Latest / The Modern Hotelier / #311: How Your General Contractor Executes Hotel Renovations Without Disruption | with Tom Kelley
Transcript
- The Modern Hotelier #311: How Your General Contractor Executes Hotel Renovations Without Disruption | with Tom Kelley === David Millili: Welcome to The Modern Hotelier, the most engaged podcast in hospitality. Don't forget to follow, like, subscribe, and let us know in the comments what you think about today's episode. Steve, who do we have on the program today? Steve Carran: Yeah, David, we got a good one in store for today. We have on the CEO & President, Digney Holding Companies. Thanks for joining us, Tom. How we doing today? Tom Kelley: Doing great. Thanks for having me, guys. Really appreciate the opportunity to chat with you about our exciting industry, quite frankly. David Millili: All right, so we're gonna jump in. We're gonna go through a lightning round. We're gonna get to know you better, your background, your career, and then we're gonna jump into some thought leadership topics. Sound good? Tom Kelley: Sounds great. David Millili: All right, so when you were young, what did you want to be when you grew up? Tom Kelley: Oh, man. You know, pretty early on I was always the kid that was drawing and doodling and doing stuff. And at the same time, I spent my youth growing up in my father's business. He started a business before entrepreneurial or entrepreneurship was a thing, right? And so he started a business, which was like a distribution business for plumbing supplies and infrastructure and water main and sewer main and fire hydrants. And so I grew up in that business, drawing a lot. Then I'd go out to job sites and the contractors there would say, "Hey, you know, these engineers, they've screwed this all up. These architects, they don't know what they're doing." And of course, what do I do? I go to school for architecture. And so I wanted to be an architect. I knew how to draw. I liked buildings and did a lot in construction, kind of on the infrastructure side. So that's what I would say, at the time I didn't know, but it was leading me down a path, you know? David Millili: Got it. Makes sense. What's something that you wish you were better at? Tom Kelley: Something I wish I was better at. I think patience is something that I struggle with. It's a consistent thing for... You know, I don't like waiting in lines, so we travel a lot for our business, so I will find anything that I can do, any kind of, whether it's the E-ZPass lane or driving. If it's at the airport, it's the TSA or Clear. It's anything to not wait in a line. I don't have a lot of patience, so it's probably a character flaw. David Millili: What's a luxury you can't live without? Tom Kelley: Nespresso. Does that count? I love Nespresso. I love coffee, and I love the different flavors that I can have in a little pod. It's fantastic. David Millili: All right. Name a person, dead or alive, that you'd like to take to lunch? Tom Kelley: Oh, that's a hard one. You know, I was just reading something the other day about JFK, and we like to go up to New England in the summertime and go visit some family. So I definitely would love to sit down with JFK once. That would be amazing. Yeah. David Millili: And if you could have a superpower, what superpower would you like to have? Tom Kelley: Well, probably related to the patience thing, maybe the ability to fly like Superman and get from place to place wherever I wanted to. Not have to wait in traffic on the DC Beltway here or get to one of our job sites around the country whenever I needed to at the blink of an eye. That'd be absolutely fantastic. You know, a cross between Iron Man and Superman, something like that. Yeah. David Millili: That's a good one. And so Nick, tell us something that's on your bucket list. Tom Kelley: You know, we like to travel a lot, and my daughter just spent a semester in London, and that was pretty amazing. And while we were there we had seen a lot of the UK, which we hadn't seen before. Right now on my bucket list is to go back over there to Scotland and Ireland. We haven't been there and, you know, from everything that we've seen, it was amazing. We spent some time in the Cotswolds and really enjoyed the authentic rural environment and stayed at some really interesting hotels that were just one of a kind. And you're never gonna find anything like this in a small village. There's some inspiring hotels in Ireland that I'd love to visit too. Steve Carran: That's great. That's great. So now we're gonna dive into your background a little bit. So you have a pretty clean digital footprint here. Where did you grow up? Tom Kelley: So I grew up in sunny Buffalo, New York. So upstate New York, practically Canada, as everybody jokes with me whenever I tell them where I'm from. But it was a great place to grow up. You know, aside from the weather, you gotta like snow and you gotta like cold, but it's a really kind place to grow up. The people there are wonderful, and it's a tough place to stay just because there's a limited geographic area. I'm kind of glad that I migrated south to Maryland where I live now, and it's about 200 less inches of snow a year, so... Steve Carran: Yes. I grew up in Wisconsin. I feel you on those things. So how did growing up in Buffalo kind of shape you into who you are today? Tom Kelley: So it kind of rooted back to that. It's a small town, and I grew up in a family business that my father started. Learned a lot about work ethic, learned a lot about diligence, learned a lot about if you don't take care of it, nobody else is gonna take care of it for you. And it really shaped that entire experience of both my upbringing, my childhood, my family, and my experiences attending college locally there, State University of New York Buffalo, and went to the School of Architecture and Planning. It really grounded me in, you know, I knew I wasn't always the smartest person in the room, right? But I always had this tenacity and this ability to feel like I could outwork anybody. And to this day, I use a phrase my father always says, "There's not eight hours in a day, there's 24 hours in a day." And that sometimes is to my demise, but at the end of the day, it also kind of keeps me grounded in whatever type of complex problem or situation we're dealing with along my career. It just helped me go back to the basics, which is just work hard, right? David Millili: So it makes a lot of sense. You grew up in Buffalo, went to University of Buffalo. We already talked about your love of drawing, and you went and got your degree in architecture. What led you to finally make those decisions that you wanted to stay in Buffalo and pursue architecture? Tom Kelley: So I stayed in Buffalo for about a year, two years after college, right? And all along college, I worked at an internship, so I was always working and going to university. I needed some beer money, quite frankly, and my old man was pushing me to get into the business because what he knew that I didn't know is that I would learn more working than I would necessarily at university, which is 100% true. And so I worked at CannonDesign, which is a really big single firm, multi-office. It just happened to be headquartered there in Buffalo. Had amazing experiences there. From there, I could really springboard, and through people that I met in my network, met somebody who was working at RTKL down in Baltimore and got an opportunity to interview with them. And so about a year and a half after I graduated, while still in Buffalo, I moved down to Baltimore. Loved the weather, loved the beaches that were close, loved the Chesapeake Bay. Always grew up next to water. But RTKL was a fantastic experience, and I was there for a little bit, and I moved literally right across the street to one of their competitors, another firm called DDG. That was where I got some international exposure, worked all over the world doing mixed-use projects, and that's where I got exposed to hotels. Working in mixed-use master plans where there was hospitality, retail, residential, and hotels, I always gravitated toward the hotel component and the design part, and they knew that was my thing. So I worked on those a lot. And while I was working there, I would meet client representatives who were working for owners that also had a design background or an engineering background, and I really liked that idea of being on the ownership side of things, working on both the financial aspects of it—left brain, right brain—and trying to solve both the constructability problems, the design problems, but also the budget problems. And so I had an opportunity to make a jump after about five or six years at DDG. In Maryland, there were a couple of opportunities to work for some larger ownership companies. I was looking for a larger ownership company, and luckily at the time, Marriott was hiring. So from there I springboarded over to the owner franchise side of things, and that's where I would say a really different chapter of my career started, where I started really learning about the hotel business, the operations of hotels, everything and anything that you can think of. What's great about Marriott is they put you into a lot of training, put you into a lot of experiences where you can learn how to make a bed, learn how to work the front and the back of house. I was on the bricks-and-mortar side of the business, and I worked on the capital expenditures side of things and worked with owners, worked with internal franchisees, worked on concepts, and it was an amazing education. From there, I springboarded over to another real estate investment trust, which was similar to some of the clients Marriott used, but this was more focused on office. So I left the hotel industry for about a decade, worked on mixed-use and office buildings for a publicly traded REIT in Maryland called COPT. It's now called COPT Defense. I really got a grounded education in everything from finance and treasury to pro forma development. We had a really robust $700 million-a-year pipeline building office buildings, data centers, all sorts of really interesting things, and a lot of mixed-use projects. What was interesting is workplace design got influenced a lot by hotel design. Everybody wants to work in a WeWork. Everybody wanted to work in all this stuff, so I came to the table with all this great background, and it really helped influence a lot of that, which I thought was great. We always like to be able to contribute, right? I had a great time at COPT. Thought it was a great company, but had an opportunity to come over and take over DIG New York, which we used when we were at Marriott. DIG New York's been around for 40 years doing hotel renovations, and it had recently been sold and acquired by the LK companies, manufacturing companies, and they were looking for some new leadership. So I took that opportunity. Haven't looked back since. Been here going on six years now in September, and we've had a lot of really great growth and a lot of great changes and adaptations to how the market has changed. But we're still doing what we do best, and that's we renovate hotels around the country. And so that's my career in a nutshell. Steve Carran: That's great. That's great. So I have to ask this. I moved from Wisconsin to Washington, DC, Milwaukee, and you moved from Buffalo to the DC area. I know I had a few, but were there any learning curves that you had or something that stuck out when you moved to the DC area? Tom Kelley: So I live close. It's interesting. I have a foot in both towns. I have a foot in Baltimore and a foot in DC, and I live closer to Baltimore. So Baltimore and Buffalo are very similar in that they're blue-collar towns. But what's great about Baltimore is that it's got a lot more historic significance, if you will. It's just older than Buffalo. But it took me a lot to learn about it. You know, Buffalo's got chicken wings. Maryland's got crabs, right? So I had to learn how to pick a crab. It's like, "What is this Old Bay seasoning you guys are raving about?" And you put it on your toast in the morning, right? So there were a lot of things like that. At the end of the day, it's really easy to fall in love with DC and Maryland and Baltimore because there's just so much history, but there's also so much culture that is unique to the area. And if you like the water, I grew up next to Niagara Falls and Lake Erie and Ontario. Baltimore and DC have the Chesapeake Bay and the Potomac, and it's all kind of the same vibe, except it's got its own nuances, right? Aside from people driving slow in the left lane down here, which I don't understand because in New York State we all understand the left lane's for fast, right? Back to my patience thing. That's the only thing I would say I still haven't overcome. Steve Carran: Oh, that's great. That's great. So now we're gonna dive a little bit deeper into your career and how you ended up at DIGNE. So kind of like you mentioned before, you started your career more on the design side with RTKL and DDG, working on large-scale mixed-use retail, hospitality, and commercial projects all over the world. What did those earlier years teach you that you still take with you today? Tom Kelley: That's a great question, and it's not something I think about often, but that exposure to working on projects in Turkey, in China, even in the US and different parts of the US, really forced us... And what was cool about working at a master plan type company first, and then they try to get the architecture second, was that you really had to dive into the area. You had to dive into the context of the area you're working in. What do people in Pudong, on the new side of Shanghai, want in a mixed-use environment with residential? What do customers want in retail in Kansas City? It's this idea that we had to really contextualize ourselves and get rooted in the area that we were working in. It really taught me to think big picture first. I think that getting your goals aligned first, getting your priorities aligned first, no matter what the situation is or the project you're trying to work through, helps ground you in the business decisions, the minute project management decisions, or the design decisions that you're making all along the way. For me, those early years added this ability to think like a designer, know what the owner's priorities could or should be in a specific market, what those financial drivers may or may not be, and apply that to organizing all of the teams of people that it takes to execute a project from the ownership side of things. And now, being a contractor that works with pretty sophisticated clients sometimes, we get a pretty wide berth of clients. We have private equity folks who are looking at hotels who maybe have a small portfolio of really nice properties, right? Every time they go into an area, they take a very personalized approach to how they invest their money. Then you have the REITs who really take a systematic approach to how they analyze, and they're usually data first, which is something I really gravitate toward myself, in how you analyze your investment before you actually organize your spend. Those early years helped ground me in the processes that it takes to get from a piece of paper to the finished product. I think it allows me to have a lot of empathy for every position along the way. Why is the architect struggling in a given situation? Why is the interior designer struggling in a specific situation? How do you have that collaborative empathy to allow people the space to work, solve problems, and create a successful project? I think that's why my early career advantages me today, even though I don't have pen to paper every day. As much as I still like to scribble. David Millili: So you brought it up before, but you transitioned over to Marriott. You were managing capital expenditure and new development design projects. What was that whole process like, just diving into the world of hotel brands? Tom Kelley: It was challenging, it was rewarding, it was exciting. It was a lot of things all mixed at once, and I was young enough to be able to absorb all of that in a way that was healthy at the time. I think I had youth on my side there because it was really a career change. It was like I'm going from the service side of design architecture and that performative work to either managing that internally and not necessarily self-performing any of that, just managing a lot of teams that are doing that, providing guidance to people that are doing that, and figuring out what you're... I would say one of the things I believe in a lot is Marriott helped teach me what is important in any given situation. Prioritize what's important. Sometimes we can get distracted by the shiny and the new or something that's maybe not necessarily the priority for the customer. It's maybe the priority for a designer or a priority for an operator. We have to synergize all that together and come up with what we think is the priority for the end user, and that's the customer experience. That's what I think Marriott taught me: at the end of the day, if you're working in the hotel and hospitality industry, the number one thing that you are always focusing on, whether you know it or not, is what the customer experience is going to be, what it will result in, and what their reactions, reviews, and experiences will be. Now it used to be just hotel reviews. Now it's on social media. Now anybody can give a hotel review in three seconds on their device. So if you keep that methodology, whether you're the architect, contractor, procurement agent, or anyone else along the way, you'll likely find yourself on the right side of decision-making. Steve Carran: Well said. Well said. And then you spent nearly a decade with Corporate Office Property Trust. You moved from the workplace design space into broader development and design leadership. How did that chapter make you think about balancing design vision with real estate performance? Tom Kelley: Yeah. It was less of a career change for me going from Marriott there than it was as an architect. But there was this desire that I had while I was at Marriott, especially on the renovation side of things. It was really design and budget, and budget economics are fairly straightforward, right? Working on some of the new-build design management roles that I had, working with some of the Marriott development guys who were running pro formas, really started to intrigue me. This idea that this is an asset and the asset performs for a financial return, and the metrics that involve that, were really interesting to me. At COPT I had an opportunity in another design management role to be a little bit closer to that. The management team at COPT was really accessible. It was a relatively small company for the size of the portfolio and the net asset value of that entire company. Everybody was accessible, so I thought it was going to be a great opportunity for me to get access to people who could teach me, and I wasn't wrong. Everybody at COPT really believes in this idea that making the team better makes the entire company better. Working with people in Treasury, working with people in FP&A, who were kind enough to teach me about how things work and why they're important to this investment, and why we had a CFO who's still there today, Anthony Missad, who was hard on everybody. He was hard on us because of this belief that every dollar that you're spending needs to be related to a specific type of return. The why behind all of that, and why institutions and shareholders invest in companies who hold assets, and how all of that cascades all the way up and down to the market, is really interesting. It took me... I would say I'm still learning today, but it was 10 years of education and growth for me that I couldn't get in a business school. That's why I really hold that dear to my heart. Those folks over there still are killing it, and they're doing a great job. Between Steve Budorick, the CEO over there, and the board and everybody that is leading that business, they have an incredible ability to create value. That was the other thing I would say that I learned: understanding why people are investing in hotels, building them certain ways, renovating them certain ways, and spending capital in certain ways to achieve a certain return, and what that means, is really the root of how, at Digney, we now, as contractors, try to instill this approach where you have to think not just about the guest experience that I talked about earlier, but also think of yourself as an investor. If you're investing in this property, let's offer this value engineering idea so that they understand, "Hey, you can buy this stone from Italy, but look at this stone we can get you, and it's a much better value," right? Ideas like that. I'm oversimplifying it, but that's the concept. Think like the customer and the guest experience, of course, but then also think like your owner and what his investment thesis may be. David Millili: Good. So in 2020, you came to Digney York Associates. You worked your way up to CEO and President of Digney Holding Companies. What attracted you to Digney? Tom Kelley: Well, it was this idea where I'd been in large public companies for over 15 years. I'd started my career in a business that was wholly owned by my father, and worked in some smaller design companies like DDG that were wholly owned by a couple of partners. I had this desire to get back into that entrepreneurial type of role, and Digney was kind of that. They were about 40 people at the time, and they were always owned by a couple of partners. Then they were bought by a big family trust that owned a big manufacturing company. They owned a lot of other companies as well. I thought it was a great idea to go back to a company that I had known about when I was at Marriott. I knew they were really stable because they had been around for 40 years, and they were just acquired by a 100-year-old private manufacturing business. The joke, though, was it's kind of back to my roots because they were manufacturing basically plumbing-related things like sinks, fixtures, and waterworks products, and I thought that was kind of a coincidence. But it was that idea to get back into that entrepreneurial environment in the right way. It was the right situation, the right opportunity, where I was certainly going to be afforded the ability to make changes, do things that needed to be done, and take Digney to the next level—from a smaller partnership-based business to a larger, growth-focused company while staying true to our core business that entrepreneurial opportunity is what inspired me and what attracted me. Steve Carran: That's great. And so for those that might not be familiar with Digney Holding Companies, can you share a little bit more about what you all do? Tom Kelley: Right. So our holding company, wholly owned by shareholders of the former LK Manufacturing, since they bought Digney, the actual family shareholders of LK Manufacturing did a merger and a sale to Zurn. And so the LK Manufacturing business is now a publicly traded business. It's known as LK Zurn, I think on NASDAQ. All of the shareholders of Digney Holdings, which was created to basically hold our Digney York LLC, the 40-year-old construction renovation business, and also we carved out a hospitality millwork business and furniture business that was inside of LK Interior Systems, which was also owned by LK. And so now those two businesses under a holding company that's called Digney Holdings are kind of creating this platform. Our platform right now has a holding company. It allows us to look at other acquisitions or do other investment-flexible transactions, and it allows each business to work independently while also looking for synergies between them. Whether there's a project that needs some millwork that might be sourced through the LK business, that could be a possibility. Or offering some furniture services to owners who may be struggling with their procurement agent. Both businesses operate independently. They have distinct customers. At Digney, we focus more on full-service and luxury-based hotels, although we do some limited-service hotels. The IS Hospitality Group focuses on limited-service brands, primarily, and some extended-stay properties, in that millwork- and furniture-based business. They do a lot of kitchens, a lot of stone, a lot of lobby millwork, and guest room furniture and millwork as well. Steve Carran: Sure. That's great. That's great. So now we're gonna dive into the thought leadership part of the podcast. One thing that we've noticed, and David and I talk about it often, is a lot of independents becoming part of brands, and a lot of soft brands starting inside of the brands. So we're seeing that brand conversions are at an all-time high. What do owners often get wrong before that renovation starts, especially when it comes to locking in the flag before spending capital? Tom Kelley: Yeah, that's a great question. I have seen this issue arise a couple of times in my career where not doing your due diligence, both on the market aspect of things but also on the asset side of things. I think this concept of do the math first, something I picked up at COPT for sure, is really important because it's easy to go spend a bunch of soft costs on design, get your furniture package designed, and say, "Hey, we want to do this really custom design on a hotel." Then you realize that the flag or the brand that you thought you were going after wants something else, or they have a new prototype that's come out, and now you're off-brand. So this idea that you're not necessarily doing your due diligence first from the design and intent standpoint or the customer experience standpoint. On the flip side of that coin is not doing due diligence on your existing assets. One of the things we always encourage owners to do, especially if they know they're at a 10- or 15-year cycle, which is going to be a heavier renovation typically, is to have an existing facilities report done. Have somebody come in—just like getting your home inspected when you're trying to buy a home—and go through top to bottom, look at all the systems, look at all the issues with the building structure, and really prioritize the things you're just going to have to do that may come up as a surprise while their engineers or architects are designing. Then they do a field visit and say, "Oh, we just found this issue with the cooling tower. Now we've got to spend $3 million to redo all that." Versus if they had known that in CapEx budgeting before they solicited for design and engineering, by paying a very small fee for doing a facilities report, you can figure out what are the have-to-dos versus the nice-to-dos, and then how does that align with brand and market. So do the math first, do the evaluations first, do your due diligence first is my number one piece of advice for owners. David Millili: So as an ex-GM who lived on property during renovations, I loved seeing this question. A lot of companies say they can renovate while the hotel stays open, but what does it actually take to do that without disrupting the guest experience and hurting reviews, and as you mentioned earlier, now with social media? So how is that possible? Tom Kelley: It's a great question, and it's what we do on a daily basis. It's back to this idea that before I got to Digney, they were one of the first companies, if not the first, 40 years ago, to realize that you can't think like a contractor in this market, in this industry. You have to think like a hotel operator. You have to think like the GM of the hotel. You have to think like the operator of the hotel and their needs, and then you have to think about how the guest is impacted. The entire business and our entire operational model allow us to infiltrate a hotel, especially in guest room renovations, where you can work on floors and shut down parts of the hotel in a way that allows you to operate so the hotel has barely any knowledge that you're there, and you're very separated from them. This idea is that you're sensitive to noise. It's all in the planning. This is all about the planning and the approach. It's not about the crews, it's not about the construction, it's not about the materials. It's about this process that we have developed that allows us to think through how all of the materials are delivered to the hotel and when. How is all the furniture that's being removed getting out of the hotel? How is all the furniture that's coming into the hotel coming in? It's this symphony of coordination—timing, installation, noise, experience, and execution—that you have to be sympathetic to all along the way. If you're doing it right, it flows from the top of the building all the way down to the bottom of the building in a way that is continuous and seamless, and the guest has very little knowledge that you're there. If it doesn't go well, it typically means that something in that choreography didn't arrive on schedule or didn't go as planned. That's the other thing I would say. In this industry, 90% of the time we get to control all of the owner materials they're providing us. Sometimes we have to introduce this concept to new owners or owners who aren't as familiar. It's like, "No, let us handle the warehousing. Let us handle the FF&E for you." Because if it doesn't arrive exactly when we're moving through the building, it becomes a problem. As the owner, you want one throat to choke. You want somebody to come to and say, "Hey, you're the conductor of this symphony here. Why isn't this sounding good?" And that's the approach that I think is the best way to do it. Steve Carran: Well said. Well said. So there's a lot of uncertainty right now. We have rising construction costs, tariffs, and overall volatility. How are you approaching fixed-price contracts and cost risk with owners today? Tom Kelley: Yeah, that's an ongoing issue. It's evolved from COVID. We've definitely seen the price fluctuations from reactive COVID to post-reactive COVID and recovery to the shipping container and tariff situation. So it's this constant kind of... What we've noticed in the last six years, the only constant is the volatility. So how do you hedge against that? The industry is wired for stipulated sum contracts for a few reasons, most of which relate to value. Most of the subcontractors are going to provide owners the best value on price when it's stipulated sum because it simplifies their accounting of the project versus a GMP, which gets very tedious. A lot of our subcontractors will throw a premium on it when they know there's a GMP in the mix, and that's also challenging. When you're at fixed price, it puts the contractor in a really difficult position because we have to put allowances in for certain shipping and freight, and that creates exposure for the owners. So it's not really a fair situation for either party, and it's really difficult for everyone to manage—from procurement agents all the way down to the owners and the contractors. What we've gone to is a structured escalation clause that basically allows us to transparently say, "All right. Here's the information that we have today. We're going to pull out all the freight costs or all the tariff costs. It's part of the stipulated sum. Here's what we're carrying. But as an exhibit, here are the three or four different levels or tiers of structure that we can move to in terms of where we think this will go." Container costs that range from either $10,000 or $12,000 one day coming from China to Long Beach in California, and all of a sudden they're at $17,000 a container. How do we account for that? How do we manage that? And how do we create allowances earlier on in the project so there's no fighting over change orders because of this, or there's no fighting over products being held because somebody won't release them because the shipping bill is three times what they thought it was going to be? It has to be transparent, and it has to be structured. I encourage people to put it into the contract as an exhibit earlier on so that there's no surprises. Then everybody is treated fairly, and everybody can execute successfully. David Millili: Yeah, I think you started to touch on this, but are we at the end of where owners can keep pushing the PIPs down the road? And what happens when they're facing those major renovations, the higher rates you talked about, and the lending conditions all at once? Tom Kelley: Yeah, what we're seeing and hearing from owners... Sometimes we get brought in at the design-bid-build stage, so we're brought into the end of the process, and they may already have their financing in place. But I'd say 50% of our work is negotiated, so we're involved in pre-construction and go along the way. What we're hearing is that lenders, right before release, are looking to make sure all of the PIP requirements are actually checked off and completed because it's becoming an issue with the flag. The lenders want to ensure that the asset they're financing is going to meet the requirements for the flag because there have been situations where maybe that capital was spent, the lender got burned, and all of a sudden a project they thought was going to be a St. Regis is now a Westin or something like that. There's no issue with either of those brands, by the way. It's more about if there's an expectation on investment level and then something happens after the fact, the lender is exposed. They're getting smarter. They're putting in some of these requirements. You have to recognize that's happening. What we're seeing is that COVID's over. The volatility that everybody knows in the world—whether it's an international situation affecting shipping lanes or anything else—is kind of not an excuse anymore. It's just the normal. The new normal is a little bit of volatility. What we're seeing is that once you get past a certain point, the franchise agreements and the operating agreements expire, and we're seeing the brands saying, "All right. You're in a great market. You need to do X, Y, and Z, and you need to make sure you're saving your CapEx the way you're supposed to." The brands don't have any patience anymore. On top of that, the lenders are getting more savvy about relating the lending to the brand requirements and the PIPs. We're definitely seeing a new wave of PIPs coming in, usually for tertiary and secondary market locations. You look at them and go, "Wow, this is a great asset, good location. It's in decent shape, but it's got designs from 15 or 18 years ago." And we're saying, "Wow, I didn't think this prototype still existed out in the market." But they do, and I think it's really just the final leg of what happened during COVID, the extension of all that time, and the pressure that's been on the market. The good news is I think ADRs have come back in a lot of major markets, especially in the Sun Belt areas and many major markets. Thankfully, from what I see in the earnings reports that I read and from clients that we talk to, group business is certainly streaming back in a really meaningful way. So even with all the volatility and all of the world's problems, I feel like at least the U.S. hotel market that we service is very robust and continues to adapt to what is the new normal. There's volatility in the world. There's volatility in the markets. There's one thing that's really hard to replace, and that's the desire for people to travel, go places, experience things, and do business together in person. So we feel like the market is going to continue to adapt and evolve, and people will need to keep renovating their hotels, which is obviously good news for us. But it's an interesting dynamic that has gotten to, I think, a final conclusion here in '26 and certainly in '27. Steve Carran: Sure. Absolutely. And I found this pretty interesting. You actually said some owners actually over-renovate. So how do you help them understand where to spend, maybe where to hold back a little bit, and where the market ceiling really is? Tom Kelley: Yeah, that's a really dynamic situation. I would say it's really about... I've witnessed in my career, and I can think of two off the top of my head. I won't name them, but there was a really high-end luxury hotel, a really great brand. They do a very contextual type of boutique hotel, and the owner of this hotel happened to be the owner of a major sportswear brand. They had this investment concept where this asset was part of a larger play on all of these other assets that are meaningful to their business, the athletes, the sponsorships, and things like that. At the end of the day, they over-invested in this beautiful property. It's an amazing design. It's got a small amount of hotel keys. It's got beautiful public areas, but it's in a secondary hotel market. It just happened to be near where their headquarters was. As gorgeous as it is, and I appreciate it from a design standpoint, it was over-invested to a point where it would never be a standalone investment. As the larger picture maybe wasn't successful, they had to exit that hotel at a significant loss. Certainly the new investors probably got it for a steal, and that's the cycle of capital. That example is one that I can think of, and there are others I know of where owners treat these investments as maybe a personal project. I don't want to call it a vanity project. It's more about trying to will the market to appear through an over-investment. I find that has never been successful. As the guy that's building it, and someone who loves design, I'm trying to use my rational investment side and say, "You can probably have the same effect. Let's use more cost-effective materials or more cost-effective methodologies to create spaces that don't have to have as many layers of design." They don't have to have the depth that maybe you're looking for. That over-investment translates all the way down to limited-service hotels as well. Look, there are brand requirements. Do the brand requirements, do them well, and stop there. Try not to over-invest and say, "Let me take this limited-service hotel and add this outside feature. Let me do this thing," and all of this stuff. That doesn't move ADR. That's not what's really going to move RevPAR for that asset. Focus on the guest experience. Focus on guest rooms. Focus on bathrooms. Focus on quality finishes and materials. Meet the brand standards. If you want to contextualize the hotel, use artwork, use imagery, use localized materials that you would have needed anyway. In full-service hotels, it gets a little more complex because you do have a little more flexibility, given the economics, to afford larger experiences or more detailed experiences that take significant investment. But root them in a business case. For example, we had a client out in California, and they converted a Marriott into a resort. It was next to their golf course that they also owned. This owner was really intelligent. One of the buildings under renovation overlooked the golf course, and while following Marriott standards, they created something totally unique to that area. They created golf suites. They said, "We're going to capture a market where a bunch of golfers come out. They've got a group of five or seven guys, they want to stay in one suite, and they want to go out to the golf course." So they created not only an operational package to support the trip and how guests move between the two assets they own, but they also created a guest room experience that supported that golf experience. What does a golf experience suite look like? They need lounge space, kitchens, enough bedrooms and bathrooms, and views overlooking the golf course that inspire the guys before they head out in the morning. They really thought of everything. They took a building where they could have done a regular guest room model, but instead decided to go for a lower key count and a higher guest experience based on a business concept. That's an example of investing to the market. Even though it is a little ostentatious and it is a really high-end design, it was based and rooted in an operational model. Back to your comment about being a GM, it's listening to the operators, listening to the sales teams, and understanding, when the development guys get involved, what actually moves the needle in the market before the contractor and designer ever get to the table. That's the number one thing I encourage owners to do because there are ways to create value in a property. You just have to make sure that sometimes value means not over-investing, or investing the same amount of money, but in a more calculated way. Steve Carran: Sure. Awesome. Tom, this has been an extremely insightful conversation. But this is the part of the podcast where we actually turn the tables and let you ask David and me a question. Tom Kelley: Oh my gosh. Quite frankly, I'm really interested in how both of you found the chairs that you're in today. As I joked with you earlier, I have very little knowledge of how to do podcasts or any of this stuff. Thankfully, I was given some guidance by my teenage daughters on making sure I had the right microphone and doing all of that. I would say two things. First, this is an amazing thing for the industry. I really love what I've seen from how you guys have approached the market and given the industry a soapbox, or a chair, to speak from about what's going on in their world so that other people in the industry can see it, experience it, and maybe gain something from it. I think that's been needed for quite a long time. I really applaud you guys. But I am curious how you both got to the chairs you're sitting in today, given the uniqueness of what you're doing. I think you're kind of trailblazing a little bit. Steve Carran: We appreciate that. David, do you want to take this one? David Millili: I'll try to make it as quick as possible. So, long story short, I was advising a company from India that was promoting their products in the US. Steve was their head of sales. They were struggling. They needed an idea. I said, "Hey, why don't we do a podcast?" Steve and I spoke about it. I said, "I want Steve to be..." At the time, it was more like a co-host type thing, but I said, "We need to do it together because I'm an advisor. I might leave. Steve's in the industry. He works for your company." That company went back to India. Steve and I bought the podcast. Steve's been pretty much full-time for a couple of years now. I've been full-time for about six months. What I would say is how we found our chairs was we had a purpose in what we were trying to do, and that was to educate the industry. We didn't want it to be about us just reading news off a website. We run it like a business. We were just at the Creators Summit, and that was my advice to people. If you're doing this, either you do it for your own brand and you don't care about the money, or if you do, then you've got to run it as a business. So not as short as I wanted to answer, but that's the story. Tom Kelley: No, that's brilliant. It was well done. Steve Carran: Well, this has been great. So our producer, Jon, who's been with us since day one, has been listening to this whole conversation. We're gonna kick it over to him for one final question before we get you out of here. Tom Kelley: Sounds great. Jon Bumhoffer: I know when you work on projects, you have to deal with a lot of brand standards, and you're kind of prescripted in the direction things go. But in scenarios where you have a little more creative freedom, what are things you draw inspiration from? Are there any projects that you're particularly proud of for Digney York? I'm just curious what kinds of things fire you up. Tom Kelley: For a company like Digney that's around 60 to 65 associates—I think we're at about 65 people right now—for a company like us to be as focused as we are, it really does put me in awe. When I walk into the New York Marriott Marquis, the largest hotel in Manhattan by room count, Digney has renovated it two times, and some of the guys here have actually renovated it three times. It's typically phased over two or three years. The owner, Host Hotels, is an amazing, sophisticated owner. To walk in there and watch how the team has to, in the middle of Manhattan, execute this symphony, this amazing choreography through the whole hotel over a series of years, is really impressive to me. That's what I would consider a large production project. The art is in this amazing choreography from start to finish. On the other side of the coin—which is why I really love working at Digney so much—we get the broad end of the spectrum. We get projects where we're brought in early, we're doing pre-construction, we're negotiating with the owner instead of doing a competitive bid, which we certainly do a lot of. When you're integrated with the team, the result seems to come out a lot better. The project sitting behind me, Snowmass, is a project near Aspen, Colorado. The Village of Snowmass had a former Westin Hotel, and an ownership group with several investors converted it into the Viewline, a Marriott Autograph Collection hotel. It's on the side of the Snowmass ski slopes, not too far from the base. We were involved with the guest rooms, and then they wanted us to do the public spaces and the lobbies. There were all these challenges, and it was a very integrated team with the design team, the owners, and the project management group, who were amazing. It was a really inspirational project because it felt very boutique, very thoughtful, and very challenging because of the location. We got to work on the spa, the meeting rooms, the lobby, the lobby bars, the restaurants, the ski storage areas, the guest rooms, the suites, and the residences. It really felt like you were integrated into a solid investment team for an entire year, basically from one season to the next shoulder season. It's fun to go out and visit those places, listen to the teams and the owners' challenges, and work through those problems because you're not going to find the same set of problems in every location. You're up in the mountains. How do you deal with the snow? How do you deal with freezing temperatures? How do you deal with all of those different things? It's that kind of variety that I think keeps everybody in this industry, at least at Digney, really interested. One day you could be working on a production project. The next day you could be working hand in hand with an owner. Either one has its value in the market, but also in what I think are people's aspirations to do good work. At Digney, we certainly strive for excellence. A lot of companies say that, but what we really try to do is be inspired by excellence because we get to work on such a variety of projects. That's what's exciting to me. To have people here that you've worked alongside who have been doing this for 20 or 30 years, I would say the last thing that gets me going is this ability to recognize that this is a tough industry. It's travel baseball. We're all over the country. But we love it because of the end product, the relationships we create along the way, and the partnerships that we hope are valued. There's not a lot of types of construction that are like this. It's not just construction. It's construction while thinking like a hotel operator, like the GM, like the salesperson, or like the bartender. "Hey, you don't like this bar design? Let us help you with this. What's wrong with the bottle layout? What's wrong with the speed rail?" It's that sort of thinking that allows the employees at Digney to feel like they're part of the team at every property they work on. That's what we love. Jon Bumhoffer: It's a very cool perspective. Every project's probably got a new set of challenges, the variety, and then seeing that execution at a high level is probably a very cool thing to witness. Tom Kelley: Yeah, and I would say, last, as I'm thinking about what inspires us to do what we do, I think you have to like hotels. You have to like to travel. You have to like the dynamic nature of the industry. Hotels have changed a lot, right? When I was at Marriott, hotels really had what we called static dry lobbies. You went to the lobby to check in, and then you walked to the elevator to go somewhere else. Now you walk into hotels, and when I was there, we were doing the Great Room designs and all of that, where it's the activation of the lobby. Now everything is activated all the time. You have lobbies that look like WeWorks. You have WeWorks that look like lobbies. Everything is everywhere all of the time, both in workplace and hospitality design. It's this constant evolution of amenities. We're putting in golf simulators in hotels now that are nowhere near a golf course. It's this idea that it's a Topgolf simulator. It's a branded experience. Spas have gotten really dynamic. Food and restaurant experiences have become more club-like and more focused on the cuisine. Travel social media creators are saying, "We're here," instead of leaving to go somewhere else. Maybe there's a Michelin Green Star restaurant that's all about sustainability, and it's inside this hotel because it's the hotel that's committed to sustainability. I think hotels are still becoming centers of the communities where they're located because they're focusing on the guest experience and capitalizing on it. They try to convert all of the space in the hotel to support those experiences. I think our experiences inform us, and our experiences drive us. That's where the passion comes from. You have to have a lot of passion to do what we do, and that's what's exciting. David Millili: Well, that does it for another episode of The Modern Hotelier. Tom, this is where you get to let people know how they can get in touch with you and find out more about Digney, so plug away. Tom Kelley: Well, absolutely. Check us out at www.digneyyork.com. You can certainly reach us through there. We have a great online presence, and we're active on LinkedIn and Instagram. The same goes for EIS Hospitality. Check out our website and our social channels. We're really active there and happy to answer any questions anybody has. We're only a click away. Hope to talk to you all soon. David Millili: Well, that does it for another episode of The Modern Hotelier, the most engaged podcast in hospitality. Whether you're watching or listening, we appreciate you and hope to be with you again soon. Thanks, Tom. Tom Kelley: Thank you.