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Tyler Morse, Chairman and CEO of MCR Hotels, revealed that his company had acquired about 70 hotels and two software companies during the pandemic when he spoke at the Skift Future of Lodging Forum.
Morse expects more good hotel investment deals to emerge because he predicts interest rates will decrease again because of potential banking contagion. MCR is set to close on four hotels this week and has 12 more in the pipeline.
In the discussion with Skift founder and CEO Rafat Ali March 29, Morse said he owns 150 hotels in 37 states and operates under 17 different brands, including the iconic TWA Hotel at JFK Terminal 5. That makes MCR the third-largest hotel owner in the U.S., Morse said. Morse also discussed why he’s a fan of airport hotels and why Residence Inn is one of his favorite brands. (You can watch a full video and read a transcript below.)
MCR has also invested in hotel technology to improve the industry’s software systems, which Morse finds lacking. It has acquired two hotel technology businesses, StayNTouch and Optii, and it has a “pipeline” of other investments.
Interview Transcript
Ali: All right, folks. Now comes the best or worst part of the day. You guys will decide. The next two interviews are mine. This is the Rafat hour, the last hour left for the day. So thank you for staying. Thank you for being here. Two very different conversations to come, one from… You don’t like to be called a hotelier. We’re going to talk about why you don’t like to be called hotelier. But hotel owner, investor. And then the last one is Catherine Powell, who’s the global head of hosting for Airbnb. Couldn’t be more different in terms of businesses, but obviously there’s a lot of commonality. Lodging, which is staying of humans, is definitely the common part. So thank you Tyler for coming. You obviously don’t have business currently in Europe.
Morse: Working on it.
Ali: Working on it.
Morse: Trying to change that.
Ali: Trying to change that. You’re the third-largest hotel owner in the US.
Morse: Correct.
Ali: That happened over the pandemic. You took a contrarian strategy of going all-in, buying hotels when the whole industry was shut. So explain your contrarian strategy there first and why.
Morse: When there’s blood in the streets, that’s when you should be buying. This is not some Nostradamus-esque philosophy. It’s been around for a long time. The lodging business is a terrific business. The hotel business is great. You heard one of the speakers say earlier, it grows at a 4% CAGR and has for the last hundred years. Supply grows at less than 2%. Those are positive tailwinds. So COVID, if you look at what happened in 9/11 or even farther back in the early ’90s, and then in the global financial crisis, the hotel business always recovered, and then some. So it’s the same concept. When everyone else was frozen in panic, we made a lot of terrific investments in hotels and software companies, hotel-related investments.
Ali: And how many hotels did you buy during COVID?
Morse: I think about 70.
Ali: And there’s still blood in the water or streets. Do you say street or water? One of those.
Morse: Blood in the streets.
Ali: In the streets.
Morse: Chum in the water, blood in the streets.
Ali: But not a zero interest rate environment. Joe almost cried on stage. The guy from Starwood almost started crying on stage. So tell me-
Morse: Don’t be hard on Joe.
Ali: Don’t be hard on Joe. Joe, we love you. What’s your sentiment now in terms of buying? Has it stopped?
Morse: So the Fed in the U.S. has raised interest rates 500 basis points in 12 months. That is the steepest increase ever in the history of the world. And I would say, as of about three weeks ago, that was definitely annoying. Our cost of debt was increasing. And then out of nowhere comes Silicon Valley Bank and a run on the bank and a run on a variety of other banks. And Credit Suisse I thought was a terrific bank. Apparently not. So they’re-
Ali: You want to hear our story?
Morse: Well, they’ve been wiped from the face of the earth. Are you a depositor or a borrower?
Ali: Silicon Valley Bank, every cent of my money was in Silicon Valley Bank.
Morse: All right. Well, now you’re a client of First Citizens.
Ali: So now we’re a client of UBS [Skift has three accounts now, including with UBS], which I’m so glad it’s not Credit Suisse. So it would’ve been the other way. Would’ve been… So anyway.
Morse: But three weeks ago, the world changed. And I am of the opinion that there’s going to be some real banking contagion that is going on in the next 6 months, 12 months, you name it. You’re going to see other runs on other banks. They might be the small or regional or mid-size banks. But there’s some real pain in the system. Silicon Valley Bank bought a lot of long-dated, low-interest-rate debt, and they got crushed. And if you look at bank’s balance sheets, that’s the same thing for almost everybody. So the other shoe is going to fall. I think interest rates are about to go back to zero. So we’re going to be in a high inflation environment-
Ali: So let me-
Morse: … with zero interest rates.
Ali: … repeat what you said. Interest rates are going back to zero. You [inaudible]-
Morse: Maybe not zero. One or two. But I mean, if you look at the forward yield curve, it used to be like this going into 25 and 26. It is now like this. Swaps have come down 125 basis points in the past 10 days. The market is pricing in banking contagion. So that is going to keep deal volume lower because it’s going to be very hard to borrow right now.
Ali: Right. With uncertainty.
Morse: So that’ll decrease transaction volume. But if you can buy stuff, I think there are going to be good buys out there.
Ali: So my question is, are you buying?
Morse: We are. We’re closing on four hotels next week. We have about 12 hotels in the pipeline right now.
Ali: And how are you financing those compared to what you were doing a year ago?
Morse: We can still borrow. We have a bunch of house banks that have been lending to us for the past 20 years. Spreads have gone up. They’ve gone from 250 over SOFR to 350 over SOFR. So again, annoying but not catastrophic. We bought a big hotel about a month ago at a 12 cap. So there are attractive deals out there, but not as many as there were in 2006 or in 2017.
Ali: And so you’re a fan of airport hotels. So for those of you who don’t know MCR, actually explain MCR because this is Europe. You may not be as known in this part of the world as you are in U.S. Give a quick overview. I know we jumped quickly into it.
Morse: Sure. So MCR, we own 150 hotels in 37 states. We are vertically integrated. So we’re an investment manager and a hotel operator. So we have about 10,000 employees. We run the hotels and we operate hotels under about 17 different brands.
Ali: And they’re showing TWA, which is your iconic hotel at JFK Terminal 5.
Morse: We converted the old TWA terminal into a hotel about four years ago. I used to be a baggage handler for Delta Airlines at LAX. It was an amazing job with the light sticks and driving the plane back into the alley, loading the L-1011 with the FMC loader.
Ali: Yeah. He’s a total athlete, as you’ll see if you go to this hotel.
Morse: Slinging the bags. Remember those old Samsonite bags that had the two locks on them?
Ali: Yes.
Morse: I’d be wearing knee pads in a narrow body plane at 727 or ’57. And you’d fling the thing to the far side of the baggage compartment. And sometimes if it hit just right, it would torque the locks and the bag would pop open, and then we’d have to put all the underwear back in the bag and stuff like that and send it on its way. But that was a whole separate story. So I love the TWA project. TWA was an iconic airline. It was TWA and Pan Am that really controlled the global skies. TWA was owned by Howard Hughes, and he built this building. He spoke with Eero Saarinen once for five minutes and he said, “I want the greatest airplane terminal the world has ever seen, and I don’t care how much it cost.” So if you’re an architect, that’s the greatest commission ever. So Eero Saarinen designed the building. He also designed the St. Louis Arch, the U.S. Embassy in Grosvenor Square in London.
Ali: What’s happening is the microphone is here and you’re speaking there. So just use that. No worries.
Morse: Does this work?
Ali: Yes.
Morse: Can everybody hear me?
Ali: Yes.
Morse: Does this work a little bit better?
Ali: Yes.
Morse: He designed the US Embassy in Grosvenor Square and-
Ali: Oh. Here?
Morse: Yes. Right here that they’re now turning into a Rosewood Hotel, the Chancery. So it’s going to be a fabulous building. Their basis is not cheap, but that’s the hotel investment business is “What is your basis?” Generally speaking, all hotels make money. The revenue is way above the costs. It’s a good business. It just depends on what your basis is.
Ali: Okay. Sorry. You were telling the TWA story, which is that we did our Skift Global Forum there in 2021, which is just a great hotel. If you want to be inspired about the history of travel, which we wanted to during COVID times, clearly, that’s the hotel to go to. So if you happen to have a layover or your flight is delayed at JFK, just take the air train. It goes right to his hotel, and you can walk in and have food there, whatever else you want.
Morse: It’s a fun experience.
Ali: A fun experience. So let’s come back to the… So what you’ve done with MCR is you not only have these hotels, but you are a buyer of hotel tech. So you bought StayNTouch. You bought Optii. You have also, you said, investing in hotel tech, not a venture capital, but a minority investor. So what’s thesis behind buying hotel tech for a hotel owner-operator?
Morse: So as a hotel operator, we use hotel technology and have used it for the last 20 years. And I describe hotel technology as a carrier pigeon and a stone tablet having mated. It is brutal. It is simply awful, as evidenced by… So when I built the TWA Hotel, I had to source 65 different software systems, and then I had to stitch them all together. And none of the vendors care what the owner wants. They just want to sell you more software. And they tell you that their software [inaudible]-
Ali: Except for our sponsors. I’ll just [inaudible] our sponsors. They’re the best.
Morse: Who’s the innocent here?
Ali: Who are our sponsors?
Morse: Google. Google’s not going anywhere, nor are they going to be offended. Google’s a great product. So we’ve been investing a lot in making hotel technology better. And we have the history and the knowledge and the day-to-day execution to make the products better. So we’ve bought two hotel technology companies, StayNTouch and Optii. We’ve made six investments so far. We have a pipeline of another four or five behind this.
Ali: This is they’re showing Optii dashboard, I guess.
Morse: And I’ll give you an example. This is Optii. But with StayNTouch, the hotel property management system, we use in our company about 16 different hotel PMSs, and everything from Opera to Infor to Springer-Miller, Jonas Chorum Fosse, FS-PMS, Reserve. I mean, you name it, we use it. And StayNTouch was the best product that we used. We were just a customer because StayNTouch thinks of the world as 24 units of inventory per day instead of one unit of inventory per day. In the United States, you can’t get a hotel PMS that thinks of the world as anything other than one unit of inventory per day. So if you go on TWA’s website, we sell a lot of rooms-
Ali: By the hour or by [inaudible]-
Morse: We don’t like to use the term by the hour.
Ali: Okay. Sorry.
Morse: This is the second-oldest business in the world, and we don’t like to use hourly jokes.
Ali: But [inaudible]-
Morse: But we do sell day stays. We call it a day tripper from the Beatles song, from 8:00 AM to 1:00 PM. You just need to take a nap, have a workout, get a sandwich before you drive into the city for a meeting. JFK is the landing destination of most of the red-eyes coming out of LA and San Francisco. And so people land at 5:00 in the morning. They take a nap, they have a workout, then they drive into the city and still make their meeting at a reasonable time. Airport hotels work.
Ali: Yeah. You are a fan of airport. You just bought the-
Morse: Love airport hotels.
Ali: … Miami Hilton as well. So what’s with the Airport hotels?
Morse: Miami, Blue Lagoon, Hilton Hotel.
Ali: How can we reinvent airport hotels?
Morse: Well, I think that TWA, we made a valiant effort at trying to reinvent it. And we were trying to make the product a part of the trip. Normally the airport is a means to an end. It’s a lousy place that you slog through in order to get to where you’re going. What if you could actually have fun at the airport? I mean, this is a whole novel concept. So that’s what we tried to do.
Ali: At least in a U.S. airport [inaudible]-
Morse: We have an infinity edge pool. We’re tied for the number-one plane-spotting location in the United States, it’s us and the In-N-Out Burger at LAX that are vying head-to-head for the guys with the long lens cameras. They come out for five hours and they just watch planes take off and land all day. We have an ice skating rink, a roller skating rink, a miniature golf course. We launch curling this year. We have the national [inaudible]-
Ali: Pickleball? Pickleball is not coming?
Morse: No. We did pickleball.
Ali: You did pickleball.
Morse: We did pickleball. We did that on the ice skating rink or on the roller skating rink last summer. We launched the National Jenga Tournament, which is a-
Ali: You bought the rights to… So you were telling me some story. You bought the rights to the-
Morse: The National Blocking Association, also known as the NBA, not to be confused with a different NBA.
Ali: And theory behind that is?
Morse: People love Jenga. Why not host a fabulous Jenga tournament? So we had hundreds of players come out. We had a $10,000 cash prize for the winner of the National Jenga Tournament. And it’s a fun game. Families can play. Friend groups can play, you can drink while you play. It’s all about having fun. This is really in response to the poker craze and the chess craze, which lend themself to smart people. If you’re dumb, you’re not going to be very good at poker or chess. Right? That’s unfortunately discriminatory.
Ali: I’m not… I don’t [inaudible]-
Morse: That would not apply to you.
Ali: No. I don’t play any of the games.
Morse: Because of your just sheer, raw intelligence. I’m sure you’re a champion.
Ali: I’m not. No. Don’t.
Morse: But anybody can play Jenga. So we try to do lots of fun things at TWA.
Ali: So actually, let me ask you a question. You’re a very good storyteller. It’s very clear. I’ve known you for a while now. And you’ve brought that storytelling at your hotel, TWA. Can you bring that storytelling to, for instance, Residence Inn? Which by the way, tell why you love Residence Inn.
Morse: I love Residence Inn because it has the highest margins in the business and the highest return on invested capital. So-
Ali: Can you story tell through these hotels?
Morse: Very difficult. Very difficult. But Residence Inn is an amazing product. Customers love it. You get free breakfast, free dinner, free wifi. The corridors are short. The distance from your car to the guest room is very short. It’s a terrific product. You get your Marriott points and you save up all your Marriott points, and then you can redeem them at a Ritz-Carlton. So one of the most important factors of the lodging business that nobody ever talks about is about 60% of our customers are spending other people’s money. So everybody on stage here talks about the Google guy, talked about how you’re searching and all this kind of thing. If you’re spending other people’s money, you don’t really care how much it costs. Humans are vulnerable to an agency problem. If it’s not your money, that’s okay.
So a lot of our Residence Inn guests are on work trips. They’re traveling salespeople. They are plumbers. They’re electricians. They’re site supervisors. They’re doing local construction. It’s a lot of business travelers. And Marriott provides 65% from the central res system in terms of delivery. The second-best return on invested capital is Hampton Inn by Hilton. It’s an amazing product. Customers love it. They’re starting to come over to Europe more. In the US, 75% of hotel inventory is branded. And in Europe, it’s 25% and it’s moving upward quickly. Booking.com has essentially taken the place of the brands in Europe.
Ali: So let’s talk about your favorite topic, booking.com, your love for booking.com. Please explain your love for OTAs or lack of it.
Morse: It’s not a love-hate or frienemy type of relationship. I do sometimes get tired of the hotel business being the doormat and the red-headed stepchild of the entire travel space. It’s where when everybody goes to extract value, nobody takes it from the airline oligopoly. They take it from the hotels. So as evidenced by about 20 years ago, two folks came along and they swiped $200 billion of value from the hotel industry. And those people’s names were Expedia and booking.com. And the hotel business did not miss a trick. This is a testament to how good the hotel business is.
And then about eight years ago, another guy came along and swiped $100 billion from the hotel business. His name was Brian Chesky. And the hotel business keeps on ticking and Airbnb is doing terrific. And there was a lot of panic in the 15 to 17 to 18 range. Said, “Oh. Hotels are going to get eviscerated by Airbnb.” We’ve all managed to coexist. Hotels keep growing. Airbnb keeps growing. It’s because of the latent demand for travel, which is largely driven by the ultra-low-cost carriers. EasyJet and Ryanair in Europe. In the US, SouthWest Airlines, JetBlue, ValueJet, all those kind of things. You can now fly from New York to Florida for 39 bucks. And it’s a terrible experience, but what do you want for 39 bucks? I mean, Ryanair and EasyJet are the same thing. The Irish guy says this all the time, right?
Ali: Ryanair guy. Yeah.
Morse: If you want a better experience, fly British Airways. It’s more expensive, but you’ll have a better experience.
Ali: Well, I don’t know if that’s any better, but let’s leave it there. Are they a sponsor? Oh. Actually, they are. Shit. Okay. To IAG, we love you. I lost my thought there. OTAs. You’re obviously distributing your hotels through OTAs?
Morse: Well, if hotels have latent demand, you don’t need the OTAs. So TWA is not on the OTAs whatsoever. Never has been. The only way you can book TWA is by going to twahotel.com, period.
Ali: Not even on Google?
Morse: Nope. Zero. Because we’re an airport. We have latent demand, and we have a great product. And if you don’t like that, you can stay at one of the nearby hotels that are not nearly as nice, and you have to take two shuttle buses, one there and one back, and then you have to deal with the air train, and you have to navigate your way around Queens. So we’ve just taken some of our other Manhattan hotels off of the OTAs, and they’re more profitable than ever. After you carve out-
Ali: But that’s because it’s Manhattan, right?
Morse: It’s because it’s Manhattan. So that’s why I’m making the distinction of hotels with latent demand.
Ali: Latent demand. Okay.
Morse: We have a courtyard in Brownsville, Texas, which maybe I can take that off of the OTAs one of these days because of Elon Musk. Thank you to SpaceX for filling Brownsville. But otherwise, we’re happy to fly a Courtyard Flag in Brownsville, Texas. You’d never want to be independent or you need the central res delivery in secondary and tertiary markets. But in markets with latent demand, you don’t need to be on the OTAs. And I think what COVID has taught a lot of hotel operators is running 87% at a much higher ADR is more profitable than running 97% at a bottom feeder ADR and selling those last rooms and focusing on this perishable inventory aspect of hotels.
Ali: So we only have about three and a half minutes, and there’s so much to talk with you about. But AI, you told me a bunch of stuff off the record. Can you say it on the record about what you said about AI when I last met you about a month and a half, two months ago?
Morse: What did I say?
Ali: I can’t repeat it because it was off the record, so I can’t even tell you what it was. But tell me your view about obviously that this is the age of AI or at least the coming age of AI.
Morse: Well, I think artificial intelligence and machine learning are-
Ali: From a labor perspective.
Morse: They don’t clean your room for you and they’re never going to. I think they’re going to decrease overhead staffing in hotels substantially. They might wipe out a lot of overhead jobs and ChatGPT could have a serious deletion effect on a lot of the manual processes that go on in hotels. But every single sales presentation that I see pitches us on, “Oh. This product has machine learning and this product has artificial intelligence.” We clean rooms for a living. We make beds for a living. Artificial intelligence does not make beds. It does not make breakfast. It doesn’t make lunch. It doesn’t make you a drink in the afternoon. And it certainly doesn’t make your life any more fun. It might make it marginally more efficient, but we’re in the people business and we’re in the experience business, and we clean rooms for a living. We have a lot of labor. We have 10,000 employees, and artificial intelligence is not going to eliminate most of those jobs. But it may eliminate a lot of the corporate jobs, people who are putting PowerPoint presentations together for their living.
Ali: And you love PowerPoints. I know that, for sure. No. I’m kidding. What’s the most fun technology? What’s the most exciting technology for you today?
Morse: Well, the greatest technology in the hotel business right now, the greatest innovation in the hotel business, is fake grass.
Ali: Is what?
Morse: Fake grass. Artificial turf. Fake grass. The technology in fake grass now is spectacular. And it is better for the environment because you don’t have to water it. You don’t have to pay to put in sprinklers that are always broken. It magically wipes away the dog poop that’s out in front of your hotel. It’s terrific. We’re putting fake plants and fake grass everywhere. It looks better than the real stuff. And then in the wintertime, when you have the dead grass in the snowy environments, or God forbid in Texas and that kind of thing, it’s green all year round. So this is an innovation that doesn’t get enough airtime.
Ali: I don’t know how to… That was-
Morse: I threw you off on that one. You weren’t ready for that one.
Ali: You threw me off. You threw me off. It’s a hard one. You were supposed to start with saying nice words about Skift. Please do it at the end of it.
Morse: The Skift folks are great. I love what Skift does. I was actually telling Rafat earlier, honestly, I go to all the hotel conferences and Alice and NYU and the Phoenix conference and the Berlin conference and all these kind of things. People actually learn things at the Skift conference. They attend the sessions and they get information and knowledge out of them. All of the rest of them are just networking opportunities for people to get together, drink a few cocktails, build relationships. Not that there’s not value to that. But I tip my hat to Skift because people actually attend, sit, listen, and the speakers do a great job. Rafat and his team do a great job.
Ali: And you’re a huge fan of Daily Lodging Report, Alan.
Morse: I love the Daily Lodging Report. I’ve read every single word of the Daily Lodging Report for the past 15 years, every single day. I can’t stand it when Alan takes a holiday.
Ali: Oh, my goodness.
Morse: I feel uninformed.
Ali: He’s going to give me such a hard time for that. All right. Thank you. Thank you, Tyler. This is so great. I appreciate it. Thank you.
Morse: Thanks, Rafat. Great seeing you.
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