Miami-based hotel-focused investment firm Driftwood Capital recognises the current unstable environment with inflation, rate hikes, and geopolitical turbulence causing many real estate debt market participants to take a wait-and-see approach – even more so in the less popular asset classes.
Carlos Rodriguez Jr., COO, is optimistic about the sector, but stresses there are some key questions that borrowers and lenders need to answer. As a lender, the firm mainly provides mezzanine loans to borrowers, working in conjunction with senior lenders.
“One of the challenges is looking at what that term is, maturity issues, and not being able to get [a] senior loan, which are probably the biggest questions in this space,” said Rodriguez. “The volatility that we’ve had, and the fact that we don’t have a Fannie Mae and Freddie Mac in this sector, makes [investing in the space] even more challenging.”
Rodriguez told Real Estate Capital USA that market volatility is making it harder to get deals done since senior lenders, such as banks, are lowering leverage, raising rates or pressing pause.
“What inflation and recession can do to a market segment has been talked about for a while, but I think post-pandemic this is accelerating,” added Rodriguez. “It’s going to be very challenging for groups to execute on hotels given costs and just the nature of property type.”
But with other groups pulling back on mezzanine lending, Driftwood’s lending fund has had better opportunity. As a mezzanine lender, the firm is able to supplement a sponsor which can secure a 5 percent senior loan at 50 percent leverage with additional financing that brings leverage up to 70 percent, with a cost of debt of about 12 percent.
“It gives us a very nice window to execute and then offer our investors a 10 plus percent net return on these loans, and still make a profit on our platform side.”
There is opportunity to be had both on the debt side and the equity side, where Driftwood is also a player.
The firm has closed deals in West Palm, Tempe, Arizona, Northwest and Northeast Florida coast, Daytona, and St. Augustine – locations that have seen tremendous growth.
“Whether it’s equity or debt, we are very bullish [with] hospitality based on current pricing,” said Rodriguez. “From a lending perspective, there’s definitely a reason to step in the space for quality assets in key markets, despite ongoing turmoil. “The compelling side of it is to be able to get high yield and still have that risk reward as an attractive proposition that we just don’t see in some of the other spaces.”