With debt offering a very attractive risk adjusted proposition, the affiliate of Procaccianti Companies and PE giant Bain Capital will focus on new loan originations and debt refinancing exclusively in the
hospitality space.
With debt solutions offering a very attractive risk adjusted return
for the foreseeable future, and maybe beyond, Bain Capital Special Situations
and Procaccianti Companies affiliate Smith Hill Capital have formed a joint
venture to originate debt and preferred equity to serve the hospitality sector
with the objective of deploying $1 billion of gross capital over the next
several years.
Recognizing a compelling opportunity, the new joint venture that first started conversations about 10 months ago will initially focus on new loan
originations and debt refinancing exclusively in the hospitality space within
primary and secondary markets throughout the U.S. In select instances, the
partnership will seek to acquire debt and provide rescue capital to
high-quality borrowers.
David DesPrez, Bain Capital
“We actually
think the opportunity is a relatively durable one; it’s not just a moment in
time,” David DesPrez, a managing director at Bain Capital, told Hotel Investment Today in an exclusive B2B trade interview. “There are two factors: the market is absorbing the impact of higher
rates, devaluation, higher cap rates, as well as a pretty material liquidity
gap that was driven by the recent regional bank strife and the fact that
more traditional lenders, banks especially, are pulling back from commercial real estate. Then, looking back a bit further, lender pullback has been particularly acute to hotels given COVID was this heart
attack event for the hospitality industry, in a way that wasn’t for almost any other real estate asset class, given the
nightly lease terms; lenders haven't forgotten that experience and liquidity has really dried up. So, when you add up those factors, we think that the
opportunity is at least a medium- if not long-term opportunity to be a
liquidity provider to really high-quality sponsors and assets.”
We think that the opportunity is at least a medium- if not long-term opportunity to be a liquidity provider to really high-quality sponsors and assets.
David DesPrez
Brendan McCormick, managing principal of Smith Hill Capital, a debt
investment management business of the Procaccianti Companies, added that the business will selectively offer debt through different cycles and not just
because rates are high. “So, for us, it’s a natural complement and
broadening of the Procaccianti business more than anything else. We do view this as
a very interesting point in our economic cycle. We also would agree that debt
offers a very attractive risk adjusted proposition in this market.”
McCormick said the joint venture can put out first
mortgages, mezzanine debt, preferred equity, and could potentially buy notes in
the secondary market. “We don’t necessarily view it as how much debt versus
preferred equity, but preferred equity is one of our many offerings we can
provide,” he said.
The new partners have been developing their pipeline over
the course of the last few months but said they have not closed a deal just yet. “But
we have a few deals in our crosshairs. So, I think it’s just a matter of time,”
McCormick added.
Going deeper on the mix of potential deals, it is a little bit market
opportunity and situation dependent. “We’re assessing both type of opportunities
within the pipeline right now – some can be a single asset deal, others can be
a two-pack, three-pack portfolio, and we are looking at some larger portfolios
as well – five assets or larger,” McCormick said.
Brendan McCormick, Smith Hill Capital
DesPrez added that an increasingly popular strategy in
single asset and perhaps, more so, portfolio real estate right now is to assume
lower-cost CMBS debt and put preferred equity behind it. “That
is the type of flexible capital solution that this joint venture could
capitalize on,” he said.
The partners also stress they want to identify top tier, well-capitalized
sponsors for deals. “Part of it is also whether or not they have the ability to execute on
their business plan, which could be everything from a proper acquisition, a renovation or from an exiting perspective,” McCormick said. “We are lenders at the end
of the day. So, how did they perform during tougher periods in time? Did they
do the right things during COVID, or during tougher parts of the cycle?”
We’re assessing both type of opportunities within the pipeline right now – some can be a single asset deal, others can be a two pack, three pack portfolio, and we are looking at some larger portfolios as well – five assets or larger.
Brendan McCormick
While there will likely be opportunities to parlay some of
the deals into hotel management adds for Procaccianti, McCormick and DesPrez adamantly
stated the new venture is not a broker shop and not a loan-to-own business to
feed other Procaccianti businesses. “Smith Hill is the debt investment
management business for Procaccianti,” McCormick said. “This is a debt
investment venture benefited significantly by the TPG platform and the larger
Procaccianti platform. So, we benefit from that in terms of market insight, or
underwriting, and looking at every deal from the perspective of an owner. But
the goal and objective of this platform is to put out really interesting debt
and not to feed other businesses of Procaccianti.”
DesPrez added that as long as the venture sees interesting
opportunities, capital won’t be a constraint. “We’re going to be discerning
about deals, but to the extent that we see a high volume of deals, or large
individual deals, with our partners at Smith Hill we certainly have the ability
to move quickly to capitalize on the opportunity… We’re targeting $1 billion,
but we certainly have the flexibility to invest more.”
While there are always challenges and potential down sides,
McCormick said he views this partnership as being very well positioned. “We do not have legacy positions. We have a great joint venture
capital partner, and speaking from the Smith Hill perspective I’m so happy I
was able to join the Procaccianti Companies and build this business with them.
We really benefit from multiple decades of experience and a truly talented
team. So, I think we’re very well positioned for the current market and what I view as
an opportunity for the foreseeable future.”
DesPrez said that while there are certainly new entrants coming
into real estate, credit and hotel credit specifically, “when you compare
that inflow to the outflow of traditional lender credit, we think those
supply-demand dynamics are incredibly compelling – not just for the near but
the medium and even the longer term.”
Bain Capital Special Situation, with $18 billion in
assets under management and having invested more than $28 billion since our
inception in 2002, has a long history of supporting the growth of global
hospitality companies. The firm’s experience in the sector includes Apple
Leisure Group, Hard Rock Hotel Marbella, Hotel Don Carlos, Marriott
International’s Edition brand, Ooedo Onsen Holdings, and Pyramid Global
Hospitality.
Procaccianti Companies is one of the largest privately
held real estate investment and services firms in the United States. Founded in
1958, its experience includes thousands of transactions representing billions
of diversified real estate investments. It is a vertically integrated
alternative asset manager with a broad national platform having owned,
developed, managed or financed investment real estate in over 300 cities across
42 states.