Thorofare Capital tilts toward alternatives, building sponsor relationships

Thorofare Capital is expanding its reach to alternative asset classes and larger ticket loans, and building longer-term relationships with operators which specialize in specific asset classes as it seeks to grow its loan portfolio. 

“We are finding niche opportunities in alternative property types. More recently, we have been active with RV parks, mobile home communities, industrial outdoor storage facilities and life science conversions. We have also kept our focus on more self-storage loan exposure, which has become more mainstream but continues to be a very fragmented market where the highest concentration of owners are still private investors,” said Felix Gutnikov, principal and head of originations at the Los Angeles-based commercial real estate debt manager.  

The firm’s deals this year have included a $51.5 million portfolio loan for five hotel-to-multifamily conversions across four states, which Gutnikov notes is an investment theme that has emerged from covid-19’s impact to functionally obsolete hotels in areas where affordable housing is under-supplied. Thorofare has recently closed a $52 million portfolio loan on two climate-controlled self-storage assets nearing completion in Southern California, with Gutnikov noting the firm is also seeing an emerging lending strategy around financing construction completions.  

“Financing construction completions was something we didn’t see often until [the covid-19 pandemic] hit. Disruption in project schedules, escalating costs and more recently a spike in un-hedged borrowing costs has impacted construction projects finishing on schedule,” Gutnikov said.  

Higher material and labor costs and prolonged delays in building have meant that many sponsors need additional financing to complete construction projects. “Before 2020, construction completion situations were limited to under-capitalized, sponsor-related issues or problems stemming from the project such as contractor disputes,” he added.  

Thorofare has taken a more conservative approach to underwriting in today’s market but still has been active originating loans of $15 million to $75 million.   

“Generally, we are not underwriting rent growth and we are increasing exit cap rates to levels that are wider than where we’ve seen some recent trades,” Gutnikov said. While there is a well-documented paucity in transaction activity, the firm is reaching out to the property managers, investors and operators with which it has relationships to real-time data in the markets where it is active.  

While it has been more challenging to determine valuations, the firm’s existing portfolio and the assets that it is lending against today are in markets where there is still activity. “We’re approaching new lending opportunities with creativity to gather data and intel from our nationwide network of reliable local sources, to make sure we’re carefully taking everything into consideration and working hard to deliver timely solutions in an uncertain market,” he said. 

Focus on infill

The firm continues to focus on infill locations of markets with high barriers to entry, where entitlements to development are challenging to lessen new supply risk. This means Thorofare has been active in markets like Santa Barbara, San Diego’s Sorrento Mesa submarket, Long Island in New York and tight New Jersey industrial markets. “Most recently, we have not been as active in the Sunbelt markets as we were prior to covid-19 or during the peak of the cycle in 2021-2022,” Gutnikov said.  

The current dislocation in bank lending has resulted in an influx of inquiries from new prospective borrowers, but Gutnikov is realistic about the ability to maintain current relationships given the differential between the cost of capital of banks and alternative lenders.   

“If the banks come back and are able to offer a lower cost of capital without being onerous on their relationship depository balance and recourse requirements, then as fiduciaries to investors, these borrowers are going to take the cheapest money they can,” Gutnikov said.  

Gutnikov believes the private credit markets will continue to institutionalize and become more efficient. “We will continue to grow in loan size and make our capital more efficient, which will help us to retain the relationships we are capturing today due to the dislocation today.”