Transcript

Aaron Strauss: We want to welcome everybody today to The Dealmakers’ Edge. Today, we’re very excited to be joined by Russ Flicker. Russ is the co-founder and managing partner of AWH Partners, which is a privately-held real estate investment firm focused on value-add and distressed opportunities in the hospitality space. It was formed by alumni of The Blackstone Group and The Related Companies. AWH Partners currently manages a portfolio in excess of $2 billion. Russ oversees all aspects of the firm, including strategy, investment development, and management of their vertically integrated team. And Russ brings a tremendous track record to the table, which included—prior to starting this company—as Chief Investment Officer for Ian Schrager Company and managing the hospitality team at Blackstone. So Russ, I really want to welcome you to The Dealmaker’s Edge, and thank you again for being here.

Russ Flicker: Thanks so much for having me. I appreciate it.

Aaron Strauss: So I guess to start off, we’d like to try to get out for our listeners a little bit of the almost pre-business background, you know, just sort of where you grew up, what type of themes shaped your earlier part of your career, and how you got to where you are before you even started working.

Russ Flicker: Sure, sure. I’ll give you the short version. So, I went to college and when I went to college, I was a little bit unsophisticated and so I knew certain career paths like fireman, doctor, lawyer. At that point, I probably thought a banker was a teller. And so I graduated. I went right to law school because that sounded like a big job to me. And I was in law school, and even though I had a great time at law school, I realized that I wasn’t…I’m more of a risk taker than a risk manager. And, I did apply to and started the path to go to business school right from law school when my parents said, “no more.” Seven years was more than enough. So, I graduated. I practiced law for two years, actually started a company in the .com craze. That failed miserably. And, I didn’t know what I didn’t know. And we were kids. We raised some angel money and, and even though we had some interesting ideas you know, ideas don’t make companies. So at that point decided what can I use my background for most productively, because I want to get into business. And I think the law background really lent itself to real estate. And so I was fortunate enough to make that shift, even though at the time it seemed super painful to make that shift having been, you know, I had friends who either just graduated college or even went to law school and were sort of progressing more in their careers, in my perception. But I sort of took a step backwards or sideways. It’s funny now in retrospect ‘cause I was in my twenties and it was a blip that lasted nothing, but it seemed like a big deal to me. But very fortunately, I shifted into the real estate business outside of law and I’ve been there ever since.

Aaron Strauss: Great. And maybe you could talk about the earlier part of your career: Ian Schrager. That came before or after Blackstone.

Russ Flicker: So that was after. Actually, I do joke that I’m like the, you know “The Forrest Gump of Real Estate”. So I’ve worked with some really interesting and quirky folks and famous folks. So when I left, I started my company. When the company failed, we returned some money to investors, and I was looking where to go. The law firm that I had worked for—big law firm—represented Trump Hotels and Casinos. And I was interviewing at Related [Companies] and Vornado, and the managing partner of the law firm said, “Why don’t you meet with Donald Trump?” This is a long time before any of his political career. He was just a quirky real estate guy. I thought they meant to meet with someone on the team. Sure enough, I literally sat down at 25 years old with Donald Trump. He offered me a job on the spot. We negotiated salary on the spot. For what? I have no idea. What was I going to be doing? Unclear. I told my fiancée at the time, “I just took a job doing what not.” So it was wild and I worked for Donald for five years. And then I went from there to Blackstone; Blackstone to Ian Schrager companies before starting my own business.

Aaron Strauss: Very interesting. Before you started your own company, what was sort of your most fearful aspect besides just being in charge of it all? But I guess you had the experiences from those different places. You understood development, you understood structuring, you understood fund… But what were some of the best things you picked out from those three organizations you were part of prior to launching your own firm?

Russ Flicker: So to take sort of those in two phases. Number one: because of my experience starting a company that failed at a very young age. Again, I

was fortunate that I had that experience, but I was young and I was able to move past it early. I knew that there was a big difference between conceptual/academic and practical. I have a good idea. I theoretically should be able to do this, but now I have to actually get someone to write a check. I have to write my own business plan. Someone has to believe in it to the extent that to invest millions of dollars. These are big, practical steps. And, and you’re competing in a marketplace with a lot of other folks. So I was definitely concerned about our ability to start this company. When I kicked it off, now what I brought to the table, which I think was one of my big differentiators is, I did have one foot in the institutional world. You know, I worked with Blackstone; super smart folks working at the top of their game at a very high level, a very large level of deal size. So I was going to be working on things much smaller. But that was a real institutional experience that was helpful. But then at the same time—both with the Trump Organization and with Ian Schrager—the most entrepreneurial and non-institutional players. And so that led me to be a little bit scrappier and have a little bit of a background. You know, I joke that when I left Blackstone and Ian, and I would make phone calls on my own. You know, people were much faster to respond to me when I worked for Blackstone. “Hey, it’s Russ from Blackstone.” People call me back like this. If now it’s “Russ Flicker from Russ Flicker Enterprises,” and the weeks go by, I think “do they remember who I am?” So you know, appreciating that difference and bringing those two pieces—which I think you do need—was a big benefit [for me].

Aaron Strauss: Yeah, I think that’s very good. It’s sort of like this career-shaping exercise. People say, “Oh, I worked at this huge firm or this fund, I’ll be successful.” But starting from scratch without that infrastructure is a whole other level and a whole other game, so you’re lucky to have had that diversity of experience.

Talk to me about the early years. I mean, 2010 was a frightful year to start a business. It wasn’t you know…Lehman was, I guess a year and a half, two years prior…but it wasn’t a fun time to raise money. [It] wasn’t easy to get started, I’m sure. But you had a couple partners you started with who you’ve really grown with. Maybe you could talk about the early years how you got started in the business.

Russ Flicker: Absolutely, and I, I would say that … it’s almost like looking back although we succeeded, it took longer and was harder than even I imagined. And so it is one of those things where you, if you’re starting a

business, you need to give yourself…prepare yourself for the amount of time and the amount of disappointment. It tests your confidence, if you will, on a regular basis. So in 2010, the best way I can describe what it was like in the early days being CEO and Chief garbage man, and, and the printer repair man is we found a transaction. The first transaction we ever bought, which was a hotel that Blackstone owned. We ended up buying it off market from Blackstone. And I was at Blackstone when we bought the public company MeriStar [Hospitality]. It was one of those assets, and I would say jokingly that John Gray probably didn’t know he owned the hotel when I bought it from him. And of course I’m being facetious, but it was a small hotel in a giant portfolio. We saw this deal in Orlando that we liked. We put together a business plan, and we spoke to no fewer than 20 investors in 2010. And 19 didn’t just say no. They basically said, “Russ, I think less of you for thinking this is a good deal.” It was so challenging and not only [that]you know you start to rethink your own ability to either underwrite or as a salesperson, [or] as an investor. And then, sure enough, we found one group, a totally institutional group—AREA, Apollo Real Estate Advisors, which is now part of Aries—bought it with us. But it was months and months of work. And keep in mind, having spent a good part of 2010 buying that, that one transaction alone didn’t, I mean, barely put us in business. We had something to talk about. We made a couple of bucks, but we were, you know, as a, I had two kids under five years old, I was still not supporting myself. So many months to get done because 2010/2011 were still very trying times. So it was, it was challenging.

Aaron Strauss: For sure. And then, you know, from there, I mean, certain years were stronger than others, but I mean, the markets certainly turn and rebounded very strongly nice long run. [At a] certain point, I don’t know the year, but I mean, you guys also bought. Full-service management companies. Describe how that fit into the business plan, how you acquired those, how many hotels had you had bought before you found that opportunity. And describe what it means the difference between buying some one-off hotel assets to being absolutely fully-integrated, vertically-integrated as a business.

Russ Flicker: Sure. Look, in the early days, we were really…putting together a deal or two. That first deal’s an example. And people would ask us not only is it, you know, is it a good deal and, and do all the underwriting together, but also, “Russ, what happens when you get a job in three months?” Like, “[if] this doesn’t work out for you, then you’re just going to end up going back to work for Blackstone or somewhere else”. As we, you know, we hit a critical point after maybe 24 months or 36 months where that was not the case and our company was a real company and growing. The management company acquisition in 2012 was a very big part of that. What was fascinating is that deal took 18 months from start to finish to complete. So not long after we bought our first hotel, we were talking about that. But we had to recut that deal three or four times. It was a family that owned not only a management company, but also a bunch of hotels that they self-managed. And it was a challenging time because their hotels, many of them may not have had any equity value. It was unclear because of the loans on them in the great recession. We recut the deal and restructured the deal multiple times ultimately structuring it into…an acquisition of just their management company and fixed price options on all of their hotels, [and] individual options—so you could exercise in some and not others—including hotels that were clearly underwater with their lenders, but maybe we’d have a few dollar option. And what that meant was we could then go negotiate with that lender as the contracted ND. Saying, “Hey, we’re going to step in. We can make this a consensual foreclosure [because] we can exercise the option and buy the fee.” So that deal not only gave us the management company—and I would say a little bit more of, in a very, very tiny way, the Blackstone and Related model where we have, we really control and can underwrite as part of the team. Buying that plus we had options then and we in fact exercised on five hotels through options in that same deal. And what that did was, in addition to having more hotels, having the sort of institutional expertise that comes with that staffing when we were looking at new deals after that, we had a team who could help us underwrite and vet new transactions. And that was a game-changer for us that really was a game-changer. And we did, we closed on that in…mid-2012.

Absolutely.

Aaron Strauss: What a difference it is to sit with an investor and talk about the full-service management company you have alongside as opposed to just the business plan to third party manage and asset. Right. What a game-changer.

Russ Flicker: Totally.

Aaron Strauss: And congrats on taking that down. I think I remember when that happened. And then, talk about sort of these mid years, I mean from 2010 all the way up until COVID, I mean there was about 10 years of robust app activity. Some years more active than others, but just sort of, building and growing a business alongside these acquisitions because buying the actual business of the hotel is just one part of the business. Figuring out who to hire alongside you guys, staffing your team, running the organization; those were all new skills you had to learn on the fly. So maybe you could talk a little bit about how you built your company alongside behind these deals.

Russ Flicker: Totally. And it was, you know, there were parts of it that we did deliberately, and of course we did best when we did it deliberately. And there were parts that we didn’t. I remember distinctly in 2000…I want to say 2013 or 14 our team in New York, which was not the management company. Our management company has always been based elsewhere that we acquired. But the team in New York, which is the investment team, was growing little by little. And someone asked me what the employee handbook said. And I said, “You know what? That’s a…we definitely need one of those. That’s a great idea. In fact, you’re in charge. Like, we’ve got to create one. And now we’ll all rely on that.” And I mean—I’m saying it teasingly now—but we genuinely, these are things little by little that when you start off and you have a couple of partners and a couple of employees, you don’t have systems in place and you need to put them in place little by little. So, I do think it’s one of those funny categories of be careful what you wish for. When I was a young entrepreneur, all I wanted was to have, you know, a great big company ‘cause that sounded exciting. I would say teasingly the HR challenges, and it’s a labor of love and we have a team that is so much smarter than us, which makes us great. But throughout the years, there are always challenges in HR, whether, you know, people are leaving or people are not getting along, or you need to staff up and you have attrition. I’ll say jokingly [that] the last three people that left our company went to Apollo, Blackstone, and MSD. And we like the compliment, but please leave us alone. Having a company means you have all these other things outside being an investor that become super important to your success. And we’ve learned along the way. And also I think absolutely the key is we have hired very, very bright, very, very motivated people. And we’ve been very fortunate with that.

Aaron Strauss: Awesome. Maybe talk about the title wave of COVID. I really try to avoid the topic of COVID because everyone’s sick and tired of hearing about it, but obviously your industry was tremendously impacted. So it shows tremendous resilience to go through that. But what was the portfolio like, you know, at the very beginning and then how do you sort of muddle through those couple years?

Russ Flicker: So we have 25 hotels maybe, and they’re, you know, some of them are larger hotels, so you call it something about 7,500 hotel rooms, 25 hotels, [and] maybe 5,000 employees going into COVID. All the hotel employees being our employees also. And, the only saving grace was, it was so bad that no one said, “Russ, what’s going on?” It was like, “Yeah” you know, it was like, it’s an absolute, it’s such a disaster that and everyone’s experiencing it everywhere that you didn’t need to explain what was happening. But listen, we had massive layoffs at the hotels, which was terribly painful. A lot of real personal impacts there. But we had…we kept our hotels open across the board, except in limited cases where the state required us to shut, Vermont briefly, things like that. So our hotels remained open. We had general managers who said, “Hey, I’ll stay on. I’ll clean rooms. I’ll bring the check in.” We went from our occupancy for same time, year over year dropped by 97%.

Aaron Strauss: Wow.

Russ Flicker: And so we were losing money performing the services we were obligated to perform. As manager, we didn’t have a minimum management fee. We were very fortunate. We had a line of credit. And that we had completed not long, but not because we were expecting COVID or anything like that; just dumb luck, we had just re-upped our line of credit. In March [2020], we pulled down everything. And essentially coming out of pocket funding the operations of the hotels. And having conversations with investors on Zoom with Bill Ackman’s family office. Bill Ackman’s an investor and a bunch of our deals. Great guy. And, you know, as an example, I remember, something to the effect of him saying, “It doesn’t sound good.” And I said, “I want to make sure you’re understanding; it’s not, ‘not good’. It’s like maybe every cent you invested with us is gone. It’s unclear. This is not sustainable. And so soon, I don’t know what will happen. We’ll send the keys back to all the different banks. It’s so bad that right now and it’s hard.” There was no visibility. I will say just—and I don’t want to ramble—that we had 25 hotels going into COVID. We own all of them today. We gave none back to the lenders. We navigated every single one. We required some capital calls for Partners, PPP loans. We sold off antennas and carved off land for Starbucks, and we were creative on this and that. It was a super challenging time. And then in [20]21 we bought more, and this year we bought more, but we still own everything we bought through COVID and we owned through COVID. So, what a labor. I’m too old to go through it again. I could tell you that, but … we, we survived it and we’re very proud of how we ended up. The story’s not fully told, but how we battled through that with our staff employees and everything.

Aaron Strauss: Amazing, amazing. And I hate to belabor that difficult time, but especially in your industry, it’s really amazing. What do they say? “Calm seas don’t make for great sailors.” So going through that, I mean, you can really face anything. That was Armageddon in your industry. And it was kind of like whiplash. Now everybody’s back and I’m sure occupancy rates are very, very high. And I remember reading a report just briefly—I think something that Blackstone put out—that they think despite this impending recession everyone’s talking about who knows what happens there. That hotels are hopefully in a very good position to weather that storm, given that people may travel to their local city as opposed to going to a foreign country. So hopefully you’ll see some really good resilience in the portfolio. And what a story of diversity that is, what a story that is. You could survive that. You could survive anything.

Russ Flicker: It was brutal. It was brutal.

Aaron Strauss: Yeah. But… and that leads to my next question. I mean, you’re in a stressful business even without something like the perfect storm happening. You started it from scratch, you’ve grown it tremendously. Hopefully now you’re in a wonderful place and continue to grow and acquire. But you know, day-to-day, the mental aspects are very, very taxing. And if you’re in the investment space, you have to really manage tremendous day-to-day stress, good markets and bad, every day it’s problems. So what type of things do you tell yourself on those tough days? Any advice you’d give to people who are, trying to look to become an investor in their own right or start their own firm, or what type of things [do] you tell yourself day-to-day to get through?

Russ Flicker: Great question. And you’re absolutely right. The stress; you can’t underestimate how tough it is or [you] can’t overestimate, rather, how tough it is to go through that. And what I think that leads to is I would say, teasingly, I was with Blackstone in 2008 and on paper, I was wildly wealthy in 2019. In my company, on cross promotes across 25 assets, I was wildly wealthy…on paper. And I’d say that you remind yourself that it’s rarely as bad as it seems, and it’s rarely as good as you hope. So you have to try to stay calm and say, “We’ll see, we’ll see. It’s good. Keep your head down.” There are plenty of times when I feel like I get nothing done every day and I look up six months later and we accomplished a lot. And the other thing I’d say is I think the best reason to become an entrepreneur is not to make more money. Look, the reality is if I stayed with Blackstone, probably I would, I don’t know. I would’ve done pretty well also. So maybe I would make more money if I say with Blackstone. What I got as an entrepreneur has massive, massive psychic value. Not only the value of…of the pride of building something and growing something, but also…the control I have over my time. Now I work, there are times when I’m, you know, on vacation and I have to take time off to work. But at the same time, the amount of time I can spend with my family, the amount of time I can move things around to prioritize family or kids or otherwise, the psychic benefits of all those things are huge. And that’s the reason to become an entrepreneur in my mind. Certainly, you want to make lots of money. Of course, right, everyone wants to make a lot of money and there’s nothing wrong with that. But I think that that helps offset that stress, that plus the idea that I try and it doesn’t [work]. I’m pretty excitable, but I try to hold myself back from getting too nervous when something doesn’t go my way or too excited when it seems like it is because things ebb and flow all the time and it is a stressful environment. You have to sort of constantly pull yourself back in the big picture and say, you know, “we’re going to get through this. We don’t know exactly how but this too shall pass.”

Aaron Strauss: Wonderful, I fully agree. You’re in the market now. You just took down a nice-sized deal I think just three months ago perhaps. Somebody’s listening to this, and I’m sure people are pinging you for deal-flow all the time. But if something’s in your strike zone, what does it look like today if somebody wants to start sending you some things to look at?

Russ Flicker: Great question. So we took down a, a good size deal this summer, and that was actually in the condo hotel space, which is interesting. Most of everything we have is traditional condo. We think there’s an opportunity for some deals in this condo-hotel space. This one actually has 20-year contracts across 90% of the units. So even though it’s condo-hotel, and you’re managing individual units, you have long-term contracts. So it’s sort of interesting. But…putting that aside, and that is an area we’re looking at. Today is much more like the Great Recession in terms of the capital markets challenges, a little bit of capital market stickiness. There was more then than there is now. In COVID, it wasn’t capital markets. That was great. It was just the underlying hotels. To your point, medium-term hotels look great. There’s lots of demand for them. There’s been much less supply of new full-service hotels. So medium term ability to push RevPAR is great because supply is, is in our favor. But the capital markets are making it a little bit challenging. Costs—not just rates—but spreads are up dramatically. And so the all-in interest is very expensive. And so, I think today, finding things where maybe the seller will give you some seller paper. Your mortgage risk is lower. Identifying areas where you think inflationary pressures will help ADR more than they’ll hurt you on cost of employees. We always like, you know in times like this, I think a good story helps and that is why is the seller selling? Why is this the right time to buy? So but look, we are active and looking for new deals and I think over the next 18 to 36 months, we are very bullish on the opportunity to buy more hotels.

Aaron Strauss: Amazing. While I have you, anything that you wish I would’ve asked that I didn’t ask, anything else you want to cover?

Russ Flicker: Look, the only thing I’d say is…the only thing I’ll cover is we’re all spending time; we are, and I imagine a lot of our investor friends are spending time thinking about what’s the yield curve going to look like next year? What does inflation mean both on rates, but also on cost of food and cost of employees. But one thing that’s really fascinating to me is…if you look at the history of rate increases from the Fed, especially this kind of dramatic pace, historically, it reverses very quickly when it reverses and rates drop, like, like flies. And so, because historically the Fed sees once it takes a few months for you to even see what the rates have done. And by the time you see it, recessionary pressures are there and now the Fed says, “Oh my gosh, we gotta…” and so they reverse themselves. And so I would say, what we are wondering and having passionate debates about in our office, but at least my personal view is, it wouldn’t be surprising if as early as mid-next year the Fed is cutting rates—which I know it seems crazy—but could end the next year. But the perception and the yield curve, once they’re even talking about the possibility of cutting rates will dramatically change. And so how long this lasts, who knows? It always takes fortitude. And you really have to have discipline and confidence in your projections in order to invest in times of great flux. But those are all often the best investments. So with that, I don’t have a crystal ball, but we are absolutely looking at new deals.

Aaron Strauss: Amazing, Russ. Well, I want to thank you again. It’s been an awesome conversation. I think people will take a lot of inspiration, but also some good tactical skillset and mental skill set that they’ll need to power through whatever’s coming next. And again, really appreciate the time and with that, I guess we’ll wrap, but I appreciate it again, Russ.

Russ Flicker: Thank you so much for having me. Really appreciate it.

Aaron Strauss: Of course.