Avana’s co-founder on how private credit has changed

Note: Hotel Investment Today talked to Avana Capital's Sanat Patel about a $250 million lending program for new construction loans that it was partnering with IHG Hotels & Resorts on for four of its brands. Here he talks about the state of private credit right now.

NATIONAL REPORT — Sanat Patel says the general market perception of private credit has changed over the past few years. Namely, it’s here to stay and fills a void that banks aren’t doing now.

“The previous perception of private credit is that it was ‘hard money’ if you have a really dire situation and you can’t get any bank to do it,” said Patel, chief lending officer and co-founder of Glendale, Arizona-based Avana Capital, which serves as a private lending firm working primarily in the hospitality space. “Private credit has become more mainstream… There are solutions that banks can use when it’s more of a stabilized asset — a built asset. But private credit is more of the bridge for a reposition or construction.”

While there have been reports that regional banks are jumping back in on hospitality lending, Patel said he’s seeing it more as an extension of serving its current customers, not new ones.

I don’t think you’re seeing those regional banks take on a new borrower unless, from a development perspective, they have experience [with them]. So they’re jumping back in, but they’re starting with their existing customer base, and that’s why we’re staying.

Sanat Patel

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“I’ve seen some banks jump into it, but it’s also driven a combination of them looking at their existing customer base and saying, ‘What can we do to expand that and lend to the existing customers?’” he said. “I don’t think you’re seeing those regional banks take on a new borrower unless, from a development perspective, they’ve got experience [with them]. So, they’re jumping back in, but they’re starting with their existing customer base, and that’s why we’re staying.”

Avana generally sees a higher quality of borrower now than in the past, Patel said. He also thinks they are seeing more customers, especially for things like bridge or new construction loans, because banks aren’t an option.

“[Borrowers] are at a point where they’ve tapped out at their current local bank because they’re too big for the bank, or it’s just that the banks are not lending,” he said. “I think it’s more the latter, which the banks are not lending today because construction risk requires a different capital allocation for banks and they’re faced not only with that allocation issue, they’re faced with a liquidity issue, and they’re faced with a regulatory burden associated with all of that.”

While Patel said for hospitality, a higher percentage of Avana’s business is in bridge-related loans, where the borrower needs a PIP to stay with their current brand or to reposition the asset, he thinks the percentage of new construction loans will be on the rise.

He also thinks anyone waiting for interest rates to come down has now realized the current environment is here to stay. He mentioned an analogy brought up on stage at the Hunter hotel conference that investors in a lower interest-rate environment were on a “sugar high.”

“It’s like any diet initially. The pain is hard, but somewhere along the way, reality sets in, and they see this is better for me, so I need to do that,” Patel said. “That’s where borrowers are today. They’re very much used to the low interest rate, and they’re trying to figure it out now, saying, ‘Hey, this is the new normal. It’s going to stick around for the next foreseeable future and we need to just adjust our business models to that, basically.’”

That isn’t necessarily a bad thing, Patel said, as it forces hotel owners to think about how to become more operationally savvy to maintain their margins.

We’re actually diving a little bit deeper into the borrower’s overall balance sheet and asking what resources they have when they hit a hiccup. We’re really delving into how they weathered through COVID.

Sanat Patel

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When asked where we are in the current PIP cycle, Patel said we’re now at a point where both brands and borrowers are aligned because they realize if they’ve waited on renovations, they have to get them done, especially for the last remaining pre-COVID loans.

“The brands have been very patient with their franchisees to wait for the market to turn up,” Patel said. “The brands are now saying, ‘Hey, we have to get this done. We’re two years behind schedule to get this done.’”

While this cycle hasn’t necessarily forced more sales over the past few years, Patel thinks more of those sales will be coming in the next two years.

While Patel said the type of lending people are doing isn’t different from pre-COVID, lenders now have to be more creative with their diligence in the underwriting period.

“We’re actually diving a little bit deeper into the borrower’s overall balance sheet and asking what resources they have when they hit a hiccup,” he said. “We’re really delving into how they weathered through COVID.”

The other things lenders like Avana are focusing on, Patel said, involve operating margins at a time when costs are constantly rising.

“It’s not a matter of whether you hit a certain level of net operating income. It’s more a function of what you are doing to preserve your net operating income,” he said. “What are you doing to remain competitive in the market and what you are doing to be ranked highest in terms of customer satisfaction?”