Exploring The Potential Of Credit Trade And Hotel Development In Commercial Real Estate

Play This Episode

2 Votes

Today s guest is Greg Friedman Greg has more than 23 years hospitality experience with an emphasis on deal-structure and financing He successfully has led Peachtree in more than 8 Billion in hotel acquisitions investments and development since co-founding the company Show summary In this podcast episode Greg Friedman shares his insights on the commercial real estate landscape focusing on the lucrative opportunities in credit trade for financing acquisitions developments and recapitalizations He recounts Peachtree s adept navigation through economic downturns like the Great Financial Crisis and the pandemic crediting proactive investment strategies Greg also discusses the hotel industry s potential driven by favorable supply-demand dynamics ————————————————————– Introduction 00 00 00 Greg Friedman s Background 00 01 07 Influence of Family and Entrepreneurship 00 02 00 Navigating the Great Financial Crisis 00 04 29 Investing During Market Disruption 00 06 39 Hotel Investment Strategies 00 09 23 Opportunities in the Hospitality Space 00 12 11 Investment Risks and Opportunities 00 13 17 Lending and Financing Strategies 00 16 58 Target Audience and Demand Profile 00 18 44 Conclusion and Contact Information 00 20 30 ————————————————————– Connect with Greg Web https www peachtreegroup com Connect with Sam I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook https www facebook com HowtoscaleCRE LinkedIn https www linkedin com in samwilsonhowtoscalecre Email me sam brickeninvestmentgroup com SUBSCRIBE and LEAVE A RATING Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts https podcasts apple com us podcast how-to-scale-commercial-real-estate id1539979234 Spotify https open spotify com show 4m0NWYzSvznEIjRBFtCgEL si e10d8e039b99475f ————————————————————– Want to read the full show notes of the episode Check it out below Greg Friedman 00 00 00 – Across all commercial real estate I think the best opportunity set is on the credit side The credit trade me hands down is the most compelling trade today And if you re doing direct lending you know where you re financing groups to go out and acquire and develop assets or even recapitalize existing assets And a lot of cases were you know ultimately driving from a standpoint of the investments we re making we re getting you know outcomes that are very similar to what we would be getting if we were investing on the equity side Intro 00 00 29 – Welcome to the how to Scale commercial real estate show Whether you are an active or passive investor we ll teach you how to scale your real estate investing business into something big Sam Wilson 00 00 42 – Greg Friedman thank you for taking the time to come on the show today I certainly appreciate having you Come on Greg Friedman 00 00 48 – Yeah Thank you Sam I appreciate the opportunity to be on the show with you today Sam Wilson 00 00 51 – Absolutely Greg as our listeners know normally I give the guest bio there in the beginning telling all about the guest and where they come from Sam Wilson 00 00 58 – But instead we re going to skip straight to the same question I ask every guest who comes on the show in 90s or less Can you tell me where did you start Where are you now and how did you get there Greg Friedman 00 01 07 – Definitely so you know I graduated from University of Texas at Austin back in 1999 I spent you know about eight you know 8 or 9 years in banking before I started Peachtree going back you know to 2007 And you know Peachtree when I originally started it it was a you know small family office that we were focused on going out and acquiring and developing hotel assets And like all businesses we ve transitioned through the years and we ve transitioned into a vertically integrated private equity firm that invests across you know all commercial real estate property type So we invest you know still very heavily across the hotel space But we also have investments across all commercial property types as well as we have investments outside of real estate as well Greg Friedman 00 01 49 – And then as I mentioned we re vertically integrated So we own an operation development lending asset management company so forth Sam Wilson 00 01 56 – That is fantastic Did you grow up in a family of entrepreneurs Greg Friedman 00 02 00 – You know I did So my my grandfather was a huge entrepreneur He was a doctor by trade And he he also owned a bunch of real estate like any good doctor that lived in a small town in Alabama because I grew up right outside Tuscaloosa He was you know he was very focused on not only being a doctor He was an eye doctor He was also focused on doing everything from owning commercial real estate you know to owning a home building business to owning movie theaters So he was you know very entrepreneurial So he was a huge influence on my life And he you know owned hotel properties And that was you know that s how I sort of got into the business because he owned a business that owned hotels but also owned a hotel lending business Greg Friedman 00 02 43 – So I personally grew up around the business before you know professionally getting into the hospitality business on the lending side when I graduated college Sam Wilson 00 02 51 – Got it And so was that I guess maybe that s the answer the question that s kind of what gave you the bug early on that said hey this is this is kind of the direction we re going to take but what did you decide to do differently Maybe you know when you launched Peachtree that your family wasn t already involved in Greg Friedman 00 03 08 – Yeah So you know at this point in time when I launched Peachtree my family was pretty much out of the hotel business outside of you know some limited investments So it was you know my grandfather unfortunately he was you know at this point in time he passed away shortly after I started Peachtree but didn t have a lot of you know he had sold off most of his investments And same for my mom who was a big influence as well Greg Friedman 00 03 29 – But but really went in and you know initially thought I was going to you know just focus because I knew the hotel business from a professional perspective that was out there financing capitalizing hotel projects and have financing capitalized over 300 hotel projects across the US when I was on the banking side so I wasn t necessarily looking to duplicate what the family business had done I was trying to really create my own legacy And you know with myself and I had a partner that still is involved in the business today The two of us both wanted to create our own legacies to go out you know acquire and develop hotel properties And we had you know our own capital that we were investing So you know personally was using my capital along with my partner And then our family members were investing heavily So my grandfather my mom and so forth were big investors Initially when we went out and acquired developed assets when we set up a business Sam Wilson 00 04 20 – Got it Sam Wilson 00 04 20 – You launched that in 2007 That seems like the prime time to get heavily into commercial real estate How did you weather the next 3 or 4 years Greg Friedman 00 04 29 – Yeah So we re good at picking timing here So we picked it in May of 2007 when we formed Peachtree And and that was probably the absolute peak before the great financial crisis And so we you know so we went out and you know made about eight 8 or 9 investments across the lodging space in 2007 timeframe where we bought some land parcels that we ended up developing into hotels shortly thereafter or we bought actual hotel assets And it was it was sort of interesting just as I reflect on it because you know it was probably the best lesson you know for us on the business side because we quickly went from you know being able to play offense meaning we were able to make investments to happen to play you know truly play defense because we were going through one of the you know worst economic situations of all time Greg Friedman 00 05 17 – With the great financial crisis that really took hold by the mid part of 2008 And and we successfully navigated through that environment not only do we end up producing you know decent returns we you know all those investments we made we actually made positive returns on every investment we made pre great financial crisis But we were we were super active We were you know very good about not only playing defense but being able to go out and play offense and buy a lot of distressed debt during the great financial crisis You know where we bought over you know 50 loans We bought a lot of hotels that were in distress on the real estate side as well And we bought you know we developed a bunch of hotels from the ground up in the middle of the great financial crisis So we had a lot of success making new investments as well as playing defense And you know being able to you know really optimize and drive the returns across our you know our existing investments at that point in time during the great financial crisis Sam Wilson 00 06 13 – It sounds like you guys were What Let s be brave when others are fearful Like you guys were brave when others were fearful in in this time What What did you guys do differently that able you know that allowed you guys to go out and buy distressed hotel assets and say or distressed debt whatever it was and say hey we re able to do something better than the previous operator has done Greg Friedman 00 06 39 – Sure So I think you know I think a couple different things I think it s just part you know at this point in time I think it s part of our DNA of our organization And when you look at just the culture here we re not afraid of chaos We re not afraid of you know operating in tough environments And we ve had a lot of success doing that obviously through the great financial crisis And then even through the pandemic we were one of the most you know active buyers of distressed debt We bought over you know 180 loans in 2020 and 2021 Greg Friedman 00 07 06 – In the middle of the pandemic we bought a bunch of hotel distressed hotel assets even during the pandemic as well as you know we made a lot of direct loans to groups that needed rescue capital made over you know 29 loans to different groups that needed rescue capital to make it through the pandemic So I think it s it s one of those components where we re willing to be decisive when the market pulls back you know you find a lot of groups become you know very timid when there s a you know when there s a chaotic environment when there s disruption in the marketplace And we re very proactive in the sense that we you know like what we did during the great financial crisis we were very proactive in asset managing our current investments and really setting those investments up to be successful And then simultaneously we were able to you know shift our mindset because it s hard to play defense and offense at the same time And you have to sort of you know you have to bifurcate those two strategies Greg Friedman 00 08 02 – And that s something we did successfully during the GFC And then as we grew our company because we were much larger you know you know before the pandemic started and we re even larger today than before the pandemic But you know we were able to split our team where we had a certain part of our team focus on playing defense and really optimizing the performance of our existing investments And then we had another team focused on going out and making new investments in finding and sourcing opportunities And a lot of cases what you find in the especially in the hotel industry there s a lot of inefficiencies from one operator to another And we ve you know we internalize the operations side going back to 2008 and Peachtree we did it in order to play defense during the great financial crisis And having our own internal hotel operation platform has paid dividends for us not only being able to identify opportunities but truly being able to outperform you know how other operators operate And unfortunately when there is disruption in the marketplace like a pandemic or a great financial crisis you can quickly see who s good at operating and who s you know who s been struggling but you know has had the benefit of the you know economic conditions before that disruption Sam Wilson 00 09 13 – What are some telltale things that you guys look for in an operation where you say man that would be a great buy because we can implement X and make this so much better Greg Friedman 00 09 23 – Yeah So a lot of it is looking at revenue management strategies like you find that a lot of hotels don t really optimize their actual revenue management strategies being able to maximize rates that they re charging and simultaneously driving the occupancy So being able to drive those revenues into the asset you find that other operators are really good at revenue managing But when you get these revenues they just overspend and you know you want to drive Great guest experience And we pride ourselves on being able to do that across our portfolio But you want to be able to you know simultaneously because you re making you know you re making investments in these assets because you re a for profit enterprise You know usually and for us we re for profit So we want to make sure we re able to control expenses And we keep a very tight budget on on what we re spending on the operations side but we re doing it at a level where we don t want to impact the guest experience Greg Friedman 00 10 15 – So being able to balance that out is usually where you can find those opportunity sets And then you know I would say from a more just high level value add strategy that we ve been able to implement When you look at the hundreds and hundreds of you know investments we made on the equity side across hotels we ve acquired you know what you find is a lot of times hotels are undercapitalized from a CapEx perspective So we ll buy an asset and go in and spend a lot of money to renovate that asset and actually bring it into a level where it can be competitive with the other hotels in its comp set to be able to charge higher rates and be able to drive occupancy And you know other cases you know you find that you know we re able to not only you know spend money to drive performance from a standpoint of renovating the asset but change the brand and going from one brand to another brand There s a lot of value that could be you know that could be created by making those brand changes Greg Friedman 00 11 11 – And we ve had a lot of success in doing that taking something that s maybe unbranded and putting a marriott or Hilton brand into it So it has a strong reservation system to help drive that performance Sam Wilson 00 11 22 – No that s really really excellent I love the insight there And I know probably of all commercial real estate asset classes I know the least about hotels So this is this is kind of a fun conversation for me to learn from you So Well Greg let me ask you this Like where is the opportunity that you guys In hotels today I mean it s something where you know the traveler preferences have changed We ve seen a lot of I think shift in the in the market you you mentioned here even before we started hitting record that you saw that there s chaos in commercial real estate So I m sure having weathered 2007 you know been through that built an enormous company up until now You guys are constantly reassessing where opportunity lies So give us kind of the insight on what you think and where you guys are positioning yourselves as it pertains to the hospitality space as a whole Greg Friedman 00 12 11 – Yeah So and we we love the hotel space And we also you know we still think there s a lot of opportunities within commercial real estate outside of hotels as well But across all commercial real estate in general hands down the best opportunity set today is not to go out and acquire assets You know we think there s a better opportunity set actually on the development side across hotels today although I think there will be a better opportunity to buy hotels more opportunistically later this year But we re finding you know a better opportunity set if you are investing on the equity side on the development side versus actually acquiring assets But going back to my original point though across all commercial real estate I think the best opportunity set is on the credit side The credit trade me hands down is the most compelling trade today And if you re doing direct lending you know where you re financing groups to go out and acquire and develop assets or even recapitalize existing assets And a lot of cases where you know ultimately driving from a standpoint of the investments we re making we re getting you know outcomes that are very similar to what we would be getting if we were investing on the equity side Greg Friedman 00 13 17 – Yet we re in a you know position that you could argue that s protected because we re in a lower leverage position because we re financing 60 to 75 of the you know acquisition costs development costs you know the current value of the assets To recap So to me that s the best opportunity set right now is to invest through credit versus taking on the last dollar risk on the equity side But if you are going to take on Las or equity risk across hotels I you know I believe the you know the development side to be super compelling because there s a lot of markets you know when you look at hotels in general you know supplies down roughly about 30 to 40 from historic averages So supply is growing at less than 1 a year That s projected to be the case for the next five years or so And that s just a you know that s a you know that s really the outcome of what happened during Covid where supply pipelines were shut down because nobody wanted to build new hotels when no one was traveling Greg Friedman 00 14 13 – And then all of a sudden we transition as travel started coming back you know back in you know 2022 we started transitioning into this environment where the credit markets became dislocated So it became more and more challenging to finance construction or new construction assets And and that s created that constraint of new supply And simultaneously there continues to be robust demand Drivers like demand continues to grow from where you know where we were even last year across our industry And you know we re still expecting over the next five years demand is going to be you know growing at historic levels at 2 or higher per year So demand s way outpacing supply And there s a lot of markets that you know could support new hotels be built in That s one reason why we do favor development The other you know just sort of interesting component to hotels compared to other property types Today if you wanted to invest across you know any property type hotels trade at higher cap rates Greg Friedman 00 15 08 – And part of the reason you know I m probably a little bit you know negative towards equity investments in general right now is I still think we re going through this whole repricing across all asset types especially you know commercial real estate because interest rates are much higher today than where we ve been over the last decade You know we ve averaged like use the ten year Treasury rate as the risk free rate the ten year Treasury rates you know averaged around 2 over the last 12 years or so And you know you look at today the ten year Treasury rates around four you know 4 3 So the ten year Treasury is almost double where it s been over the last 10 or 12 years And you know I believe that the ten year Treasury is going to stay elevated And if it does stay elevated when you start applying risk premium spreads which the ten year treasury rate is from my viewpoint the risk free rate And if you applied the you know risk premium spreads on top of it for what commercial real estate typically is which is on average about 275 basis points above that risk free rate Greg Friedman 00 16 07 – You know you start to realize a lot of you know assets a lot of these assets that are trading at a 5 cap rate or even a low 6 cap rate you could argue you could see you know continue to see a cap rate expansion from where they re trading out right now And that s the risk of making equity investments I m not sure if the market s fully reset Whereas hotels you know are trading around 8 cap rates So you have higher risk premium spreads you have less repricing risk And that s why hotels are More compelling on the equity side than some of the other property types that you see out there Sam Wilson 00 16 42 – I love that explanation Thank you for taking the time to to do that on that on that credit side of things what are people building now that today s that Yeah I guess what are people building right now that makes sense for you guys to be the lender on Greg Friedman 00 16 58 – Yeah So I mean on the development side we re financing a lot of new hotels that are being built Greg Friedman 00 17 03 – So we re doing a fair amount of construction loans We re doing a lot of acquisition loans as you can imagine outside of construction We re actually doing some multifamily construction loans You know you have a record amount of supply getting delivered in multifamily So we are very selective on the markets that we are financing But we are doing some multifamily construction loans some stuff on the industrial side as well on construction lending but by far the majority of the type of loans we re making today are you know going out and providing acquisition financing or recapitalizing existing assets And we are starting to ramp back up on buying loans You know we bought four loans in the month of December alone We re buying we re in the process of buying several loans as we speak today And when we buy loans this isn t you know our credit strategy is not a loan to own strategy Our strategy is to go in and buy loans or even make loans with the idea of helping the borrower be successful You know that s what we re our focus is on Greg Friedman 00 17 59 – As we buy these loans we typically buy them with the idea we re going to restructure the loans and hopefully allow the borrower to have runway to be successful and get us paid off over the next couple of years as the market normalizes back out Sam Wilson 00 18 13 – Right No And that s I mean that s a lot of moving pieces there and a lot of different strategies I think that you guys are employing all at once So it s it s a lot of fun to hear you just talk I know you you probably stay at the 30 000 foot level with a lot of people making a lot of these things happen I think that s that s really really cool I guess maybe even a more direct question is on the construction loans that you guys are doing I guess I m trying to understand the type of traveler today that the hospitality space needs not the type of traveler that we re building for today Where is what is that Sam Wilson 00 18 42 – Yeah So we yeah typically we re Greg Friedman 00 18 44 – Focused you know on just to sort of put to scale what we re looking at is typically select service limited service compact full service extended stay hotels with 100 to 250 rooms Greg Friedman 00 18 57 – Right So typically the type of guess we re going after are the you know corporate travelers In some cases it s leisure demand And because each of these submarkets have different you know demand drivers that are driving who s actually utilizing these hotels But I would say the majority of the demand is coming from corporate and group demand as well As you know there s a decent amount of leisure demand which usually makes up about 20 to 30 of the hotels that you know we invest into have about you know have a leisure component to it as well Sure Sam Wilson 00 19 27 – No That answers the question that that was Yeah that s that s super insightful because that s that s kind of the answer I was expecting because I think I ve just we ve just seen kind of the the demand profile change I think slightly over the years And that was that was the answer I probably expected right now was that more select service yeah Corporate traveler sort of sort of clientele at those hotels So that s really really cool Sam Wilson 00 19 50 – Greg we ve talked about a lot of different things today I mean you guys have grown an enormous company here over the last What is that Oh seven 17 years Sam Wilson 00 19 58 – 17 years Sam Wilson 00 19 59 – Yeah Man Congrats That s a lot of fun You ve done a lot of things you ve shared with us today Your thoughts on the market as it is today where you guys see opportunity You ve shared with us how you guys have built built your firm the types of things that you guys are investing in the opportunities and how you guys have diversified yourself over the last ten years or so and what you ve been investing in the types of loans you re buying acquisitions development and a very insightful show I appreciate you taking the time to come on today If our listeners want to get in touch with your firm what is the best way to do that Greg Friedman 00 20 30 – Yeah just visit our website Peachtree Group Com and we re happy to you know connect with anybody that the connect with us Sam Wilson 00 20 37 – Fantastic Thank you again Greg Appreciate your time today Greg Friedman 00 20 40 – All right Thank you Talk soon Sam Wilson 00 20 41 – Hey thanks for listening to the How to Scale Commercial Real Estate podcast If you can do me a favor and subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts whatever platform it is you use to listen If you can do that for us that would be a fantastic help to the show It helps us both attract new listeners as well as rank higher on those directories So appreciate you listening Thanks so much and hope to catch you on the next episode Click here to visit this podcast episode