Driftwood Capital plays its best hands

Note: This is Part 1 of a two-part interview. In the second installment on Monday, April 22, Driftwood will address the acquisition cycle and controlling development costs.

MIAMI – Driftwood Capital is creatively rolling with the punches coming from micro-market economic instability and what continues to be an expensive debt market. The Miami-based father and son team of Carlos Rodriquez Sr. and Jr. has pivoted to focus on providing even more rescue capital as well as debt and is being more selective with development and acquisition.

Even as Driftwood remains conservative on the development side and at a moment in time when getting new developments to pencil out is challenging at best, the vertically integrated commercial real estate firm still exceeds $1 billion in projected value with $800 million worth of strategically pursued projects either under construction or scheduled to break ground in 2024.

This pipeline includes the groundbreaking for the Riverside Wharf property, which is the $267 million mixed-use development located on downtown Miami's riverfront, featuring a Dream Hotel. In fact, several of their new properties are in Florida, but growth is coming across the U.S.

Driftwood is also developing a $54 million Element by Westin in Melbourne, Florida, due to open this June; a $74 million Element by Westin Mission Valley San Diego, California, that is just underway with completion projected in 2026; and the Westin Resort & Spa Cocoa Beach, Florida, an approximately $410 million luxury resort development expected to break ground in Q3 of 2024.

Rendering of Dream Hotel Riverside Wharf in Miami

Its $267 million Riverside Wharf Miami mixed-use development is expected to break in the latter half of 2024. This project benefits from Opportunity Zone advantages and EB-5 capital sourcing through Driftwood Capital’s affiliate EB-5 Regional Center.

Carlos Sr. told Hotel Investment Today that Driftwood has two more deals with term sheets – a bigger development in San Antonio and more of a lifestyle deal in Boca Raton, Florida.

Multiple opportunities

Since 2015, Driftwood Capital and its principals and affiliates have transacted on more than $5 billion in hospitality assets. They have seen it all and can use that experience to navigate today’s uncertainties. Today, it has 90 hotels in its portfolio, about half with varying degrees of ownership.

Right now, Driftwood remains very active on the credit side, having laid out $100 million in the first quarter of this year alone. They are also doing “white knight” deals, coming in to take majority stakes on stalled developments where a lot of the leg work is complete. In addition, to the development described above, Driftwood is active in the acquisition market – only not nearly at the level it was pre-COVID (one a year versus eight a year). But father and son said they expect M&A to ramp up starting in the second half of this year.

Rodriguez Sr. is often on the road working to attract more capital investment and talked about how investor expectations are evolving.

On the lending side, where a lot of capital is sourced in international markets, Rodriguez Sr. said their investors are pleased with their returns and demand remains very strong. “The moment we put out the paper on loans they sell in a day,” Rodriguez said. “Investors on the lending side are very happy.”

It’s not easy, man. I’m telling you. We underwrite a ton of deals to achieve these deals. We used to get loans with banks for 70% to 75% of loan to value or loan to cost. Today, banks will offer 60% if you’re lucky but more likely 50% to 55%... So, not everything pencils; it is a difficult environment.”

Carlos Rodriguez Sr.

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On the acquisition side, Rodriguez Sr. said expectations have increased for higher returns because of higher interest rates. “Investors are looking for 300 basis points more than they used to – in the high teens,” he said.

And on the development side, Rodriguez Sr. said investors want returns in the 20%-plus range to make deals appetizing. “It’s very difficult to make these deals pencil with construction costs being higher, with interest rates being higher, insurance and payroll being higher,” he said. “Then the project won’t stabilize for six years, and you can’t sell it for seven to 10 years. Whereas in an acquisition, you’re taking about selling the deal in three to five years. And with loans for three-year terms – it’s a lot more liquid.”

So, when Driftwood does make a development deal, they are very methodical and strict in their underwriting to deliver those 20%-plus returns. “But it’s not easy, man. I’m telling you. We underwrite a ton of deals to achieve these deals,” Rodriguez Sr. said. “We used to get loans with banks for 70% to 75% of loan to value or loan to cost. Today, banks will offer 60% if you’re lucky but more likely 50% to 55%... So, not everything pencils; it is a difficult environment.”

But new deal flow will start to pick up, according to Rodriguez Jr. “When banks start loosening up a little bit, when interest rates go down, you’re going to see a spike in construction. There are a lot of deals on hold right now because the numbers don’t work. But once you start seeing interest rates coming down and banks loosening up the purse strings, you'll start seeing new-deal flow. But it’s going to be a few years – it’s not going to be right away.”

White knight approach

Absent more development and acquisition opportunities (they acquired one hotel last year when they normally buy between five and eight), Driftwood is playing “white knight,” jumping in on stalled deals and taking advantage of all the planning and permitting work already done, which skips a few years of work.

Driftwood will bring in the capital structure and take at least 50% of the deal, and usually a majority stake. It brings its development expertise and basically revives the project.

“The developer usually knows the market, the people, the government officials. So, it’s a very helpful partnership and working very well for us. That’s an approach we’re going to have for the next few years. We feel good about doing these jvs nationwide.”

Looking ahead, Rodriguez Sr. said he expects that there is going to be an opportunity on acquisition value-adds with so many PIPs coming up that are no longer going to be extended. “In our acquisition fund, the last five deals, with the exception of one, have all been heavy value-adds,” he said.

Watch for Part 2 of Hotel Investment Today's interview with the Driftwood Capital father-son team tomorrow.