May 14, 2021
Davidson Hospitality Group Chief Operating Officer Pete Sams recently connected with Gary Prosterman, president and CEO of Development Services Group (DSG, Inc.). Here are some excerpts from the interview:
Pete: As a third-party provider of management services, how has Davidson supported you through this unprecedented time and been a partner to you?
Gary: We give Davidson really high marks for the partnership. As we all know and learned–because we’re all learning on the fly–this was unprecedented for everyone involved: owners, management companies and everyone else. We learned many things, as they say, you learn most about your partners when you’re in the fox hole together. We give high marks for the way that Davidson, both at the corporate level as well as team onsite, performed in an environment where we were learning and changing and making modifications fairly frequently. It helped in our case that our GM had a military background – Calvin has done a really good job. Frankly, Houston we had other challenges too – a market driven by business travel and group, not a lot of leisure, rioting…it was a challenging time, but the Davidson team did everything we could ask and more.
Pete: You’re very selective in the projects in which you engage. How do you see us culturally aligning as partners?
Gary: I’ll respond with the background on what the focus of DSG, Inc is and has been for many years: we focus on adaptive reuse of existing buildings. Most of the buildings are listed on the National Register of Historic Places or are eligible to be listed. We do what we do for a lot of reasons: 1) we believe that a lot of these great buildings are in good-if-not-great locations and a lot of times they have architectural features that are irreplaceable. The other thing is that it’s sort of a known secret of those in the industry: doing adaptable reuse is the “greenest” building that exists because it’s not only that you’re saving all of that work and effort that went into existing building, but think about what a waste it would be to tear those building down and start from scratch. But none of that works if there’s not a good business model for it as well. In our case, I’ve learned and become adept in the historic tax credit industry. The end result is the product that fits very well with Pivot culture and that’s the alignment – because most of the hotels that we are doing (in the class of boutique hotel – Le Meridien, Kimpton, etc.) – it’s a guest experience that’s different in these environments. It was important to us that we aligned with a management company that “got” that and would enhance that asset. We’ve been really pleased with the Pivot team. The other thing that has made a difference is the depth of the team focused on these types of hotels whether it’s revenue management, F&B management, HR, etc. that we are able to tap resources that also have the same cultural bond, if you will – consistent cultural direction that we’re after. It doesn’t mean we’ll get it right every time, but we all know what we’re shooting for anyway!
Pete: Our resources in marketing, F&B and operations are incrementally above and beyond what a normal management company would provide you in terms of support. Sounds like you’ve experienced that firsthand and been able to leverage that, is that fair to say?
Gary: Where we’ve experienced more of that is in the pre-opening and branding and naming of our Kimpton hotel, opening soon in Downtown Fort Worth. We worked closely with Patricia Davis and her team – we engaged a national branding agency to help us create the name. The Davidson team was right there with us as we went through the naming, collateral material, logo, etc. It was certainly beneficial during preopening to have all of that support. We all have to be in the same boat rowing hard to create an environment in which people want to work.
Pete: A lot of our owners are at different places in terms of the recovery and their vision of what they see lying head in the space. Curious from your vantage point – how has this defined your current mission and opportunities coming out of this window? Do you see business climate changing?
Gary: We all have a crystal ball and mine is like anyone else’s – based on information that I try to assemble and digest, I have no idea how accurate it will be. What we are experiencing in the hospitality industry is an uneven recovery which I think will remain uneven for another year. If you happen to be in leisure market and have a leisure-driven hotel, you’re doing pretty well right now. On the other hand, if you own hotel that is driven primarily by group, meetings and conventions, you’re lagging and you will continue to lag. That’s not news to anybody – just reiterating what we know. What my crystal ball says, if you’re asking me, when is the business traveler coming back? Our hotel in Florida, we’ve seen the business traveler come back. Our mix is up to 20-25% business now from what was 3-5% business. I am hopeful that we will start seeing some tripling or modest business travel in other markets. I am one of those that believes we are social creatures, that whether it’s a year from now or two years or three, business travel will get fairly close to 2019 levels if not right there where it was. But it will take some time and also presuming that we do have COVID-19 pandemic under control.
Pete: From your personal business model for DSG, Inc. – has this window opened doors for you in the short term, do you see an uptick in activity coming out early in the recovery? Or do you endeavor to do so?
Gary: We are different than every other one of your owners in that I know most of your owners are REITs or real estate funds and I’m sure this is a window of opportunity for folks to acquire assets at a discount or rescue capital and there’s some of that but a lot less than people thought there would be because of PPP loans and other things. Other than the fact that we focus on adaptive reuse, we’re just an old-fashioned, boots-on-the ground developer. We look for great assets in great markets around the country, but everything we do is driven because there is a development aspect. For what it’s worth, we do a fair amount of multi-family. Candidly right now, the big project we have on our board is a massive adaptive reuse of a historic warehouse – 700,000 sq. feet, but it’s going to be all multi-family. I think that there will be opportunities for development, but as everyone is also aware, developers can only develop when lenders are willing to lend. I’ll also tell you the most money we ever make on any project historically is when we can develop in a down-cycle because inevitably we come out of these cycles and those that were able to get something done have an asset that is of value, presuming you’ve done it right. I’d have to say I do think hotel development is going to be much slower than it has been for the next 1-3 years, which I don’t think is necessarily a bad thing. It will give everybody a chance to catch up. Things that were under construction when pandemic hit will open, but there will be a smaller number of properties opening over next couple of years.
Pete: As far as above property support, is there anyone on the Davidson corporate team that you would say stands out based on your firsthand experience?
Gary: So, when we interviewed Pivot for Kimpton Harper in April 2020, what I will tell you is that the Pivot team was far better prepared and did a much better presentation than the other three management companies that we interviewed. What I will also tell you is that we were particularly impressed with the fact that the folks who were in those roles had come up through the ranks, so they know what it was like day-to-day at the hotel level (such as Vanessa Claspill and Caroline Dyal). We thought, wow, these ladies get it, they understand what we need in these roles, we trusted they could find people to mentor and fill those roles. In Houston and Fort Worth, we feel that has been the case. Peter Tziahanas has been the “symphony conductor” and we are pleased with the entire team. We met with the team in person recently and Harry was great, Marc and Greg in F&B – everybody knows their stuff. We feel most comfortable about is the depth of the team – they’ve done it, not just talking about it theoretically, it’s a lot easier for someone who’s actually done it to mentor those that are doing it.
Pete: From a hotel operations perspective, do you see any differences or long-term effect of what we learned from pandemic that will carry forward through future?
Gary: I think that all businesses throughout the pandemic and certainly hospitality: we are all running with more lean staff and we have been more cost-conscious because we’ve been in survival mode. Some of that will stay with us, I also think there will be that challenge for finding balance that we are delivering the quality product that our customers expect while maintaining margins. I think we are all going to be challenged by labor market that nobody has an answer to. That could force some changes in the hospitality industry.
Pete: Anything other points you’d like to share about our interactions or relationship or in general?
Gary: I think another thing that differentiates Davidson and Pivot is it’s a true third-party management company versus an owner that also manages. That is a healthy way to do it. I would say what is probably the most helpful thing other than that is the fact that it’s obvious that Davidson continues to invest and reinvest in its people and systems to make sure it stays in that leadership position and the evidence of that is the depth of the team across whether it’s IT or revenue management or marketing or sales. We are very comfortable and pleased with how what we thought was going to the case on paper, a year in, it seems to be working that way.