|
| Torchlight Investors provided $27.5 million in financing to support Laurus Corporation's acquisition of the 393-room Hunt Valley Inn in Baltimore. |
NEW YORK—For the loan origination team at Torchlight Investors, it’s all about the basis.
The New York-based investment adviser gets pitched a lot of hotel deals, but they only bite at those that are acquired at a reasonable price point that promise good value, said Mike Butz, senior VP of loan origination and acquisition.
“We’re a very basis-driven firm,” he said. “We appreciate the value of being in at the right basis. While I see plenty of other good properties and good markets and good sponsorships, if it’s in a market that seems to be a little overheated, then often we see they’re buying at a basis that we wouldn’t be comfortable with. Everything else might look good on the deal, but they’re paying too much.
“Those cap rates are just a little bit too tight,” he added. “We’re always looking for good relative value.”
Take the group’s recent deal with Los Angeles-based Laurus Corporation to help finance the acquisition of the Hunt Valley Inn in Baltimore. Torchlight provided $27.5 million in debt financing for the 393-room hotel, which Laurus purchased at a significant discount-to-replacement cost. The loan, comprised of senior mortgage and mezzanine debt, has a three-year term and will be held in the portfolio of Torchlight Debt Opportunity Fund IV.
“We’re not really bridge lenders for the short term. We like to get a multiple on our money. We’re a multiple-driven debt shop,” Butz said, adding they aim for “mid-teen” returns.
For investments such as the Hunt Valley Inn, a property with a value-add and repositioning angle that will take a few years to stabilize, Torchlight limits their terms to a three- or four-year window, he said. As part of that transaction, Laurus will implement a $9.5-million renovation program, which will include a full-scale room renovation and the opportunity to develop an additional 4,000 square feet of meeting space.
The 10-year terms are for hotels that are a lot closer to stabilization right out of the gate, he added.
Torchlight does not prefer one scenario over the other, nor does the group play favorites to certain brands, market segments or even real estate classes, Butz said.
“We’re not precluding any sectors. … It’s all deal-specific. We’re always looking for the good deals in the good market with good sponsorship.”
Again, what matters most is the basis, he reiterated.
Other loan structure guidelines include:
• minimum loan size of $5 million (subordinate) or $10 million (senior);
• cash flow and accrual mortgages;
• typically non-recourse for principal;
• Stabilized LTV between 70% and 90% and non-stabilized LTV between 60% and 80%;
• straight coupon or upside participation; and
• fixed or floating.
Working the fund
Debt financing for the Hunt Valley Inn deal will be held in the group’s fourth debt opportunity fund, said Robert Kopchains, managing director of client services for Torchlight.
The group is still in the fundraising process, which he said is challenging because of increased competition from other firms.
“(Activity has) been constantly growing over the past couple of years, which has certainly presented challenges,” Kopchains said.
Torchlight began the process for Fund IV during 2012 and likely will be doing so for the rest of 2013, he said. The group aims to raise $1 billion.
Butz said the money will be spread across various real estate sectors, including office, multifamily and hotels. Of the latter, he said, “We continue to look at the sector for sure.”
A stable outlook
Butz expects more of the same in hotel debt financing, at least for the foreseeable future.
“I’d say it’s very even to what I’ve seen for the past six to 12 months. It hasn’t slowed down, it hasn’t heated up. It’s been very, very even. I don’t know what would change that,” he said.
“I’ve seen moderate pickups in value, which is good. I think a lot of that outside of New York is due to a lack of construction.”