Editor’s Note: Today, we’re sharing a guest essay from Marc Chaikin, founder of Wide Moat Research’s corporate affiliate Chaikin Analytics. Marc has 50 years of experience in the markets as a trader, stockbroker, analyst, and head of the options department for a major brokerage firm. Today, he shows why management quality can make or break a company in one of the most competitive corners of the real estate world – and why that matters so much for investors right now.
In February 2019, Terri Shanks was on a global adventure with her 7-year-old son, Cameron…
A few months earlier, they left their home in the U.K. Shanks was going to spend about two years traveling the world.
She spent years preparing…
Shanks spent her entire life savings on the trip. It felt like a priceless opportunity to make memories with her young son.
They spent a few months going across the U.S. and Canada. In early 2019, they visited Malaysia and Singapore.
The next stop was Australia. That’s where things took a turn…
After a long flight, Shanks and her son arrived around 11 p.m. at the Cambridge Hotel. It’s a 15-story hotel in Sydney.
While they waited to check in, the fire alarm went off. The desk clerk seemed unfazed. He made an announcement over the intercom to tell guests to stay in their rooms.
It turned out to be a false alarm. But it was a bad omen for the rest of Shanks and her son’s stay…
Their room was on the third floor. As Shanks opened the door, she instantly noticed a damp, musky smell.
It was bad. But she and her son were both exhausted. Shanks opened a window and went to bed.
She woke up a few hours later while it was still dark. The smell had become even worse – almost like sewage.
Shanks sprayed perfume on her pillow. Then she went back to sleep.
The next morning, the situation was the same. And now, she could see how filthy the room actually was…
A Worst-Case Scenario for Bad Hotel Management
There was chipped paint everywhere. And the curtains were moldy.
The bathroom was even worse – with dark spots all over the shower and toilet. And Shanks saw poop on the wall by the toilet roll.
Outside, the pool was disgusting. The water was clear. But it revealed a series of dark, moldy-looking patches all over the sides of the pool.
Shanks went to the front desk to ask for a refund – or at least a different room.
She told the manager about the awful smell. He said that he would make sure the room was properly cleaned. But Shanks explained that a simple cleaning wasn’t good enough.
That’s when Cameron did his part…
As Shanks complained about the smell, her son threw up on the floor next to the reception desk.
After that, the manager agreed to move them. Their new room was almost twice the size of the first one. It featured nice views of the city. And importantly, the bathroom was clean.
Aside from this disaster at the Cambridge Hotel, Shanks’ trip was a huge success. And it was a wonderful experience for her son.
The Cambridge Hotel ended up getting a major renovation. Its owners spent $65 million to modernize and expand the property. They even changed the name.
The building obviously needed updating. And it might have saved the hotel from going under in a tough industry…
The Importance of High-Quality Service
Struggling hotels don’t last long. Even a temporary drop in quality can trigger a wave of negative online reviews. That usually leads to fewer bookings – and less money.
Keep in mind that the entire real estate industry is built on debt. And that includes things like hotels, resorts, and casinos.
If a hotel’s revenue keeps sinking, it won’t have enough money to cover its debt payments.
Just look at what happened to LuxUrban Hotels a couple months ago…
In September, visitors to its three New York City hotels showed up to find a “closed” sign on the front door. The company didn’t contact them beforehand.
It turned out that LuxUrban had just filed for bankruptcy. Previous guests noted that its hotels had low occupancy and almost no staff.
Of course, most hotels don’t let things get that bad.
But high-quality service is critical for successful companies in the hospitality space…
It’s a tough, competitive business. Every hotel is desperate to stay ahead of its competitors.
So for investors in the sector, that makes finding the best operators particularly important.
The hospitality industry is currently going through a rough patch. But it’s not affecting every company the same way. But it’s part of an economic trend that has been gaining steam recently.
Good investing,
Marc Chaikin
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