The RADCO Companies, an Atlanta-based investment manager, invests across multiple property sectors and plans to expand its holdings in the hotel market segment this year.
Although the firm has historically invested in hotels – and two years ago made the move to expand its hotel portfolio – much of its focus since 2011 has been on the multifamily sector, according to Bhavnesh Vivek, vice-president, hotel acquisitions.
The opportunity is driven in part by what is going on in the debt markets, with financing more difficult to line up for sponsors than in years past.
“This is a space where we are actively looking to grow given what is happening in the market,” Vivek said. “We feel like hotels are a relatively good investment and that there is debt capital available for the right deals. The first quarter of this year was a tough transaction market, but we are seeing more deals that make sense and we anticipate more distressed opportunities coming but have yet to see a wave.”
There are a number of potential scenarios that could present opportunity, with Vivek noting owners could have large capex costs or simply are unable to line up new financing in a market where rates are substantially higher than they were two years ago.
“Those factors, coupled with whatever capital requirements there may be, cause an equity gap where they need to bring new equity to the table or just can’t get a loan refinanced,” Vivek said. “There is a ton of equity chasing deals. The harder part is on the debt side, given where interest rates are.”
Still, Vivek said RADCO is seeing a more active lending market. “We closed on a deal at the end of last year that had tremendous cash flow and it was pretty tight in terms of the debt markets,” Vivek said. “That story has changed quite a bit this year as lenders have more capital to put out and are being a little more aggressive on the substantially smaller volume of deals that are currently in the market.”
He believes this is because there is more clarity around the Federal Reserve’s next moves on interest rates.
“Typically, when we see the Fed raise rates, spreads start compressing and that had not happened for the better part of a year. But it is starting to happen a little as we have gotten more clarity on what the Federal Reserve is going to do going forward. When no one knew how far rates would rise, it was a volatile time to get a loan,” he added.
Although transaction activity has been slow, Vivek anticipates this will change as more distress works through the market.
“I think the transaction market will open in the second half of this year, particularly as we see more distress and know there is a wave of debt maturities coming up in the next 18 months,” he said. “I do think we will see more deals shake loose toward the end of this year and into next year.”
RADCO founder Norman Radow got his commercial real estate start in the hotel business, getting into a redevelopment deal for a property that ultimately became the Four Seasons Hotel in Atlanta’s midtown submarket in the mid-1990s.
The firm began to sell its multifamily properties in 2019 and over the next three years executed about $3 billion in sales. “Observing what was happening in the marketplace, we felt like it was the right time to exit a lot of those deals,” Vivek said.
Vivek joined the company in early 2021 to launch a true hotel platform and over the past two years, the firm has acquired 11 hotels. Nine of these assets were purchased over the past year, he added.
Because of the way the firm raises the capital, RADCO can be flexible in where it plays in the capital stack but prefers to remain on the equity side.
“We have seen opportunities we have not necessarily pursued where there are gaps in the capital stack,” Vivek said. “But to date, there has been enough volume that we have been able to go in and buy our own properties and go where we want to with the business plan.”
The firm has acquired full- and select-service hotels and has purchased middle-market properties ranging in size from 80 to 300 rooms, or a deal size in the $15 million to $75 million range. “The Southeast will continue to be the bulk of our focus and we are targeting assets in Arizona, Texas and some deals in Colorado as well,” Vivek said.