Risk Management During Times of Uncertainty: Pinnacle Hotels CEO Barry Lall on the Hospitality Industry’s Response to the Coronavirus Pandemic
To say this year has been unprecedented in all aspects would be an understatement. Every single industry has been presented with unique challenges and have had to quickly adapt in the face of sudden changes and constant uncertainty, and the hospitality industry has not been spared by any means. Owners and managers have had to deal with not only governmental restrictions on the services they may provide, but also rethink the way they go about practically all aspects of their hotel’s operations from food and beverage to house cleaning. On a larger scale, owners are being faced with the question of how they can maintain adequate cash reserves, and while expanding their portfolio may be one of the last things on their mind, below we talk with Pinnacle Hotels CEO Barry Lall on why this may be just the right time to do so.
Lall has been the owner and CEO of Pinnacle Hotels USA since he founded it over three decades ago, but prior to his first purchase of a small 12-room motor lodge in southern California his life had been on quite a different trajectory. He trained to become a doctor and earned his medical degree in the United Kingdom and moved to the United States with the intention of starting a career in medicine. However, since he was a young boy working in his father’s clothing shop he felt the pull of entrepreneurship, and these inclinations were only heightened once he reached “the land of opportunity.” When he happened upon a newspaper ad for a beachfront motel for sale he toured the property and immediately saw its potential, and with the purchase of that location left his medical career in favor of the hospitality industry. Today, the Pinnacle Hotels USA umbrella owns and operates nine properties licenced under eight brands with seven restaurants across the continental United States. Counting over 1,500 keys within his management, Barry has been strategic in his accumulation of properties over the years, using the market conditions whether they be favorable or poor to his advantage.
You’ve been in the hospitality industry for over 30 years. Can you think of other times when the hospitality industry has had to respond to a nationwide demand-curtailing event such as the coronavirus pandemic?
As you know, over the years within the United States and the world we’ve actually had many recessions. I have personally witnessed several recessions .–The recession that was precipitated by the Savings and Loan (S&L) crisisin the early 1990’s, and then the recession that was caused by the dot-com bubble (along with 9/11) in the early 2000’s ,and of course most recently there was also the so-called Great Recession of 2008 – 2009. However, this particular recession that has been caused by the Covid 19 pandemic is in my opinion the worst – not just because of the severity, but also because of the anticipated duration. So for the hospitality industry, our business revenue stream and profits have been significantly impacted since March of this year, and many firms anticipate a negative cash flow right through the middle of next year and possibly even longer. We do not anticipate returning to 2019 numbers until at least 2023, .The big question in today’s world is how can we keep our hotels afloat. How do we stay in the game until the population is vaccinated..
So this is indeed the worst downturn that I have witnessed and I dare say anybody has witnessed. It is absolutely devastating..
What lessons do you think the hospitality industry should learn from this and apply to future planning and risk management?”
So this is where a lot of real estate owners – hotel owners – are going to be in deep trouble if not already.. We are going through a very difficult time period, and while those who have adequate cash reserves will survive, there is still going to be a lot of turmoil in the market in the near future.. Most hotel owners may have anticipated a downturn to last six months and never have anticipated that their investments would have negative cash flow for 12 to 18 months..
So what one can learn from this pandemic is that we are involved in a very risky business where the lease term is as short as a day; you can never be prepared for a calamity of this severity and duration..
During the challenging market conditions created by Covid-19, many hospitality CEOs are seemingly holding on to capital rather than investing in assets. What can you tell us about the importance of having the courage to invest in situations when others won’t take the risk?
We have to look at: what is the purpose of buying a hotel? As I see it, anyone can make an investment, anyone can buy a hotel, say they bought a hotel, but why do so? Generally, for most if not all investors it’s about ensuring they get high returns on their investment, and if you want the highest returns on the investment then you are able to achieve that if you buy during downturns. Buying during a recession is very, very difficult, but it is also where you can gain the most. Although I never had an education in business or finance, I think I was blessed with somehow understanding how to take advantage of downturns. When I began my career in the hospitality industry it was the early 1990’s, right in the midst of the savings and loan crisis, so I was able to experience firsthand and right out of the gate how buying during a recession allows you to make a significant profit on your investment. Purchasing property at almost pennies to the dollar during the deepest part of a recession allowed me to hit “home runs” right away.
So the question is do you want to make average investments or outstanding ones and if the answer is the latter then there is not better time than during a recession. So as they say buy low and sell high.
Can you give us any examples of any of those types of decisions you’ve had to make throughout your career?
Well as I stated previously I began my career during an economic recession so I have considerable experience with operating during downturns, but even more recently during the Great Recession of 2008-2009 I was able to buy several hotels. One in particular – the Marriott Hotel in Riverside, California – I went to see in early 2009. Upon viewing, I liked the hotel’s location, I liked the building, I liked the brand, I liked everything about it, but most of all I liked the price, which represented a value of $65,000 per room – an extremely low unheard of price for any location but especially in southern California. Having the opportunity to buy a full-service nationally branded Marriott Hotel for such a low price when everyone knows the cost of building a hotel like that would be around $200,000 per room, I knew it was too good an opportunity to pass up. So although a very difficult deal, because of the challenging times, I was able to raise the equity and get the financing when all lenders stopped making any loans-let alone hotel loans. This is a perfect example of high risk -high reward.
Were you able to purchase it? What was the outcome?
Yes, I was able to put up a contract, but I ran into a lot of difficulties getting it financed. Nobody wanted to give me a loan because as I said earlier the pendulum is constantly swinging and it had swung in the other direction where no lender was prepared to give hotel loans.. This is where your reputation and relationships become very useful and I was able to go to an institution that I had a special relationship with. They took a risk on me, and despite my peers saying that I would never be able to get the deal closed I was able to acquire it in June of 2009.
By the end of 2009, the hotel’s financial performance had declined considerably. At the end of that year, the financial performance had shrunk to such an extremely low level that one would have thought I made a bad buy, but not so. The recession ended and thereafter the hotel recovered and its performance improved significantly. I’m proud to say we still own it and it’s now one of our strongest performers. So that is an example of an acquisition during a recession that was difficult to consumate, but turned out to be one of my best buys.