Owner Q&A with Michael Rock

Pete: Always a pleasure to speak with you Michael! I know across our shared portfolio we continue to see a better than expected rate of recovery. What are you seeing across the breadth of your impressive portfolio in its entirety?

Michael: My phrase for what happened is “The Great Reset” because we’ve had downturns in our industry, as you and I have both been through many times. It is always the question of “when” not “if” in our cyclical businesses. There’s never been one like this and because of the nature of it, all of us – ownership and operators working jointly together – learned a hell of a lot about our operations on the way down last year. It forced-fed us knowledge about our businesses. We did learn a lot and it applies going forward as you’ve seen margin improvements going forward. If you think about where we’re at here, Delta variant aside, after a while the trend is the trend and the trend your friend. That’s what’s been going on in terms of recovery is outpacing expectations. We are seeing pent-up demand, we still have a long way to catch up with individual business travel and group travel to pre-COVID levels. If you think about outsize pace of recovery which has been a pleasant surprise. You mentioned margins – margins have been very healthy. We did learn a lot in the Great Reset – some of the things we thought were sacred cows, we found out were just cows. We can treat them differently. The situation forced us to modify those beliefs and at times, the consumers are much more adaptable than what we had given them credit for. Some of these learnings and savings will continue – I think we’ve figured out how to be more efficient and economical. I think we’ve figured out what we’re offering for F&B environments in resort environment, it doesn’t need to be seven nights a week year-round. Five really busy days are better than seven days. Modified housekeeping has gravitated into the option of choice for upper upscale and below, it’s a very interesting change in our industry that has value going forward. IT varies by brand, by market and hotel. Flexibility with those operating standards certainly help. Another thing that is boosting all of this up: because this rapid pace of recovery, all of us in the industry know we are seeing some outsized productivity gains that are not completely sustainable going forward because we simply have 100+ open jobs in some hotels. We are figuring out a way to get business done efficiently, but as applicant flow returns, some of those outsized gains will come back. That said, I do think that labor recovery is lengthy recovery. I don’t think it is something that recovers in 2021 and I personally think it could take most of 2022. We want enough staff to take care of the consumer in the way that they are accustomed to because they are paying outsized pricing right now.

Pete: It has been great to see the recent high degree of acquisition activity at Host. We are particularly excited to be working with you at Baker’s Cay. This has been a truly successful hotel under our management and we are honored you made the decision to keep Davidson in as the operator. Tell me a little bit about that decision.

Michael: Our acquisitions post-COVID fall into two buckets: iconic and irreplaceable and opportunistic. Opportunistic – chances for us to get into a market we haven’t been in before or getting an asset at a discount whether it’s a financing situation or bankruptcy situation. Then there’s the iconic/irreplaceable bucket and two the purchases we’ve done fall to that: Four Seasons Orlando Resort at Walt Disney World and I’d put Baker’s Cay in that bucket. We had been looking at the Florida Keys for a long time – we see the vibrancy, easy access, it’s the “American Caribbean” you can drive to and you don’t have to fly to. We see the supply and demand economics in the Florida Keys have always been very good are extraordinarily good going for. We know this asset from before back when it was a Hilton resort. It’s a dynamic asset, it’s got a terrific beach (not something you hear about a lot in the Florida Keys). We think it’s nicely positioned, we love the fact that it’s an hour or slightly under from Miami International Airport, so we think for attracting regional group business, it also speaks to that. We wouldn’t spend $1 million a key if we didn’t think it was a great asset. We kept Davidson in for a number of reasons – we think you guys are doing a phenomenal job there and we know we can expect phenomenal moving forward. We’ve had some great successes in Florida resorts with The Don CeSar and Beach House Suites, I had the fortune of overseeing those personally for a few years as we were relaunching. It was a great partnership and I think how The Don CeSar handled itself during this crisis was also nothing short of admirable, from corporate level, regional level and on-property level. The leadership and commitment we saw from Davidson and its teams was an example to hold up to. There was some incredibly creative staffing moves that were taken by the team there to keep some of the best of the best talent around, maybe not a job they were hired to do or a job they planned on doing, but they did it for a couple of months just to get through. The re-launch plan there, I thought, was also outstanding – we were on the front edge of the recovery and there was this great perseverance of attitudes. There’s been a great relationship amongst our companies for a long time, not just with yourself but with Thom Geshay and John Belden and the whole team. It’s always been a good working relationship/partnership – we have the same goals in mind, we don’t always agree 100% on how we are going to get there, but there’s good collaboration, good give and take. The shortest answer on why I can say you guys are still there running Baker’s Cay: you earned it! You earned it with what you showed at Baker’s Cay and you earned it based on what you showed at The Don CeSar and we have faith in our partners going forward.

Pete: You spoke of the two primary lenses through which Host views the current acquisition environment and the types of transactions you find attractive – opportunistic and/or iconic and irreplaceable. How do you see this playing out in the next 12 months? Anything imminent?

Michael: Well, I think the situation is going to continue to evolve and be fluid. I think the acquisitions and dispositions level of activity in our industry is vibrant. There’s a lot of paper floating around, a lot more than pre-pandemic. We’ll continue to be very diligent and thorough as we are when we’re looking at anything that’s out there. I do think those two buckets are where our strategy lies. As far as opportunistic – we picked up the Hyatt Regency in Austin and the former Hotel Alessandra in downtown Houston. With both of those, we got a significant discount because of financial hardships for those particular assets. Whereas iconic/irreplaceable: completely opposite reason for buying those. We’ll see – it will continue to be a very active market, we’ll see if what’s happened recently with Delta variant, which is having some short-term impact, we are certainly seeing some hesitancy for groups looking to cancel, reschedule or rebook. We’ll see if that takes a little bit of fuel out of the fire of the level of activity or if that changes some of the pricing out there in the market. I don’t know the answer to either of those questions, but I do know we’ll be very diligent. The one nice thing about being part of Host as the largest lodging REIT, whenever anything of significance is going to be marketed or handled on an off-market basis, we get a tap on the shoulder. We’ve been getting lots of taps on the shoulders, not all of those come to fruition as we are very specific and selective on what we are going to acquire, but it’s been an exciting time even though we’re not at our normal levels of business, we are busier than we’ve ever been! I’m encouraged where the industry is going, where Host is going, I think we have fantastic leadership – a terrific group of very smart, very talented and supportive people and that’s what makes Host such a great company to work for. I’m excited for us to get past this Delta variant bump so that we can get on with all of the good news of the recovery.

Pete: You mentioned some of the incredible leadership at the helm at Host. What do you believe defines Host’s culture and where do you see similarities with Davidson?

Michael: This is easy to talk about our values – they are EPIC. Excellence, partnership, integrity and community. Excellence: we think we’ve got the best portfolio of lodging assets, we have the best operators like Davidson operating them. It’s striving to be the best you can. Partnership: that’s in the bones of Host and how we get along. I think people describe us partnership-oriented owners, not command and control owners. We do want to partner with the operators because of the diversity, the depth and breadth of our portfolio – we’ve got some good data. We bring something to the table besides questions. Sometimes we come to the table with some damn fine answers! Here’s what I think we should do as opposed to, “What are you going to do?” which is a very different tone to the conversation. We want to be partners in everything, we don’t manage the hotels directly, we have great operators like Davidson to do that for us. We want to be partners in every conversation and amongst peers in industry and help influence from AHLA down to local levels. Integrity: we all know what it means, do the right thing all the time. Lastly, Community: that takes a bunch of different forms. It’s the hotel community and the community of owners and operators. It’s being supportive of the communities we do business in – how do we be known as good owners even though our name is not anywhere to be found on the building? We want to be an owner with the head and the heart doing the right things. Being influential — supporting the greater lodging business and travel industry. To critique our industry, we are under voiced, perhaps, in my opinion. When people get together on local hotel association boards, everybody on there is an operator and darn few people participating are owners. There should be an owner’s voice at the table, it ought to be a balanced perspective. As far as some of the recognition that we get, we’re proud of it. It’s nice to see, but we’re doing it because it’s the right thing to do and at Host, that’s what we are always going to strive to do. We’re not perfect, mistakes can be made, but we always want to strive to do the right thing and learn and move forward.

Pete: It’s been a true pleasure as always spending time with you Michael. Anything else you would like to add before we part?

Michael: Look, we continue to have tremendous respect for Davidson as a partner. Great operators, top to bottom, side to side. People that have great integrity, understand the value of the partnership, think long term and think about the business in the same vein that we like to think about business. Not like we need to agree upon everything, but it is about the partnership going forward and how we all keep pushing ahead. You mentioned – you’re right, during tough times is where the great captains separate themselves from others. Anybody can sail a ship on calm waters, that’s easy. It takes great leadership and great commitment and hard work to be successful in choppy waters. The waters have never been choppier the last year and half in my time and I’ve been in this business since the mid-80s. I’ve never seen choppier waters than what I saw and I’ve never seen finer efforts and folks I’m more proud of the last year and a half as well. It’s made all of us better, it makes the industry better, it just hardwires and cements those partnerships. Now we’ve been through tremendous adversity together that pairs with the success that we will see again shortly (and that we’re already seeing). Appreciate all that you guys do, when you’re looking for another fan, you know how to reach me!