Peachtree’s Friedman lays out multi-layered strategyBy Jeffrey Weinstein | February 28, 2023Share The multidimensional developer, buyer, manager and lender is leaning into available debt opportunities right now but expects to be active on the acquisition front later this year. One of the more diverse players in the hospitality space with divisions touching hotel acquisition, development, lending and management, Peachtree Group can offer a more holistic perspective on the state of the marketplace. So, in late February, Hotel Investment Today asked CEO Greg Friedman to share the company’s take on the state of industry affairs and the direction it is taking to get the best risk-adjusted returns based on macroeconomic conditions.Big picture, while volatility remains the catchphrase of the day, Friedman says there is value in any cycle, even on the acquisition and development side. That said, with the extended lack of supply on the debt side, it’s a great time to be in that space and its Stonehill lending platform is forecast to beat last year’s $1.2 billion investment. The company expects to close on $300 million of investments in the first quarter of 2023 and is targeting $1.5 billion for 2023. “It’s very beneficial for us to be a lender because we’re able to lend, in a lot of cases, at higher spreads. But we’re also able to be more thoughtful about the leverage points that we’re lending to, the type of assets, the borrowers and sponsorships,” he added. “We’re leaning in as organization, investing more capital on the debt side as we speak right now.”Friedman was quick to add that Peachtree is also gearing up to take a making a bigger play on the equity side over the next six or nine months as groups face loan maturity issues, or renovation requirements, or simple fatigue from the pandemic and associated higher debt service. “All those factors, we think, are creating the perfect storm where there’ll be a lot of opportunities to buy hotel assets at very favorable pricing.”Peachtree’s hospitality division includes Peachtree Hotel Group, which invests in hospitality-related real estate; management company Peachtree Hospitality Management with almost 10,000 rooms; and Peachtree Hospitality Development, the hotel construction and renovation arm. The commercial lending division includes Stonehill and Stonehill PACE, a direct property-assessed clean energy lender for all commercial asset classes.Here is more on what Friedman had to say about all the disciplines where Peachtree participates:Hotel Investment Today (HIT): What types of debt opportunities seem to be the better plays at the moment?Greg Friedman (GF): We’re lending across the U.S. with very few markets that we’re avoiding for different reasons… We tend to like to lend into markets with very sustainable demand drivers and a very much business friendly environment. We like flex-service, limited-service, smaller full-service hotels, or the extended-stay hotels… We’ve stayed away from bigger boxes in general given that they tend to have bigger capex needs and staffing challenges. We try to focus on assets that have more efficient labor models.Rendering of Peachtree's Hampton Delray, Florida, developmentHIT: Why do you expect a big opportunity on the equity side later this year?GF: For ownership groups that have not hedged their interest costs, debt cost most likely has doubled or more. That increase in debt service is eating away all cash flows. So, it’s very challenging for groups to pay debt service. In a lot of cases, groups are even in negative leverage situations, just given how fast rates have risen.We don’t see any catalyst for interest rates to drop in the near term and think we’re going to be dealing with rates over the next 24 months… We believe there’s a higher probability that The Fed may pivot and reset their targeted inflation rate to something closer to 3%, or maybe a little bit higher. And there is not going to be a catalyst for The Fed to start dropping rates because they’re concerned that inflation may get out of control if they start reducing rates. So, unless we go into a deep recession, we see there being no ability for rates to drop. Ultimately, as the year goes on, especially the latter part of this year, most groups are going to come to that realization if they’re in a floating rate loan, or if they’re getting new debt, their debt costs has gone from 4% or 5% to 8% to 10%, or even higher. Most hotels typically trade in the 8% cap rate range, give or take 100 basis points. So, most groups are going to be very close to being in a negative leverage situation just given that imbalance.I think there’ll be a lot of scenarios where groups are just selling assets with the idea of having a little bit of equity. Or, they may have a lot of equity in certain assets that they sell to pay down debt on other assets that are over-leveraged.HIT: What type of assets are going to be more appealing to Peachtree?GF: On the equity side, we like to buy assets that are well located – that are almost core, if not core type assets – where you are in a position to get more opportunistic type returns given how the market has reacted to the volatility in the debt markets.We’re also focused on buying premium-branded flex-service, extended-stay hotels in these well-located markets.HIT: Talk about Peachtree’s development outlook?GF: We have about two dozen projects in development today – seven or eight are under construction and we have more than another dozen projects in different stages of development that should be in a position to break around in between now and the next 18 months. A lot of the new hotels we’re developing are in opportunity zones.As we develop, we will end up with one of the few hotels built. So, we should outperform and get a premium on the sell side as most groups like to buy newer assets.We’re starting to see [development] costs stabilize, but it definitely hasn’t dropped by any material level. Nor are we seeing price increases at the pace that we experienced in 2021 and the first half of 2022.Greg FriedmanShare this quoteHIT: What are your remaining pain points on the development side?GF: We’re starting to see costs stabilize, but it definitely hasn’t dropped by any material level. Nor are we seeing price increases at the pace that we experienced in 2021 and the first half of 2022.HIT: What is the biggest lesson that you’ve learned in the past year on the development side?GF: Waiting to bid projects until we have fully completed plans. When you don’t have full plans, it can lead to situations where you may end up paying higher pricing, or you may have pricing that is not consistent with where it should be. You end up having budget overruns, given that you bid too early. Or you might end up in a situation where you’re overpaying.Historically, you have been able to bid projects when plans are 80% or 90% set and you have a pretty good idea what the final cost is going to be. But this time around, just given how fast everything’s moving, it’s almost better to have fully baked plans and then get your project bid to have a more accurate view of the actual costs.HIT: What’s on your mind, in general? How are you feeling about the business?GF: I’m definitely uneasy about the current macro environment. But with that said, I’m very optimistic and very bullish on the outlook for lodging, just given the fact that I do believe we’re going to deal with higher rates and higher inflation for an extended period.The best way to hedge inflation from an investment perspective is to invest in lodging, just given the fact that a hotel reprices daily and in general trades at higher cap rates compared to other commercial real estate assets. There's also a higher risk premium spread. When you look at the 10-year Treasury rate today, hotels are trading on average a good 300 to 500 basis points above that 10-year, which is the risk-free rate compared to some of these other commercial real estate assets that traditionally trade at 5 or 6 caps, or even lower.Couple that with the fact that there’s really a lack of new supply being built, and there are a lot of tailwinds for demand… Lodging is going to prove out to be one of the better, if not the best, commercial asset types to invest into.