80 – Hotel Syndications and Managing a Billion Dollar Asset Portfolio with Jerome Yuan

So the best way, I mean if you’re really interested, is just study deals and deal flow and whatever comes to your desk, whatever questions you might have, you got to keep studying and make sure it’s something that’s right for you.

Hey everyone, and welcome to another episode of the Everything Real Estate Investing Show with Sean Pan. Today, we have Jerome Yuan. Jerome’s a hotel syndicator and at one point, his portfolio consisted of 1 billion dollars worth of hotels. He’ll be sharing his story of how he got into the hotel space and how he was able to leverage partnerships to do larger deals. If you’re interested in understanding how investing in hotels work, you need to listen to this episode. If you enjoyed this episode, subscribe to the show and leave a review. We release episodes every Wednesday and Sunday and release the show notes on our site everythingREI.com. Enjoy!

Sean: [00:01:07] Go ahead and introduce yourself and let us know who you are and how you got into real estate investing.

Jerome: [00:01:11] My name is Jerome Yuan. Worked at a family office basically with my father and my uncle and we’ve been doing real estate investing mostly in the commercial real estate and specifically in the hotel space for over 10 to 12 years now. The way we started was just backing into this sector back in the financial crisis 2008-2009. My family figured it was a good time to jump back in into real estate and we looked around different asset classes: office, retail, apartments, and hotels mainly, and found that there were a lot of opportunities in the hotel sector that we can take advantage of. And we kind of jumped on the opportunity once it presented itself whether through like bank foreclosure, bank notes or just distressed assets with working through with sellers. So the past, you know, 12 years have been a good run especially in the hotel sector because the cash flows have been great and we just been leveraging ourselves and our education to keep growing and doing more deals one by one.

Sean: [00:02:37] Did you guys have experience with real estate investing before all this?

Jerome: [00:02:40] Yeah, so minor experience. My father in the 80s and 90s did some development. Mostly condos, small units, like 6 to 8-unit condo developments and would sell it off. And then you know, we had some legacy type of real estate investments just in the family like a small apartment unit, like 15-unit apartment. And then some farmland up in Bakersfield that we just kind of leased out. You know, we didn’t have specific experience in the hotel sector so we kind of just learned as we went along.

Sean: [00:03:19] Hotels are such like an ambitious project, don’t you think? Like most people when they go into real estate investing they buy a single-family house or they flip a home.

Jerome: [00:03:28] We were fortunate enough to be able to kind of pool our money together with overseas investors. You know, just from networking and my family’s background. During that time a lot of money was coming in from China and Asia. You know, we would look at projects together. And so obviously at that time we didn’t have millions of dollars to kind of put down on a first project. So we kind of syndicated investment together with a partner where they put in about ninety percent of the capital and we put in ten percent. And you know, they needed some local knowledge to walk them through everything here. So we’re kind of fortunate in that way where we started with a big partner that wanted to do bigger deals.

Sean: [00:04:18] So this partner is overseas and have this a lot of capital they want to invest in something in the United States. You guys are like the boots on the ground and able to offer I guest operational expertise.

Jerome: [00:04:29] Right. Yeah, exactly. So yeah, they’re overseas. So what we did was we are the asset manager instead of like the property manager, where we do have a property manager at the hotel that we hire. It’s a third party and they’re approved by the brands and stuff but we act as asset manager. So almost like owner’s representative that’s here in the US but we negotiate with the property manager, their contract. We negotiate with a lender if there’s a loan. We negotiate with the franchise, the brand if there’s a brand like Marriott and Hilton. And we do mainly the big ticket items in terms of capex. So anything above, you know, like $5,000 at the hotel we got to approve anything and and pay for that capex coming from our office.

Sean: [00:05:21] How are you sourcing those deals when you’re just getting started?

Jerome: [00:05:23] It’s funny because in 2009… so we actually closed our first hotel in 2010. In 2009 we’re just you know talking to brokers and and talking to banks. It took us like almost a whole year to source the first deal. But when we closed in 2010, it was like early 2010, at least in Southern California or Los Angeles, we were the only group that purchased a hotel that whole year that was over 30 million bucks. So we kind of made a name for ourselves in the industry and everyone, all the brokers and all the management companies came to us after that and said, “Who are these guys who wanted to buy a hotel?” you know, at this time when nobody else is buying. So we kind of built a reputation at that time so that people will come to us if they had any deals and because they knew we can close, we were interested in, and wanted to get deals done.

Sean: [00:06:32] And did you have your money partner already lined up or did you try to make the deals first?

Jerome: [00:06:37] Yes, we had the money partner lined up. He wanted to diversify out of China and wanted to put money to work here. And so we look together at all those different asset classes and just fell upon hotels. So yeah, we’re lucky in that way.

Sean: [00:06:55] So go ahead and tell me the quick story of how you found this first hotel deal. Where was it? And why did that particular deal looked attractive to you?

Jerome: [00:07:02] It was a broker deal through JLL but it was also a bank foreclosure. So they were working on behalf of the lender. And you know, you could take it over REO once you purchase. So it’s attractive because the bases are so low. It was a 450 keys Marriott in downtown Los Angeles. An old Marriott, which has since changed to an independent boutique hotel. But for 450 keys, you know, we could buy it for about 60 million, which was basically the amount of the note and with a little bit of discount. So that’s kind of where we came up with why this was attractive. It’s one it’s in downtown LA. We knew that downtown LA is transforming. It’s a good location. It’s all about location. And that you know, we were in at the cost of the lender so we felt like we were safe. Obviously as you know, non-performing asset that we had to inject a lot of capital, working capital as well as spend on the renovation, but we felt putting that money would be worth it after doing all the due diligence.

Sean: [00:08:27] So that’s pretty amazing and obviously back then there were some great discounts. How about now? What are you looking for now?

Jerome: [00:08:34] Yeah. Now it’s a lot different where you know, we’ve had a long kind of run in the cycle. Some of the hotels that we have across the country, you know, you can see kind of a… I don’t want to say slow down but it’s you know, kind of slower growth in terms of one year after the other. So now just based on my experience and the lessons learned, because I’m located in California, I want to stay, if there is a hotel, I want to stay in California or major markets like New York, Manhattan or New Jersey or something like that; markets that I know that I’ve been in and I can understand fairly easily. So I’m not going to go into a new market like Chicago or something like that even though I’m sure it’s a great market. It’s just I would have to start over and learn about the whole city and the market demand. And because you know because we’re such too late in the cycle, I want to make sure that our cap rate that we go in is reasonable for that market. So whether it’s a 8-cap, 7-cap, something like that, in California it’s something that’s more reasonable and that can support the distribution that I’m promising my investors.

Sean: [00:10:06] So, what are those? Like what is your buying criteria? And what are the distributions that you kind of tell your investors?

Jerome: [00:10:12] We’ve always kept it simple. So distributions are 8% preferred. And we keep the waterfall and the hurdle, you know, very simple and easy. 8% is kind of the hurdle. And then the buying criteria, if it’s in like urban downtown kind of LA, San Francisco, obviously cap rate can be lower. But within the suburbs then I got to get like 7.5 to 8% in terms of cap rate for the hotel.

Sean: You’re just talking about 7-8%. I know people who are buying hotels here in San Jose or San Francisco is 3-caps.

Jerome: Right, every investor has a different criteria. So it could be, you know, trophy property, or a distressed asset, or could be a huge value add play, you know, depending on where they’re buying it. So everybody’s different but at least for me and for where we are I got to have a seven or eight cap in this. I mean, especially in the hotel sector if you buy such a low cap rate, you could get in trouble, it could.

Sean: [00:11:27] Does a hotel require a lot more work than say a multi-family?

Jerome: [00:11:31] Right. I mean hotels are a completely different animal. Depending on the size of the hotel, there’s anywhere from 40 to 100 employees working at the hotel. And people check in and out on a daily basis. So definitely there’s couple long-term contracts but majority of the hotel is daily volume, daily transactions. So there’s a lot more operational activity that needs to go on a daily basis to watch over the hotel. I mean and that’s also the reason why there’s like kind of an arbitrage opportunity where operationally one management company, one owner to another owner, have different investment philosophies and different ways to manage. And so one owner can make a lot of money with the same hotel asset compared to another owner. And it just depends on how they want to manage and how they want to own the asset.

Sean: [00:12:30] So what do you think separates you and your company from let’s say another hotel operator?

Jerome: [00:12:34] We’re hands on. I’m not saying other people are not hands on. But we we watch the expense line items extremely carefully, just because the flow through. You know in apartments, if you have the net income compared to the gross revenues, it could be like 45-50% for net income from the gross revenue. But for the full service hotels that we’re looking at, it could be, you know, the name can be 20-25% of the gross income. And so every dollar that we save is a dollar to the bottom line. You know one thing that we do is definitely watch the cost extremely carefully. The other thing that we do is we watch the cost of the renovations extremely carefully. So we have a team kind of in-house project management that does all the construction and design and walk us through the renovation so that you know, we try not to go over budget. We try not to go past the deadlines in terms of construction. And so that kind of helps us save money in that sense. I mean, I think the business-wise it’s hard. It’s hard for us to generate revenue for the hotels just because all of our hotels are across the country, you know, we really rely on the property manager, the brands, the management team in-house at the property, to generate that revenue. But expense-wise we try to keep things in line.

Sean: [00:14:10] And what are some of the things that like a new operator might not know when they get into this business?

Jerome: [00:14:17] There’s a couple things I mean, you know. One the property manager that you pick is extremely important for the hotel. I mean, if you don’t even want to think about it, you can hire the franchise to manage the hotel. There’s plus or minus two everything. But first things first is the property manager is the most important thing and digging deeper is really the general manager at the hotel. That’s the most important person for you to communicate with. They’re like the CEO of your hotel and their day-to-day, talking to all the employees and the clients and customers and and the brands and stuff, so that person kind of steers the ship for the whole asset. And so you just got to be very careful. Make sure you pick the right person. They understand what you’re trying to do. They know the ins and out of how to manage the reservation system and you know follows all of your guidelines in terms of operations.

Sean: [00:15:24] Yeah, sounds like all the like similar problems that we have on the residential side, just on a much grander scale.

Jerome: [00:15:31] Right. I mean, yeah, it’s very similar, you know, like kind of like fixing and flipping houses is similar to fixing and flipping hotels. I’m just yeah just bigger dollar amount.

Sean: [00:15:41] So I remember when I first met you, you said you couldn’t make it to our event because you’re busy closing or I guess putting down a down payment on a large hotel in Texas. And I remember you said the down payment was like three million dollars, and just like my mind exploded because that’s the purchase price of a whole home here in Palo Alto. And you know, you guys own like the Queen Mary right? The hotels in Queen Mary. You own some hotels in Florida for like Nickelodeon. I was wondering you have so many projects. Do you have a favorite one?

Jerome: [00:16:14] Yeah. No, I don’t. You know one of the… there’s a Double Tree in San Pedro and Los Angeles. That one probably is the closest, nearest, and dearest in my heart. It’s one of the earliest hotels that we purchased in like 2012. And we bought it like, you know, dirt cheap for like 12 million bucks at that time. And you know, I don’t think that we’ll ever going to sell that thing because our bases is so low. That one’s on the water or by the water, and we spent money to renovate it. So it’s nice, kind of resort like feeling and we’ve had a good time owning that for the past six to seven years. Yeah, there really isn’t a favorite. I try not to get too emotionally attached to any of the investments just because it’ll make it harder for us to sell and exit when the timing is right. But yeah, I think that one is my favorite.

Sean: [00:17:21] I totally understand because at the end it’s a numbers game. You don’t wanna get attached to anything. So I was wondering how do you fund your deals? Because I’m pretty sure it’s not just one guy funding you guys 90%. You got the 10% more. How are you guys trying fund?

Jerome: [00:17:38] We have different funding sources for our most recent projects. And mainly it’s friends and family. So friends and family would come in for the majority, I would say 65%, you know two-thirds of the investment money. And then to the 1/3, you know the last two or three projects we actually tried crowdsourcing. So we’ve done online crowdfunding and raise a couple million dollars just to try it out and see how it goes. But yeah, we have different sources and obviously the high net worth individuals that we work with in the past and some institutional partners that we’ve done in the past have come back as well. But mainly it’s just friends and family and this crowdfunding thing.

Sean: [00:18:28] So do you guys usually do 25% down and then get some large bank to cover the rest?

Jerome: [00:18:34] Yeah, we try to be more conservative because hotels are a lot more volatile type of commercial real estate. So we do at least 30 to 35% down and then we go out and get a loan for 60 or 65%.

Sean: [00:18:50] Okay, and then you said that you guys do like 8% pref. And on the back end, what does that waterfall structure usually look like?

Jerome: [00:18:58] 8% pref, then hundred percent total return to investors and that’s including our money that we put in and we put in anywhere from 10 to 25% of the capital stack also. And then hundred percent to the investors back and then it’s 70/30 split.

Sean: [00:19:17] 70/30… to the investors right?

Jerome: [00:19:21] Right. 70 to the investors. 30 to us as the manager.

Sean: [00:19:24] How big is your guys asset portfolio now?

Jerome: [00:19:27] So we just actually did a transaction where we sold six of our hotels to a public REI in Singapore for 250 million for the six hotels. I’ve been gradually selling the hotels since 2017 just because I have a feeling timing is right and I just don’t want to hold onto too much risk as we get later on in the cycle. But anyway, so we just sold six. We only have three hotels left in the portfolio which you know, the three hotels are about 150 million, put it like that.

Sean: [00:20:11] I mean it’s still a lot.

Jerome: [00:20:14] It sounds like a lot. Real estate is funny. You know, it sounds like a lot, you can leverage. But really like, you know, sometimes you’re still cash-poor, you know you’re asset rich and cash poor.

Sean: [00:20:26] That’s how it is on all levels man, because when you buy seven houses but then you don’t have cash at some point.

Jerome: [00:20:31] Exactly like that.

Sean: [00:20:32] I mean, so you’re actually pretty big on the space. Do you have any opinions on, I don’t know, I guess like public raisers like Grant Cardone? He’s very big out there getting people to invest in his syndication deals.

Jerome: [00:20:43] You know I’m not too familiar with like a lot of the syndicators out there in terms of other asset classes I guess. For hotels like the only real groups that I deal with are like private equity funds and management companies and institutional guys, or I know that they’re still raising a lot of money and chasing a lot of the same deals. So, I mean, I think there’s a lot of deals out there. There’s a lot of money out there chasing fewer and fewer deals. And so I feel like that just drives up the price on the hotels. My belief in the syndication is like it’s more about the project. If the project makes sense, then you can raise money for it. I mean the sponsor obviously is important and the track record and you know, if they’re trustworthy and all that type of stuff, you know, that has to be given. But you got to look at the project. I don’t think I like the fund system; kind of you invest in a fund and “let us take care of the investment”. I think that can be hit-or-miss and it’s harder to evaluate.

Sean: [00:22:04] I guess the problems that you have on the grand scale are the same as the problems we have on the small scale, but you guys profit way more because you’re doing much bigger deals. Would you recommend that people get into larger commercial properties or should they start with the small single family homes and duplexes first?

Jerome: [00:22:20] I think it’s really up to that individual investor and how they see things. I think a lot of people could get intimidated by doing bigger deals, you know. It’s all about about risk appetite and their investment knowledge. I would say start small like I personally started small too. Like we just kind of built 2 spec houses down here in LA to see how kind of construction and development works because we’re thinking about doing development now. And so, you know, we just built two houses from the ground up and sold them and just to see if it’s something we want to try on a bigger scale and building a hotel or any other commercial real estate.

Sean: [00:23:06] Do you have any advice for any new investors who want to get into the hotel space? How would you even try to get into your space?

Jerome: [00:23:14] Yeah, man. It’s been a while so I’m not exactly sure what’s the best way to get in. I think you just got to look at as many deals as you can. You know when we hire new employees for our company, I just keep sending them deals to study and they just gotta know review all the deals, review the demand drivers, and what are the value-add propositions, just to get yourself familiar with the asset class and location and everything. So the best way I mean if you’re really interested is just study deals and deal flow and whatever comes to your desk, whatever questions you might have, you got to keep studying and make sure it’s something that’s right for you.

Sean: [00:24:07] How large is the company now? How many employees you guys have?

Jerome: [00:24:09] Yeah, we don’t have… I mean we’re still like a small company with 10 employees, because we were more of asset manager and we’re like try to keep it light in our own office. Yeah, we’re still a small company. I mean, it’s funny like we had a portfolio that was worth at one time close to a billion dollars, but we’re still like 10 to 15 employees in our office. That’s why I think asset value in real estate, it’s kind of strange a number to evaluate, but I guess there’s no other way that you can evaluate.

Sean: [00:24:50] Oh, yeah. I mean just keep it quiet like 70-member operations but all you do is flip homes, and they’re nowhere in the 1 million dollar asset value range. So like what are those daily tasks that you’re having your team do?

Jerome: [00:25:03] It’s all like whatever fire’s that come up at the hotel level that reach up reach our desk on a daily basis. So it could be, you know capex, then these get paid right away. It could be, you know any violation that popped up after the last fire life safety test from the local fire station. Or it could be just the brand is visiting the hotel and getting the hotel ready for QA, quality assurance inspection. Yeah, that’s like 20%-30% of the day and the other 30% is like taking care of asset level like lender questions, investor questions, brand correspondence. And then the last you know 30-40% is just spending time on finding new deals, doing underwriting, and reporting to current investors and general office type work here in the headquarter.

Sean: [00:26:12] And for finding new deals, are you guys doing more broker outreach or since you guys are such a big name that you’re actually getting all the deals to your desks now?

Jerome: [00:26:19] I really believe in building the broker network. So we always try to do more broker outreach. They’re very important to the deal flow because we need deals. They’re one of the first people to kind of hear deals. I have a team here that reaches out to them, talk to them. I mean we do get emails from email blasts from all the big brokerage houses. But yeah, we reach out and then we reach out to like that the management companies, third-party managers that manage with tells for other owners. They get first-hand information of other owners who are trying to sell. I really believe in trying to build up that network because it’s important especially in real estate, you know, your reputation is very important.

Sean: [00:27:04] Yep, absolutely. And staying top of mind is very important as well. Now that you have so much experience and you know kind of know more what you’re doing now, if you can go back in time, say 20 years from now, what kind of advice would you give yourself?

Jerome: [00:27:18] That’s a good question. 20 years going back in time, I would just tell myself to kind of focus more time on studying different real estate asset classes and trying to make sure I understand each asset class in greater detail. Just because now that I do understand hotels and this asset class and I’ve been exiting out of hotels, I do want to kind of expand and go into different asset classes. But I’m just kind of like starting over now and doing all due diligence on a whole bunch of stuff.

Sean: [00:28:00] Yeah, it’s fun to jump asset classes, but also very scary because like you said it’s like starting all over. So how can people get in contact with you?

Jerome: [00:28:09] Our company website is AsapHoldings.com. That has all of our contact information. I get emails on a daily basis so feel free to email me or call the office number on there. That goes directly to me.

Sean: [00:28:28] Awesome. Well Jerome, thank you so much for your time today and telling us everything that we need to know about hotels.

Jerome: [00:28:34] Thank you so much for inviting me.

Sean: [00:28:37] Take care!

Here are some of the key takeaways from this episode. Partner with someone who has a lot of funds to do big projects. It’s much easier to do deals after your first one because brokers now know that you’re serious. And when you’re investing in someone else’s deal, it needs to be project specific. Jerome doesn’t think the hedge fund model works. Your reputation is also very important to real estate. So keep a clean record. Treat everyone with respect and constantly follow up. I hope you all learned a lot. You can find the show notes on our site everythingREI.com. Thanks, and have a great day!