By all measures, 2021 was a record year for Peachtree Hotel Group and its affiliates, and company executives said they intend to carry that momentum forward through 2022.
The Atlanta-based real estate private equity investment manager was able to take advantage of the hotel industry’s recovery in 2021, with a record $2 billion in total capitalization through 140 transactions.
“We geared up not knowing exactly what the opportunity was, but we knew that there would be an opportunity to go out and deploy additional capital,” said Brian Waldman, executive vice president of investments for Peachtree.
Peachtree acquired nine hotels for about $300 million in 2021, growing the company’s portfolio to 76 owned and managed properties with 9,351 rooms across the U.S.
The company’s affiliated commercial real estate direct lender, Stonehill, originated loans and acquired senior notes for about $1.6 billion in market capitalization. It lent $770 million through 23 originated construction and bridge loans and preferred equity investments. Its property assessed clean energy affiliate, Stonehill PACE, completed $150 million through 17 deals.
Stonehill also invested approximately $700 million to acquire 103 senior notes.
“Shortly after the start of the pandemic, there's kind of a fork in the road where half the team went left to focus on asset management and keep the existing state and existing business going,” Waldman said. “Half of us went right to basically gear up to take advantage of the opportunities that we thought would be coming with COVID.”
The company launched a distress fund; and Stonehill, which is accustomed to lending in a recession, explored opportunities to buy notes from balance sheet banks.
Lending and Buying Notes
Stonehill’s team has high expectations for debt demand in the hospitality industry, Waldman said. Many traditional balance sheet lenders haven't fully recovered from the pandemic, especially on the construction side and even for bridge loans, he said.
Many construction deals were put on hold during the downturn, and as those projects start back up, Stonehill will become an active construction lender, he said.
The groups that are waiting for bank financing to come back for their shovel-ready projects will find projects will cost more than if they worked with a different lender today, he said.
“You’re better off to move forward today than to sit on it for the next two years and wait to see what might happen,” he said.
Over the past 18 months, Stonehill quickly and aggressively started buying notes, even portfolios of notes, to restructure them for the borrowers, many of which were already borrowers with Stonehill, Waldman said.
“The banks are structured differently, where we had a bit more flexibility to work through it,” he said “Given our roots in hospitality, we understand the space. We understand the business plans, so we know what it takes to get to the other side, and we're able to work with borrowers if they have a credible business plan and a path forward.”
The company’s appetite for purchasing notes is huge, but there are only certain points in a cycle in which banks are looking to sell them, Waldman said.
He said he expects that window to close sometime this year. “You're going to have less banks looking to sell. They've already moved on,” he said. “You're going to see us gearing up more in our more traditional business lines.”
Appetite for Deals
Peachtree was active through 2021 acquiring hotels, and it has a robust pipeline for deals this year that are under contract or close to it, Waldman said.
“Acquisition velocity is going to accelerate going into 2022,” he said.
During the pandemic, many owners haven’t had the capital to keep up with maintenance, he said. The brands allowed owners to delay on property improvement plans, but now want owners to start moving to refresh and update their hotels. These pressures, along with banks becoming less flexible, will lead to more hotels becoming available, Waldman said.
The company is in an aggregation stage, he said, noting that buying a portfolio, rather than a single property, aligns more with its strategy. Distressed deals aren’t likely to contribute much because of all the competition for hotels, he said.
“We're looking to pay fair prices for good assets to build a great institutional portfolio,” he said. “If you're just looking for steals, it's not out there. There's a lot of capital out there.”
Peachtree typically targets premium-branded, select-service hotels and compact full-service hotels where it can create value through operations, renovations or other components, as opposed to just buying cash flow, he said.
The company’s portfolio is primarily in secondary markets, instead of in the top 10 markets where often there’s a “cap rate race to the bottom,” Waldman said.
Development Plans
Along with acquisitions, Peachtree is an active hotel developer, with about 30 deals in its pipeline along with several joint-venture development deals in the works.
“We're really excited about the ability to move forward, develop hotels and capitalize on new hotel developments that will hopefully be completed and deliver as we're coming into the strong part in the next cycle,” Waldman said.
Construction costs have spiraled, and it’s getting more difficult to build because of supply chain, labor and entitlement issues, he said. Peachtree pursues complicated deals because of the ability to create value, particularly in markets with high barriers to entry.
“It's a great opportunity at this point in the cycle, and at the end of the day, when the hotel opens, you have the newest, shiniest box,” he said.
Stonehill doesn’t finance Peachtree projects as that would be a conflict of interest, he said. Given its size and scale, as well as the relationships it’s built through Stonehill, the company has had access to debt capital, though.
A lot of groups are still struggling to finance projects, Waldman said. As banks open back up, they’re going to go to their best and strongest customers first. That means there will be a lot of projects in the development pipeline that won’t get done, or will require more equity. That could mean partnering with a company like Peachtree.
“The construction loan that you were able to get in 2019, it's not there today for most groups,” he said.