Madison Realty Capital and Newbond Holdings, which last month launched a joint venture to provide first mortgages, mezzanine loans and preferred equity to US hotel owners and developers, is preparing to scale its platform as the hospitality market continues to recover from the covid-19 pandemic.
The partners have an initial $500 million of lending capacity and could see that increase as opportunities arise, Josh Zegen, managing principal and co-founder of Madison Realty Capital, told Real Estate Capital USA. The New York private equity firm, which provides on debt and equity strategies, went into the pandemic with a hospitality-light balance sheet.
“We believe the fact that we were so light on hospitality provides us with a strategic advantage,” Zegen said. “We now have a large balance sheet to provide capital. This is different from many of our peers, who were loaded up on hospitality loans going into the pandemic and are now tapped out on the market.”
Although Madison Realty Capital looked at the hotel market a year ago, its interest was piqued by the perception that prices were low. “But we were concerned about how long it would take for a recovery to happen – there was no sense at that point of when a vaccine would happen,” Zegen said. “We believe that now there is a little more transparency in the market and there is also a lot of need from owners who require a flexible lender.”
In some ways, the Madison Newbond venture was years in the making, with Neil Luthra, founding partner of hotel specialist Newbond, telling Real Estate Capital USA that he and Zegen had long talked about ways to work together. The principals of Newbond, also based in New York, have completed about $14 billion of debt and equity investments in the hotel sector.
“We have always looked at opportunities and this was the perfect chance for us to use our platforms to help each other,” Luthra said. “We see this as an opportunity to collaborate with borrowers as they recover and we believe there will be a massive amount of capital needed in all hospitality classes, from limited service through to the five-star resorts and hotels.”
The partners have a strong pipeline, with additional insight from the acquisitions Newbond has made so far this year. The venture will look at opportunities in the coastal gateway cities like Boston, New York and Washington, DC, as well as parts of Florida, Texas, California and Hawaii.
“We have a deep history in those markets and as a lender, it’s also really important to have insight into those markets,” Zegen said. “This is especially true around hospitality, which is really an operating business that has a food and beverage component to it. We have always done some hospitality lending and always knew that if we wanted to scale that part of our business we would need a true operating partner which understood the ins and outs of the business.”
Because of the quirks of the sector, Zegen and Luthra anticipate there will be substantial customization of loans based on situational needs. This is easier in situations where the borrower is using lower levels of leverage – and where the lender isn’t relying on repo or warehouse lines. “Borrowers are at a point where they need to choose their lenders wisely,” Zegen added.