, look guys, I've got a test case. What do you think?
[00:21:45] Michael Blank: Yeah, I used a, there was a startup that I met that did AI revenue management. So talking about AI and, owners, operators take their hands off the steering wheel in terms of revenue management and let a system set it by itself. It was kinda the nascent of this technology for this company. So there was definitely some hiccups and wasn't the most successful. But, you know, it was a great experience and one which I am now talking to brands to say, what, how can this be integrated? The PMS system. And now again, it's a rigorous process and one that most brands aren't open to yet.
[00:22:34] Susan Barry: Mm-hmm.
[00:22:34] Michael Blank: But I am hopeful that as I get more technology implemented, that this independent hotel. And, you know, another one is, and this is kind of basic, I partnered with a digital art company out of Israel and they work with real artists that generate digital art that's animated. It's amazing. It's funky. And it, and they do it in big screens, in office buildings. And they have a service for people's hotels or people's homes. But there's an opportunity to put these into hotels and people can buy the art, the digital art, directly through the room and the QR.
[00:23:12] Susan Barry: Oh, wow.
[00:23:13] Michael Blank: And the artist can be designed in a way where they can actually make it customized to say, if you had a group.
[00:23:19] Susan Barry: Mm-hmm.
[00:23:20] Michael Blank: They've been on their own making some inroads, but, you know, we have a large branded hotel that we're using as the first approved hotel to test it in the guest room. So they've been able to get it approved in some brands in the public space. The real gold mine is actually getting 'em in the hotel room. So when the guest turns on the TV, that digital art is there, it's active. So we're trying it out now and it's not without hiccups and implementation integration. But yeah, I'm excited to be able to test something that I've been passionate about into an actual branded hotel that we own.
[00:24:00] Susan Barry: Oh, I hope they're giving you a cut of any of the art pieces that they sell. For someone who's interested in breaking into hotel investment, who didn't go to Cornell, what are the most important first steps? Like what I'm sitting at my house thinking, well, I'd like to own a hotel. Why not? What should I do?
[00:24:20] Michael Blank: So, we talk to investors who wanna invest with us about it. And, you know, the first thing that we do for them is we give them a hotels 101 book on just what hotel investment is, you know, what the risks are, how it operates. So, you know, thinking about it is making sure you talk to people that really understand the financial side of the business, right? Understand, you know, where do you get, how do you know how much revenue you're gonna get in a given year? And how much does it really cost to clean a room and, you know, what is the impact of property taxes? Right. I think that in its age of social media, and I love seeing it, but you see every, all these TikTok reels or TikTok feeds and reels and stuff saying, you know, you can own a boutique hotel. It's just as simple. Or, you know, it just takes six steps and it's much easier than multifamily. It is not.
[00:25:23] Susan Barry: It's less easy than multifamily, in my opinion.
[00:25:26] Michael Blank: It's incredibly hard.
[00:25:27] Susan Barry: 'Cause in you have an operating business in a daily lease, like at least in multifamily, the lease only expires once a month.
[00:25:33] Michael Blank: Yeah. You know, it's like those people that think that restaurant business is glamorous, right?
[00:25:38] Susan Barry: Mm-hmm. Mm-hmm.
[00:25:39] Michael Blank: You know, for the 1% that restaurateurs that are really successful, it can be. But Top Chef really changes the math and so hotels are the same and hotels is not a TikTok reel. You know, it's you. It's not an investment as a sure thing, and people have to understand that.
[00:26:00] Susan Barry: Well, we have reached the fortune telling portion of our show, so now you have to predict the future and then we will see if you got it right. What is a prediction you have about the next big shakeup in hotels? You're probably not gonna tell me what you really think because then I will beat you to a patent. We'll see. What do you got?
[00:26:21] Michael Blank: So look, I spent a lot of time thinking about this and you know, this industry really hasn't changed much in a long time. I mean, it we're changing maybe the room sizes or how people stay. So I thought since we talked about AI and the lack of it, I thought I'd ask ChatGBT to tell me what they think, the changes, because I struggle with what would actually revolutionize it. So, there were some interesting things here. The one that I thought was most interesting was that, you know, it predicted the end of traditional loyalty programs. So shifting to the way the answer is a blockchain rewards and dynamic pricing model system. So change the way people use hotels to reward themselves as they travel. Maybe there's more and it's more customizable and more, you know, each person gets their own reward in a way that right now it's not possible.
[00:27:27] Susan Barry: So this is interesting. One of the very first episodes, like in the first few months of this show, my guest was Lenny Moon, who at the time was the CEO of a company called Fly Coin, and it purported to be a travel rewards program that was built on crypto so that you were earning cryptocurrency, that you could then spend how you preferred versus how the hotel or airline told you how to do it. That company is no longer in business. Maybe there's something to this idea. Maybe we need to have a little side conversation, see what we can come up with. We can call Lenny and see what, what advice he would have for us. Okay. If you could wave a magic wand and change one thing about how hotels generate revenue, what would it be?
[00:28:16] Michael Blank: Well, again, I think that hotels should be in the data business and we welcome people, unique visitors and repeat visitors in our hotels. Day in, day out, they come and they go, we know nothing about 'em.
[00:28:34] Susan Barry: Mm-hmm.
[00:28:34] Michael Blank: Other than their loyalty number. We are blessed with this infinite resource of data that we could know about our guests and use it in a way that's financially proves the operations of hotels, that we don't. We don't, you know, Amazon does, Walmart does Target, does all these companies do it knowing their customer patterns and hotels don't. And that would be the thing that I would change. I would work on spending the time to really understand my customers and use that information in a way that benefits them and their experience, but benefits me in a financial way.
[00:29:17] Susan Barry: Do you think that's the next iteration of loyalty programs?
[00:29:20] Michael Blank: So it should be right, but the challenge is the break between franchisor and franchisee or owner and brand and, and most circumstances that the brands control the data, not the owner. And so while the brands can reach out and say, Hey, we got a deal for a hotel in Miami, 'cause we saw that you were looking at flights one day, we don't know anything about that guest. The brands do.
[00:29:52] Susan Barry: Or the OTAs, right? So then that sort of asks the question, how can an owner or a hotelier get back the relationship with the guest as, or has that ship sailed?
[00:30:08] Michael Blank: Unless you're independent, it's a slippery slope to try to get the brands to approve your ability to get that information. It's a one way street right now.
[00:30:23] Susan Barry: On that note, Michael, we are going to head down to the loading dock where all of the best stories get told.
Elevator voice announces, “Going down.”
[00:30:36] Susan Barry: Michael what is the story you would only tell on the loading dock?
[00:30:42] Michael Blank: I'll again, I age myself a little bit, but you know, we go into hotel rooms and there's certain design elements that we just take for granted. One of them being in the bathrooms, the curved shower rod. You know, it was revolutionary in its day along with a mattress that had the name heavenly to it, right? And we thought, Oh, how novel to actually try to promote the bed when it's the most central part of our stay. But, you know, the curved rod was simple but impactful but still novel back in the day. And I was with one of my former employees who was in the process of implementing the curved shower rod across the entire hotel. When the general contractor went outside of the property and he noticed one of the construction guys was jumping on the shower rods. And so he went over to him and he said, Hey, what are you doing? And he said, look, the entire shipment came curved and I'm fixing it. I'm straightening it.
[00:31:53] Susan Barry: Shut your mouth. No.
[00:31:55] Michael Blank: I'm straightening it out. 'Cause we can't.
[00:32:00] Susan Barry: That is crazy. How many did he do?
[00:32:02] Michael Blank: So he did a decent number.
[00:32:04] Susan Barry: Oh no.
[00:32:04] Michael Blank: Right. It takes a little time to jump and make straighten out shower rods. But you know, he thought it was a mistake and he was just trying to fix it.
[00:32:13] Susan Barry: Oh no, that's terrible. Michael blank, thank you so much for being here. I am sure that everyone listening is cringing full body as I am over these shower rods, and I really appreciate you riding up to the top floor.
[00:32:30] Michael Blank: No thank you. I really appreciate the conversation.
[00:32:34] Susan Barry: Thank you for listening. You can find the show notes at topfloorpodcast.com/episode/187. Jonathan Albano is our editor, producer, and all around genius. He even wrote and performed our theme song with vocals by Cameron Albano. You can subscribe to Top Floor on Apple Podcasts, Spotify, or wherever you like to listen. And your rating or review will go a long way in helping us give you more of what you like.
[00:33:10] Narrator: Thanks for listening to the Top Floor Podcast at www.topfloorpodcast.com. Have a hospitality marketing question? Reach us at 850-404-9630 to be featured in a future episode.