Thayer Lodging's Leland Pillsbury on the foreign investor mindset and why cross-border investment should be easier

Anyone who knows, met or has heard Leland Pillsbury speak, knows he says what’s on his mind and rarely uses a filter to deliver it. In the hospitality industry, where all too often executives carefully choose their words—or, worst, have their words written for them—Pillsbury is a refreshing anodyne. One of his greatest strengths is his experience and background: he’s worked on the brand side and he’s worked on the investment side. This blend allows him insight that few have.

In 1991, Pillsbury co-founded Thayer Lodging Group, a private investment company he is now chairman of, and whose assets include some of the top hotels in the U.S., such as The Ritz-Carlton, San Francisco. In 2010, Thayer, along with JV partner Shanghai Jin Jiang International Hotels, acquired Interstate Hotels & Resorts, the largest independent hotel management company in the nation.

Prior to launching Thayer, Pillsbury spent 19 years at Marriott International, where he became an EVP and a corporate officer. In addition to his work at Thayer, Pillsbury played a major role in the launch of numerous new companies in hospitality, including internet services provider TIG Global and Chinese central reservations system innovator HUBS1.

If there is someone who understands the mindset of the foreign investor, it is Pillsbury. He will share that comprehension as the closing speaker at NATHIC, Nov. 4-6 at the Fontainebleau Miami Beach. Pillsbury will discuss how to be successful as a hotel investor, which is to say, how to avoid being a bad one. One of Pillsbury’s top tips, especially for foreign investors, is to never be passive: “If you are relying on inflation to bolster your investment, then you’re a defensive investor and hotels are no place for you to be,” he famously says.

This candid point will be just part of his address, in addition to delving into topics that include how to work with partners to make sure goals are aligned and why hotel investment is still such a great growth story—for investors both within North America and outside.
Ahead of the conference, Pillsbury offered up some further advice for cross-border investors, and some instruction on how to make foreign investment into the U.S. even easier.

What does it take to be smart and shrewd investor, particularly when your business is buying and selling hotels?

Pillsbury: The notion of being a passive real estate investor doesn’t work. If you are passive, you are relying on inflation and the hope that there will be inflation. If you are foreign, you are hoping for that combo of greater inflation in the U.S. than your home currency, in order to produce attractive returns.
What is your rationale for investing? Is it an inflation hedge, a defensive investment or a growth strategy? If you are looking at hotels, it’s hard to be defensive under any circumstances. Hotels are more volatile than any other class of real estate by their nature. The industry is cyclical, and returns show greater volatility than other forms of commercial real estate because hotels derive yield from operating cash flow rather than lease payments.

Hotels are very good inflation holders, and you can reprice them daily. If that’s the case, then as an investor you have to recognize that not all of your partners necessarily share your objectives of maximizing your price. So you better have an asset manager watching out for you.

Investing in hotels is a good growth area because hotel demand has been growing faster than GDP. And will continue.

You have noted or said you believe brands have lost some of their value. Brands and owners, in some regards, are at odds: Brands want to open more hotels because they derive fees that way, while owners want less supply in the market so demand and occupancy stay high. How do you explain this duality?

Pillsbury: The brands business model is a function of growth. They are part of publicly held companies, so they are driven by their stock price, which is a function of earnings per share and growth rate. That growth-rate function is about unit growth and revenue stream. They are highly incentivized to grow new units. The urge is to open as many units as they can and not to worry about cannibalization. You see this in retail and in restaurants. Hotels are no different. The business model works the same way.

You’ve worked with foreign investors before. What is their mindset? How is it different from a North American investor?

Pillsbury: They recognize that real estate is a local business. They are at a disadvantage in a foreign market and smart enough to recognize that location is critical. They tend to focus on the major markets that are easier to understand, and that have deeper demand and, in particular, international demand.
Money is now moving very easily everywhere; customers are moving very easily everywhere; and labor is moving very easily. Capital, customers, labor: They are much more mobile and international.

There is now a movement of international brands coming to the U.S. and, vice versa, U.S.-based brands moving overseas. Is it sustainable?

Pillsbury: It’s proven difficult; it’s very hard for foreign brands to succeed—either coming to North America, or vice versa. In fact, international brands in china are running maybe around 50-percent occupancy. They have a tough time penetrating. In the U.S., it is similar. The Essex House in New York, for instance, was once Middle East-owned and had a hard time achieving typical market occupancy and RevPAR compared to domestic brands. It’s tough. You can take your domestic customers with you to another market, but you have to attract foreign customers to succeed.

The U.S. is making it easier to invest here. Should it be that easy?

Pillsbury: Sure. Anybody who wants to bring money to the U.S. and put it to work—please come and do it. I’m a free-market capitalist; if someone is willing to make me a car and sell it to me for half as someone else, great for me; if someone is going to lend me money for less, that’s great, too. I’m better off if I can buy my money cheaper. Competition is a good thing.

What about the U.S. tax code? Should it be more favorable toward foreign investors?

Pillsbury: The U.S. tax code is an abomination. It’s ridiculous that we created a tax code where foreign investors who lend money here don’t pay taxes on profit that they make through interest, but pay high taxes on profits through capital gains. Foreign investors can lend money and pay no taxes, but with real estate, they face 60-percent taxes.

What are the benefits of a show such as NATHIC?

Pillsbury: It’s an education—sharing knowledge and information. An informed investor benefits everybody. That’s the most important thing. The more investors understand, and have a good working knowledge of the intricacies, then the better their investments will be.

Two, recognizing that it takes partnerships and relationships. You have to have a team of people and experts in everything you do. Programs like this give you that opportunity to get to know and evaluate experts and begin relationships. You can’t operate on your own.

Leland Pillsbury will deliver the closing keynote address on Nov. 5 at NATHIC. Click here to register for the conference, Nov. 4-6 at the Fontainebleau Miami Beach. 

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