Distressed hotel assets are of major interest to investors at times like these. They are an attractive investment that can bring high yields when industry demand returns. At the end of April, there were 1,103 distressed assets accounting for 189,987 rooms, according to the latest figures from Lodging Econometrics. That includes 317 that were mildly distressed and 786 severely distressed. Across the U.S., each region has close to or more than 200 hotels that were distressed.
Corten Real Estate Partners, an affiliate of The Buccini/Pollin Group (BPG), invests directly in hospitality-facing real estate assets in need of physical or financial repositioning. Dave Pollin, Corten’s managing director and cofounder/president, The Buccini/Pollin Group, connected with Hotel Business to discuss distressed assets and what makes them attractive to investors, the uses of R capital and recent developments for both Corten and BPG.
What is R capital, and how does it impact the hotel industry? R capital (e.g. Rescue, Runway, Recovery, Retention, Reinforcement, Rejuvenation, etc.) refers to preferred equity being deployed to help owners and borrowers work through pandemic-driven challenges that have clobbered the hospitality industry. R capital is essentially working capital that is used to fund operating shortfalls, loan extension/modifications/curtailments and required CapEx. Lenders often will trade additional term and covenant relief for new capital coming into a venture. The goal is usually to restabilize operations, allow property value to recover and for owners to keep their equity alive.
What makes a distressed asset attractive to a hotel investor? Hotels are the most dynamic real estate asset class. Lodging tends to cycle more aggressively than other real estate assets because it is essentially an operating business and a perfect “current indicator.” Vintage and basis tend to drive return outcomes more in hospitality. The industry is also event-driven, as we’ve seen over and over again. When the worst happens, revenue declines coupled with capital markets shutting down combine to put pressure on valuations. When demand returns, investors that were able to enter the space during a dislocation usually generate outsized investment performance.
How has the pandemic created so many distressed assets? Over a very short period—between March and April 2020—occupancy/demand went from all-time highs to nearly zero in all hotels, across every chain scale and market. Revenue plummeted, and many owners did not have the liquidity to fund operating shortfalls and debt service obligations, resulting in many capital structures becoming distressed or worse.
What does Corten Real Estate provide when it comes to R capital and distressed assets? Corten was founded by and is run by hotel industry lifers. We are not a run-of-the-mill private equity investor. Our deeper understanding of the hotel industry allows us to be more creative and flexible in how we structure an investment. We tailor capital solutions to borrowers’ specific needs. We move incredibly quickly and provide certainty of execution for borrowers all over the U.S. Our target investment size ($5M to $50M) is comfortably within the middle market and appeals to a wide array of situations—whether a single asset or across a portfolio of assets. We are the “good guy” capital that allows sponsors the flexibility and time to navigate their way through this historically difficult environment.
Can you tell us about the deals Corten has made this year, and what made those hotels attractive? Corten has made three, separate R capital investments in 2021: Ace Hotel Brooklyn, a newly constructed, lifestyle hotel in Brooklyn, NY; the Sheraton Imperial Raleigh-Durham, a full-service, upper-upscale hotel in Raleigh-Durham, NC; and a full-service resort in Palm Springs, CA. While each investment has its nuances, all three share several themes: They facilitated a senior loan paydown and maturity date extension; funded operating and interest shortfalls to carry the property to stabilization; and funded capital to complete an in-progress renovation/development. Each investment was sourced directly by Corten via existing sponsor/lender relationships.
Are there any recent developments from BPG that you can tell our readers? Corten’s development affiliate, The Buccini/Pollin Group, is currently under construction on two exciting hotel projects: the 238-room Virgin Hotels New Orleans that will open in the third quarter of this year and the 235-room Washington Marriott Capitol Hill|NOMA that will open in the fourth quarter of 2022. The new-construction Virgin Hotels Nashville and Washington Marriott Capitol Hill represent BPG’s vision of where full-service hotel development is headed. The design of each property is food-and-drink-forward because the firm believes that experiential hotels drive premiums, and that meaningful hotel experiences revolve around great food and drink. Each of these hotels has a beverage-centric, full-service bar and restaurant at grade level to attract neighborhood residents. Both properties also feature a destination rooftop bar and restaurant with an elevated concept that is oriented to be the social focal point of their local markets.
The Washington Marriott Capitol Hill | NoMa will have the only ballroom in Capitol Hill’s NoMa neighborhood. The Virgin Hotels Nashville similarly provides a unique meeting and social venue for the city’s downtown/warehouse district.
BPG also recognizes how crucial great technology is to travelers today and has designed IT systems for each hotel that offer guests unlimited options.