The Exchanges

Q What are the things that you've experienced where you see their opportunities or risks to avoid in your portfolio companies that someone without the industry specialization might miss?

A I think of people who use too much leverage. Leverage is the enemy of liquidity and liquidity is where value comes from. And so I would say that's the most common thing is the reality is if you over leverage an asset, especially urban hotels, and we don't do as many of those, but urban hotels are cyclical because a lot of their business comes from corporations. Corporations have hard times and they say cut costs. Cut costs means cut travel. That doesn't apply to your family vacation nearly the same way it applies to your job. And because of that, as soon as the CEO of JP Morgan, Jamie Dimon says, cut back, say on travel, JP Morgan bankers won't travel. And if you're a hotel that has a lot of that demand, you're going to see cyclicality. If the owner of that hotel used too much leverage, guess what? They have a problem. I'd say that's the most common thing. The other thing I would say is all the ancillary businesses around a hotel, someone who tends to look at urban hotels, 80% plus of the revenue, maybe even 90% is coming from the hotel room rate. You go into the resort world, perhaps 30%, 40% of the revenue is coming from the hotel room rate. All the other revenue comes from everything else. The restaurant, the spa, the retail activities, and other amenities that they sell. If you don't really understand the complicated rule set of running a retail shop versus running a hotel,…

AI assessment note: “I think of people who use too much leverage. Leverage is the enemy of liquidity”

Q When you're looking at investment opportunities, what are the different types of investments that hit your sweet spot in terms of a potential target?

A We love to invest thematically. So we identify a theme that we believe has legs, and then we like to vertically integrate so we can own both the real estate associated with that theme, as well as an operating capability. So build out a management team that can then go and execute and replicate. An example of that would be in the ski business. One of the things that we did in the late nineties unveil was we were fast followers on creating basically a discounted season pass for skiers. This is now fairly common, but at the time it wasn't. Small place called Bogus Basin, Idaho, that had Cut their prices on season passes by like 80% and sold a zillion of them, et cetera, et cetera. We followed that trend. We charged 200 bucks, I think it was, that first year, and you could ski as much as you wanted at Keystone and Breckenridge. And that was in 1988 and had great success. Vail Resorts was far more successful doing this after I left, but they were doing incredibly well with this. They identified and expanded on that product, ultimately calling it the Epic Pass. We saw that being an opportunity, but we didn't have the critical mass of resorts to really create a competitor. And then in 2017, we had the opportunity through a series of transactions to create Altera Mountain Company. And in doing that, we had the opportunity to launch what we thought could be an equally exciting, if not e…

AI assessment note: “We love to invest thematically. So we identify a theme that we believe has legs”

Q How do you think about the travel services around that? That's one component, that tourist part of your hotel stays.

A Well, I think that there's certain things that you would have thought with the internet would have gone away. Travel agents, concierges. The reality is there's so much information available. There's clutter. How do you go sift through all the clutter to really curate the trip you want? And at the high end of travel, we tend to focus on the mass affluent. Think of that as the top 10% or so of income earners. They really are looking for a curated experience. There's a thousand different tours I can do in Provence, but which are the three that really I should consider while I'm staying there, when I'm going there from the United States, and I really don't know it very well. I'm going skiing in Steamboat, and there's 50 different family activities to choose from for what to do in the evening or the afternoon or day off from skiing. Again, which do I choose? So I think we have to do a better job. I think we're getting there. There's more room left to run, but we need to be that curator for people, and we can do that in part through a more powerful app-based experience for our resorts. We can do that in part through our staff on property, but I don't think we can just rely on the internet to do it for us. TripAdvisor is good. It's not that good. There's still gaps there at the local level, And so I think if you think about that last mile of service execution, that's where we come in.

AI assessment note: “we need to be that curator for people, and we can do that in part”

Q Curious how you think about capital allocation. On one hand, you have real estate assets, capital intensive. On the other, you have A franchise-like operating model and everything in between. As you're making an investment that has all this integration, how do you think about where to deploy your assets to get the most out of the investments?

A Portfolio construction has to be a big part of the focus for any investor. So from our perspective, we want to have appropriate diversity, but all within a sector. So you're making a sector bet, obviously, with travel and leisure, but we think of it as managing our corporate exposure versus our leisure consumer exposure. Managing our international exposure versus our domestic U.S. or North American exposure. Managing our more growth-oriented business exposure, unit growth-based business, or something that was more of a franchise business, or a restaurant business that's more consumer-oriented than our more real estate-type asset-heavy exposure. And when you look at that, it's all about maintaining an equilibrium. We don't have a prescriptive way of doing it, but generally speaking, we want two-thirds or more of our businesses to be real estate intensive. And we don't think of that as capital intensive in a negative way because we're taking that into account in our underwriting and what we'll pay for that. But there's also some real benefits that get created by having it be a little bit more capital intensive. There's higher barriers to entry. There's an underlying floor value. Typically those real estate heavy investments are more financeable. They're more tax efficient. So that's a real positive on the real estate side. They're a natural inflation hedge. And then you balance t…

AI assessment note: “we want two-thirds or more of our businesses to be real estate intensive.”

Q What'd you do in those years you were working for Vail?

A I was the quote unquote manager of strategic planning to start. I didn't manage anyone. I was basically the financial analyst who, Apollo was our owner, and it was a privately held business at the time. Unbeknownst to me, my first week I got to Vail, I went into a meeting room where I was the analyst listening in on the first conversation about Vail Associates at the time, the name of the company owned just Vail and Beaver Creek ski areas. They wanted to buy Breckenridge and Keystone's curious. We started talking about going public. I don't even think I knew it was owned by Apollo until I got there. So I really lucked into the situation where I was in the ski business, but I was really getting private equity experience. And I was the one person who had worked at McKinsey and from the East coast and speak that language. So I was the person in Vail who was tasked with being the go-between with Apollo and the company. And that gave me a window into The world of private equity into the ski business, into IPOs and acquisitions and finance, and from there I went. I was very fortunate, and I had a lot of opportunities for professional growth in Vail. I was there for five years. I ended up becoming vice president of a bunch of things, all the non-accounting parts of finance strategy and budgeting and M&A and investor relations and things, and got to be on the executive committee of Vai…

AI assessment note: “I was the quote unquote manager of strategic planning to start.”

Q When you start talking about stratifying different customers you're serving, you get into clubs. What is the club business that you like to look at?

A We like varying forms of clubs. Clubs have a mixed reputation. Are they exclusionary? That's not the goal. When we think of clubs, we think of an opportunity for people with a like-minded interest to come together, and by pooling their resources effectively, they get access to something they couldn't otherwise get access to. Maybe I'm wrong about this, but no one person's gonna be able to create a private ski area, but 900 families at Yellowstone effectively have come together and they helped to fund a private ski area. The same thing that's happened in golf or health club doesn't have to be at the most exclusive level, but effectively a club allows you to get access to an amenity set that on your own, you probably wouldn't be able to afford or recreate. So we think that's great because that allows you to have a theme around which to build. So golf clubs, for example. Golf clubs have a certain appeal if they're just targeted towards golf. We've always focused on what's a golf club experience that gets broader to really attract the whole family. So when we invested in a company called Club Corp going back to 2006, which was and is the world's largest owner of private golf clubs. It was founded on a basis of anyone who wanted to join could join so long as it wasn't full. It wasn't exclusive in that regard. Our focus became how do we modernize it so that it appealed to the whole f…

AI assessment note: “We've always focused on what's a golf club experience that gets broader”

Q With your history and culture of, let's say, being frugal at your old corporate headquarters, how do you think about the balance between keeping costs down at your properties and making sure you have the valuable experience for the customers?

A It's really important to distinguish between what drives the customer experience and what's just cost for cost sake. We don't need to have a fancy back of house, but we need to have really appropriate amenities, the pool, the spa, the gym, the restaurants, and so forth. But at the same time, just because you're not going to over invest in the back of house doesn't mean that you don't want to be investing in your people. It just means that you want to justifiably invest Put the higher visual impact capital into the guest facing areas. So I think our teams do a great job of balancing. How do we make sure we're taking care of our guests and how do we still make sure we're taking care of our people? Just the definition of how we do that is a little bit different.

AI assessment note: “distinguish between what drives the customer experience and what's just cost for cost sake”

Q How do you think about turning these assets that you're buying and improving into investments? What is it that you're looking at when modeling out to say, hey, this is going to turn into a good outcome?

A I think you look at a few things to start, and it's like anything. It's layers of the onion. You start peeling back. What's the addressable market? How big is it? Who else is doing something similar to what you're doing? Is there someone to aspire to that you can benchmark from? Do you have access to that data? What's most closely in our experience that we can look at that's comparable to the thing that you're trying to model? And then you're trying to build out a case. Of what you think is achievable with a reasonable margin of error. And in doing so, the one thing you know is that you're wrong the moment you start. That's the reality of every model. And we can't take them as gospel because I don't think we've ever hit a model spot on. It's virtually impossible. So it's understanding the impact of different variables on the outcome. What's most important? What is highly impactful to the outcome? And what isn't? And don't sweat the things that aren't and really focus on diligently those things that are most impactful and looking as far and wide as you can for comparability. And now one of the things we look at a lot is, so how did something do during COVID? And before COVID, it was how did things do during the GFC? And we still have access to that data typically. So we've stress tested this industry incredibly significantly in the last two decades. And so we can look at that an…

AI assessment note: “What's the addressable market? How big is it? Who else is doing something similar”

Q What are some of the strategies you found that your management teams to deploy to help manage those challenging moments or experiences that your guests are having?

A Empowerment. It's really about empowerment. A lot of the conversations we have, a lot of the frustrations we have are about how much do you centralize and dictate from above versus how much you empower people to solve problems from their own seat. That's empowering the CEO of one of our portfolio companies. It's also, it's empowering the pool attendant at the pool to solve the crowding issue on the pool that day where the person who reserved a cabana and then it wasn't available when they got there. It goes up and down the chain, but I think empowerment While very inefficient to empower all your people to make individual decisions, because at times you can feel it's like a box of chocolates. You don't know what you're going to get all the time. That leads to the best long-term outcomes. And I think we've evolved to that mindset.

AI assessment note: “Empowerment. It's really about empowerment.”

Q When you're thinking about exit strategy, you do have those assets that you want to hold a continuation fund. For those that don't fit into that for whatever reason, when you're the large player in this specialized space, how do you think about who's there to buy from you?

A Fundamentally, if we can take a complicated asset, if we can simplify that, stabilize it from a structural perspective, from a physical perspective, upgrade the asset, make sure it's in great condition, Really show the market what it can be. What we do is we open up the universe of more passive buyers to make an investment in that business. So it could be we buy something, we transform it, and we sell it to a REIT that's a more passive, more long-term owner. Great. That's terrific. It may be that we sell it to an individual who didn't see the opportunity in La Costa when we bought it and had to turn it around and invest half of what our purchase price was to bring it up to stuff. But the next buyer gets the benefit of a stabilized asset that they can then build off of. I think it depends on what the business is, but generally speaking, if we can do well by that asset, be a good caretaker of it and innovator of it during our period of ownership, these are very desirable underlying businesses. There's no shortage of people who would love to own it, and we can broaden that universe if we do our job right, and if you broaden the buyer universe, inevitably what that means is you can then get a more attractive price for it.

AI assessment note: “we open up the universe of more passive buyers to make an investment”

Q What's most exciting to you about the current environment over the next couple of years?

A What's most exciting to me, not just over the next couple of years, is this trend that people want to experience the world. Fundamentally, it's undeniable. Once you've taken care of your basic needs, Food, shelter, healthcare, education, and so forth, and you get to that next level of sustainability of income and wealth and so forth, you start to want to explore. And that sense of exploration, which is undeniable, and by the way, also is not satisfied in the metaverse or through social media. If anything, when you see places online, it makes you want to go there in person even more. When you pair that with the growing trends towards more awareness of the importance of activity and health and wellness, What we've seen in the last 60 years of just ongoing growth in travel as there's been more wealth in the world, I think that's only going to accelerate. So that gets me most excited. What I really like about the next two years is the combination of what I just said with interest rates being as high as they are. Unfortunately, it will cause unintended consequence and problems with people's balance sheets becoming upside down. And we have the capital, we can invest, and we're talking about equity investments a lot here, but we also have debt capital and capital that's very flexible. To be able to provide a capital solution to people who have upside down balance sheets. I think that'…

AI assessment note: “What's most exciting to me... is this trend that people want to experience the world.”

Q As you walk through each of those five, how do you think about the risk reward opportunity of each of them?

A Risk and reward, it gets tilted by what's your entry point and what is your outlook for the market. So when you're in an environment like today, we think differently about risk reward in the sense that interest rates are higher. There's a lot of macro uncertainty out there, yet the long-term trends towards travel and leisure are very favorable. We were in the middle of a multi-decade shift of the economy to going from more of a goods-based economy to more of an experiences-based economy. And so that provides a tailwind because we tend to focus on the leisure part of the travel business, less so the corporate travel or the urban hotel. We do some of that opportunistically, but we're primarily leisure focused, about 90%. And so that economic shift, that psychographic shift that people want, they want to do more things with people as opposed to buy more things. They want to post on Instagram, ironically, more about that mountain they climbed than that handbag or car they bought. And that's good for travel and leisure. So we think that's a good secular tailwind. The same time you have crazy capital markets right now, now all of a sudden living in a world of 10% interest rates again. And so for us, what that means is we think there's a really unique opportunity to combine lower entry points for pricing because higher interest rates mean you can't pay as much for something a day. Yet…

AI assessment note: “Risk and reward, it gets tilted by what's your entry point”

Q What are some of the values that you brought to KSL that you learned from that experience in the business KKR owned?

A I was a CFO of that company at the time when we sold it to, it was a group called C&L Hotels, which ultimately sold to Mesref. And we'd been in trailers for 12 years. First double wide construction trailers, and then we were on a temporary permit with the city of La Quinta, and then Finally, the city said, listen, we're not going to renew this temporary permit anymore. These are not temporary. You've been here for 10 years. And we had nine months, and we had to find office space. So the only thing we could basically do was do more modular offices. So we literally bought 18 single-wide trailers and welded them together, put a false stucco exterior, painted the windows blue, so it was a white stucco with blue windows, just like the Le Quinto resort that we own down the road. And that was our offices. And we thought, boy, we had died and gone to heaven. We had our own dedicated little building. There was no foundation, all sorts of wildlife crawling all over the place underneath the floorboards, but that was our headquarters. So we wanted to be able to infuse our team with that culture going forward. We didn't want to lose the offices. So we were selling KSL Recreation Corporation. That was the KKR business to CNL. It was 2.2 billion dollars. Really big deal. 2004. And back then you actually all got around a closing table. And we were in New York, Simpson Thatcher, that was our la…

AI assessment note: “So we wanted to be able to infuse our team with that culture going forward.”

Q What's different about operating businesses across these different areas all vertically integrated at the same time?

A We're sometimes operationally detailed to a fault. Because all we do is this. We used to do these things called freezer tours. And it's actually an old Mike Shannon story, but we were touring a golf club. I think it was in Florida. And Joey Garan, our general manager, they're a wonderful guy, one of the most talented guys, whoever worked within the space, he was taking us on this tour. And we'd inevitably go in the freezers of the kitchens and started looking around. And you learn a lot by going through the back of house. How clean is it? How organized is it? And going through that, what we noticed was There were a third of a pound hamburger patties, and there were lobster tail in the freezer. So we get done with the tour, and Mike says, Joey. And Joey's like, yeah, boss. He had this thick southern accent. Yeah, boss, what do you need? Joey, great tour. Only two problems. What do I ask you about? Yeah, yeah, what do you, what do you need, boss? Well, there's lobster in the freezer.

AI assessment note: “We're sometimes operationally detailed to a fault. Because all we do is this.”