John Pritzker on the importance of perseverance and an iron stomach

SAN FRANCISCO – John Pritzker believes some of the best investments can be made during disruptive moments in a cycle and with The Federal Reserve poised to further cut interest rates, that moment could be at hand.

The founder and managing director of San Francisco-based Geolo Capital talked to Hotel Investment Today about the state of M&A, what he loves about the business and offers his more bullish take on San Francisco.

Complete video transcript:

Hi! I'm Jeff Weinstein, editor in chief of Hotel Investment Today, and this is On the Money.

I'm excited to have with me today John Pritzker, founder and managing director of Geolo Capital in San Francisco. Geolo is a multi-billion-dollar developer of hospitality and multifamily assets.

John, thrilled to have you with me today. Thanks for being here.

John Pritzker: Thank you. I'm thrilled to be with you as always.

Jeffrey Weinstein: So, let's jump in. You know, you've been in this business a long time and you've obviously had big learns along the way – some of those ‘aha’ moments where you kind of took something away and really was able to use it throughout your career. Tell me about one or two of your aha moments that really gave you this great learn, this great takeaway that you still apply today.

I’d like to think any one of those perils would have been enough to derail even the most hardened investor. We either had the iron stomach I referred to, or we were totally naive.

John Pritzker

Pritzker: Well, I guess it would use Ventana Big Sur as the example.

Ventana Big Sur taught me about perseverance, flexibility, and the need for an iron stomach.

So, we bought it in 2015, and for six months we were geniuses. We were convinced.

We were beating business plan. Everything was going great. Then the Soberanes Fire hit and came within the half mile of literally burning us down.

That went away, we dusted ourselves off, and we proceeded with a planned renovation.

Six months later, amidst 100-year rains, the resort was cut off both to the south and the north. When the bridge on Highway 1 failed and we were closed for eight months we had to hike in 45 minutes to get to the property.

We kept everyone on payroll. We managed through the closure.

We completed the renovation. We repositioned the hotel. We were hitting our stride again, and then COVID hit. The hotel shut down, I think, for four or five months. We reopened in the mid-summer of 2020 as a repositioned, all-inclusive resort, and we did really well. I think our NOI doubled.

At that point in the investment cycle and my patience, we figured it was time to pass the torch to the next investor, and despite our parade of challenges, we set a record for per key sale price. I’d like to think any one of those perils would have been enough to derail even the most hardened investor. We either had the iron stomach I referred to, or we were totally naive.

Weinstein: You're still an investor in the hospitality space. What motivates you? What is it that that gets your juices going and get you excited?

Pritzker: As the landscape has changed, it’s a much more real estate- and finance-driven industry than it ever was before. But I came up through operations, and I’ve always loved the people element, both our guests and our staff and our colleagues.

We're in the hospitality business, not the shelter business.

The city is not nearly as bad as the press that it receives. It’s still the most beautiful city. The bay is still there. It is vibrant, and it’s coming back, and that’s not me marketing. Full disclosure – we don’t have any hotel product in San Francisco. So, I’m not marketing. I'm not pitching.

John Pritzker

We've built a portfolio of lifestyle hotels and resorts, and the objective is to try to connect with guests on a very personal level. So, I think about Chicago Athletic Association. It was built in 1891 for the World’s Fair, and it really screamed Chicago history. And if you go there, you will literally live in Chicago history.

At Carmel Valley Ranch we do the S'mores rituals. We do the bees. And I think those are critical elements to the financial success of those hotels. So, it’s the programming and experiential end that really gets me excited. Still.

Weinstein: You mentioned it’s changing times, and certainly right now things are evolving on the investment side, and there's a lot of expectations heading into the end of the year and into next year. What's your take on transaction activity for next year?

Pritzker: If we can get Chairman Powell to cooperate, we’re all hoping for a meaningful uptick in transaction activity. I think we need to see a 50-bps reduction in base rates before the spigot really opens. Until that happens, with a few exceptions that we’ve seen over the last few months with the large transactions, think it's going to remain pretty anemic for a while.

We've all been waiting for this rate drop to happen, and a lot of people figured in two or three drops. And I think we're just hoping for one meaningful one.

Weinstein: A lot of people are saying, give it six months and maybe we'll see a point or more. What would that mean?

Pritzker: As my mother says, your lips to God's ear.

Weinstein: What do you think if we got there? What do you think it would mean to the investment market?

Pritzker: I think the spigot opens, and there's a lot of money waiting. There are a lot of bottom opportunities.

I also think it will allow owners like us to enhance existing assets. But until that happens, our strategy hasn't really changed.

So, reduction in base rates: it'll provide relief for our floating rate loan facilities, and it'll free up capital to enhance existing assets. But until then I'm a little pessimistic.

Weinstein: Would it make you more of a buyer? Would you get more active in the market?

Pritzker: Oh, that's for sure. But you know, I think there's so much money out there. It's going to come flooding back. And I think competition for the bottom is going to be very tough.

I'm not Blackstone. I'm just little old me.

Weinstein: So, you’re in an interesting market. Your office is in San Francisco. Everybody’s asking the question: when are they going to fix San Francisco? What's your take? What’s your expectation for an eventual rebound in hotel values?

A good basis, though, needs to be supported by an actionable, forward-looking business plan. And a lot of these opportunities come with challenging labor dynamics or business models that don’t really work in a post-COVID operating environment. So, I think we just have to wait. It’s a mixed bag of what happens with rates. How much money is out there flooding into the market. Time will tell.

John Pritzker

Pritzker: What did WC Fields say? The stories of my death…

The office complex that we’re in we share with a variety of private equity venture capital and tech firms. It’s fully leased. It’s fully occupied. Restaurants are packed, new restaurants are opening.

I'm involved with the Museum of Modern Art, which is literally Kitty Corner from Moscone, and I think until Moscone comes back and creates the same level of pre-COVID compression, I'm skeptical hotels will be able to overcome the increases in operating expenses.

I've been screaming about Moscone to anybody in town that'll listen. There's a booking cycle, and if it all got cleaned up tomorrow morning, it's probably a couple of three, four years before we're back to where we were.

From a property standpoint, over the next six to 12 months, I suspect there'll be a handful of trades at the bottom before we see growth and valuations pick up in San Francisco. But you know, for those naysayers who love to sit 3,000 miles away and say how awful it is, come to San Francisco. You'll see it's not nearly as bad as our press.

Weinstein: So, one last question, John. Based on bigger picture hotel investment trends, what do you see? What is a great opportunity right now? Conversely, what gives you pause?

Pritzker: Well, historically, our best investments were sourced during times of disruption. We bought Carmel Valley Ranch in 2009, and the Hutton in in Nashville in the spring of 2020, and have done very well with both.

So, I think we just have to wait. It’s a mixed bag of what happens with rates. How much money is out there flooding into the market. Time will tell.

Weinstein: Well, John, thanks for being with us today. I appreciate your candor and your expertise and look forward to seeing you down the road.

Pritzker: Nice seeing you, Jeff. Thank you.

John Pritzker on the importance of perseverance and an iron stomach

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