The father-son team said the
current environment is ripe for increased M&A, but they will be picky about
dealmaking and even consider tertiary markets if there is strong growth
potential.
Note: This is Part 2 of an interview with Carlos Rodriguez
Sr. and Jr. Read Part 1 about current Driftwood opportunities, including their
“white knight” investments.
MIAMI - Driftwood Capital President and COO Carlos Rodriguez Jr. says
the perfect storm for transactions is at hand and he expects volume to pick up
soon. He’s referring to PIPs coming into play for capital-challenged owners and
simply a lack of available capital or ability to float loans to the medium
term. Add cost creep and a lack of clarity about lower interest rates.
“Everything is coming to roost, and you have a situation
where brands are expecting you to renovate your properties,” Rodriguez Jr. said.
“Now, banks are no longer willing to play ball and they’re getting stricter as
loans mature. So, it’s a perfect storm that is coming.”
He doesn’t expect to see big discounts in asset pricing, but
he does believe buyers are increasing their conviction in advance of lower
rates and seller simply having to let go. “I do see this kind of pressure
cooker letting out steam throughout the year... Transactions are finally going
to materialize to a greater degree.”
Lounge at the Element Mission Valley development in San Diego
Driftwood is going to be pickier on the acquisition side,
looking for high barriers-to-entry, high growth markets. “And I don't care if
it’s the tertiary market as long as there’s a strong market that has growth,” Chairman
and CEO Carlos Rodriguez Sr. said, adding that they are starting to look at
portfolio deals.
Rodriguez Sr. said Driftwood has one deal in North Carolina
that will be announced in early May and is working on a “quite larger” deals to
be announced in the summer.
Controlling costs
Circling back to processes for Driftwood's four current development deals for some
$800 million, controlling costs has been challenging with the cost of labor and
materials skyrocketing in recent years.
We just invited subs to a meeting in Cocoa Beach and 80 showed up. That shows to you that there is a hunger out there, and that is helpful for projects like ours.
Carlos Rodriguez, Sr.
Very cognizant of the all the related issues, Rodriguez Jr. said having
a very good general contractor and good oversight to avoid changes along the
way makes a huge difference. In fact, the two boasted about its Element in
Melbourne, Florida, which is ahead of schedule and under budget.
“We review plans in depth and make whatever changes we need while
they are still on the drawing board,” Rodriguez Jr. said. “We’ve been working
on the Westin in Coco Beach for so long that I don’t know if we reviewed any
plans as much as these.”
In fact, Driftwood just put out bids for subs and had a
massive response for such a smaller market, proving the competition is much
healthier than the past few years.
“The pipeline for subs and for building is definitely
slowing down,” Rodriguez Jr. added. “We just invited subs to a meeting in Cocoa
Beach and 80 showed up. That shows to you that there is a hunger out there,
and that is helpful for projects like ours.”
All that said, revisions do happen and at Driftwood’s Dream hotel
project in Miami and at the Westin in Cocoa Beach, they modified the suite
count to meet increasing demand. “It added some cost, but we feel the return
will be worth it.”
Driftwood also opted out of residential at Miami and Cocoa
Beach. In Cocoa Beach, it wanted more hotel keys due to the adjoining
convention center and when it was time to decide they found condo per square
foot prices weren’t quite where they wanted them. In Miami, they were hit with
density issues and didn’t have enough room for condos to make sense.