New Varde Partners JV sees value creation from debt, equity dislocation

Varde Partners and Hawkins Way Capital are gearing up to deploy $1 billion into US value-added and distressed hospitality and residential properties at a time when equity and debt dislocation in the commercial real estate markets has opened the door for the partners to acquire and reposition properties in major US cities.

Varde, a Minneapolis-based investment management company that makes investments in real estate debt and equity and beyond, came together with Hawkins Way because the partners saw a similar story playing out in the market. The covid-19 pandemic has meant that there is a sleeve of hotel and housing assets that have been overlooked and are not viable in their current form, according to Ross Walker, a managing partner at Beverly Hills-based real estate investment company Hawkins Way.

The partners recently struck a deal to acquire 569 Lexington Avenue, a non-operating 764-key hotel on 51st Street in Manhattan that was being sold by RLJ Lodging Trust. The 19-story property was previously a DoubleTree-branded hotel focused on corporate and business travel but has been shuttered due to the covid-19 pandemic.

“We are focused on trying to generate the best risk-adjusted returns for our investors and the best way to do it is to look at moments of time where there is dislocation,” Francisco Milone, a partner at Varde, told Real Estate Capital USA. “This dislocation is created by a disagreement between market participants about the value of an asset or a particular sector. When we started to look at a post covid-world, we decided the US real estate market would potentially be a really interesting to sector spend more time.”

The partners see a limited opportunity to acquire properties at a discount to their intrinsic, potential value with the aim of repositioning the assets for higher and better uses. There is a large and scalable investment opportunity, Walker said.

But to achieve the best risk-adjusted returns, it is necessary to buy something at the right price, understand the potential and manage the execution risk as well as being able to effectively line up debt, Milone added, noting this led the company to form a partnership with Hawkins Way.

“Hawkins Way has a portfolio of almost $1 billion and they’re experts and share the philosophy and approach that trying to buy from investors who don’t want to hold assets anymore because they don’t belong to their strategy anymore,” Milone added.

The partners are looking at 10 major US cities, with plans to look for properties that could be converted into other uses as part of the investment process and are in the process of lining up another major acquisition.

“We have a little bit of experience now of raising debt in these conditions and that space is not as easy as it used to be,” Milone said. “There is a lot of dislocation in the debt space as well. Dislocation is usually caused by the lack of capital and that applies to both the equity and debt levels. Hopefully, once the assets are taken out of the storm, you’ll be able to find can even find better financing.”