Austin, Texas-based investor works on placing its first $100
million in debt, as well as taking equity positions in first three hotel
assets.
AUSTIN, Texas – Times of change and uncertainty typically attract new
players into any business vertical with hospitality being no exception. Among
the more recent entrants is Austin, Texas-based Palladius Capital Management,
which is placing both debt and equity into the hotel space led by CFO and Head
of Hospitality Afshin Kateb.
To date, the two-year old firm that has been more active on
the residential side and industrial side has created a $50 million pocket
equity fund that has already deployed capital for one East Coast resort-like hotel
asset in partnership with a prominent West Coast partner. Kateb expects this
first fund to place equity with, perhaps, two more assets, and prefers compact
full-service properties without too much reliance on food and beverage. Once a small
portfolio is in place, Kateb said he expects Palladius to create a new equity
fund.
“With consumer credit card or discretionary income beginning
to fizzle out, we want to focus on key markets with good and diversified demand
fundamentals,” Kateb said, referring to those with returning corporate demand
and Top 25 markets like Los Angeles, San Francisco and Washington, D.C.
On the debt side, Palladius is trying to fill a void with
smaller loans in the range of $3 million to $30 million and this year it has
placed five with a six debt deal pending. It will do both construction loans as
well as take senior mezzanine and preferred equity positions. “We’re very
selective as the quality of borrower is paramount,” Kateb said. “Location is
very important and ultimately exit for us is key… Can we as lender get paid in
24 to 36 months?”
We’re very selective as the quality of borrower is paramount. Location is very important and ultimately exit for us is key… Can we as lender get paid in 24 to 36 months?
Afshin Kateb
Kateb said the near-term goal is to place about $100 million
in debt by the middle of 2024 and $500 million in the next few years.
“We’re going to see greater reliance on private credit and
want to be looked at as a solution provider,” Kateb said. “Our objective is to
grow the book and substantially reduce the risk on any single loan that we put
out.”
While definitely not looking to loan to own, some of the
deals Palladius sees could move in that direction, according to Kateb. He
referred to a deal where an existing mezz lender wanted out on an asset that
was ramping up and Palladius stepped in to remedy the situation for the owner
who offered full recourse, had good liquidity and a good network. “That hotel
is going to do well and continue to do well,” Kateb explained. “We’re even
exploring potentially looking at the senior position in that deal if this
current trend continues.”
In fact, Palladius is working programmatically with Choice
Hotels’ Everhome Suites brand, according to Kateb. “We’re hoping those assets
will continue to perform as planned, and we certainly could be a suitor on
exit.”
Experienced perspective
The Palladius team has several hospitality and real estate
veterans with Kateb being the founding CFO for The Kor Group, which created the
Viceroy hotel brand, as well as for sbe, which developed the SLS brand. He also
ran a hotel fund for Lowe Enterprises.
“We’re constantly looking at hotel assets because we view
that there are opportunities ready to present themselves and we just need to be
ready to jump on those,” Kateb added.
However, aside from lending to owners who plan to hold, Kateb
talked about how the transaction market should get more interesting. Everyone
continues to wait for the moment of reckoning, or as JLL Americas CEO Kevin Davis
has dubbed the “Great Reconciliation,” when the realization sets in for owners that
they must sell after holding on too long or lenders make that somber resolution
for them.
“The first quarter of next year is going to be very telling
– either lenders will work it out with the borrowers, giving them another
lifeline, or they will go back to the policy at the beginning of COVID,” Ketab
said. “Lenders have put people in two buckets, haves and have nots. They
immediately know which borrowers have the ability to sustain, feed the asset
and get out of it, and those that are just not going to be able to survive. And
the lender doesn’t want to deal with that latter type of a borrower anymore.”
Bottom line, Ketab expects to see a substantial number of transactions
next year, and as he said Palladius is keeping close tabs on all the activity.