Varde Partners is set to significantly expand its exposure to the hotel lending sector, with the company anticipating completing about $1 billion of loans on hospitality properties.
The move is a shift for the Minneapolis-based company, which had reduced its lending to hotels prior to the start of the covid-19 pandemic, James Dunbar, senior managing director, told Real Estate Capital USA.
“Coming into the pandemic we had already begun reducing our hotel exposure as we moved later in the credit cycle, originating less than $25 million of hotel debt in 2019,” he said. “The opportunity has ramped up significantly this year and we’d expect to extend around $1 billion to the sector versus more than $2.5 billion of overall commercial real estate lending.”
The move comes as the firm is observing an uptick in borrower appetite for non-bank lenders. “There is an increasing acceptance in the marketplace of the non-bank lending universe. That’s a positive for the industry as a whole,” Dunbar noted.
Part of this stems from a different risk profile and understanding of the assets where alternative lenders are active. A traditional commercial mortgage-backed securities conduit lender, for example, can’t originate loans on transitional assets.
“What we try to do when we make a loan is understand the inherent value of the building, and then the business plan that the borrower has to increase its value,” Dunbar said. “The occupancy of that building right now might only be 50 percent, which might not work for your traditional CMBS lender, or your traditional bank lender, because it doesn’t have enough cashflow. But we understand why it is just at 50 percent and why the borrower is putting money into that building. For example, if it’s in a good location within a good submarket, and we believe they’re going to be able to execute their business plan.”
There are two other factors that a non-bank lender provides: speed of execution and flexibility. “When you look at some of the flexibility that non-bank lenders can have when they’re structuring these loans for certain business plans, I’d say borrowers are always looking for flexibility around what repayment options are available as well,” Dunbar said.
The firm has completed over $4 billion of originations, all first mortgages, across the United States to date – varying by real estate sectors, with the majority being in the office, multifamily and hospitality space, but also industrial, self-storage and some selective retail.