Turnbull Capital Group is one player in an increasingly crowded field of capital jockeying for opportunity to take advantage of potential distress that may emerge in the commercial real estate market in the wake of the pandemic. Over the past nine months, the commercial real estate investment banking firm has partnered with more than $20+ billion in dry powder that it plans to aim at investment opportunities in distressed assets. Specifically, it has aligned itself with a half dozen domestic family offices and American hedge funds that are interested in providing rescue capital in the form of preferred equity to distressed hotel and resort owners.
Turnbull Capital is leaning on its team’s connections in the industry that stem from a long track record.
Combined, the team has been involved in some $19.5 billion in hospitality workouts, restructurings, bankruptcies, receiver-controlled and lender-owned real estate transactions over the past 36 years. “People know that we’re the real deal. This is our fifth rodeo so to speak. We’re trusted, and we’re fiduciaries,” says Dr. Donald W. Wise, co-founder and senior managing director at Turnbull Capital Group, a commercial real estate investment banking firm focused on hospitality and leisure.
Groups that have a history of successfully deploying capital in distressed investment opportunities may have an edge in the current crisis, where the supply of capital seems to vastly outweigh the distress that has yet to materialize. “We have not seen the kind of widespread distress that would be implied around the fundraising momentum,” says Bernie McNamara, global head of investor solutions for CBRE Global Investors. “It really has been about stress either around individual owners or balance sheets, and it is still to be determined whether or not any widespread distress is going to emerge.”
The pockets of stress that have emerged have generally related to the need for liquidity or gap equity. Those opportunities are very relationship-focused, with investors that are tapping into their network of owners, operators and developers to access opportunities. Larger groups are relying on multi-dimensional, global networks with people on the ground to source, underwrite and understand the opportunities, adds McNamara.
Different business plans emerge
Investment groups are moving forward with different strategies to place capital, and many anticipate the need to pivot as opportunities shift. Turnbull Capital has created two different ”white knight” scenarios to create liquidity for distressed hoteliers that include its preferred equity business model and a ground lease option.
Since March 15th, Turnbull Capital's preferred equity business model partners have placed approximately $247 million, with another approximately $130 million in the queue. Most of that capital is going to branded hotels with an average deal size in excess of $20 million. According to Wise, the firm has approximately six different preferred equity funds active in this space, with access to billions more in dry powder. The beauty of preferred equity is that until the property or properties are cash-flowing, there is no additional burden to ownership in terms of payments. In addition, at the end of the term, whether that is four, five or 10 years, the owner can buy out the preferred equity partners and go back to business as usual, notes Wise.
Ground leases can be a good alternative if a property had weak 2019 revenues ahead of the pandemic. Specifically, in urban markets where the value of the fee simple title may be as much as approximately 20 percent to 25 percent of the value of that asset, that can provide cash liquidity to the distressed borrower, according to Wise.
However, Wise wouldn’t be surprised to see the firm’s business models morph multiple times over the next few years in what could be a long, slow recovery for the hospitality sector. “We’re still very early in this cycle. This is likely a three- to five-year drill,” says Wise. “Some of the exuberance that this was going to pass quickly is fading very fast.” Some states are still experiencing high levels of COVID-19 infection rates. In addition, more than 60 percent of corporations are telling employees they don’t have to come back to the office until summer 2021, and that is clearly going to slow down the rebound in business travel, he says.
BH Properties is a value-add investor that has seen a surge in opportunistic cycles dating back to the Resolution Trust Corp. (RTC) days. So, the current market is right in its wheelhouse. “We think there’s going to be a decent amount of loan sales coming forward as opposed to traditional foreclosure and asset sales,” says Andrew Van Tuyle, senior managing director, investments, at BH Properties, a family office based in Los Angeles. “We don’t think lenders are staffed appropriately to be able to take on the flood of assets coming their way. So, we wouldn’t be surprised if we ended up seeing a large market for loan dispositions and loan sales in the coming months.”
BH Properties hopes to attract opportunities to its doorstep by offering different platforms, such as a ground lease program, preferred equity and bridge lending. The company is also active in the bankruptcy world by providing debtor-in-possession financing, bidding on bankrupt assets and participating in 363 sales. “It’s important in today’s market to be able to play in as many different facets as you possibly can, because we don’t know exactly where these assets are going to pop up,” says Van Tuyle.
How patient is capital?
Another question facing opportunistic investors is when to move. Do they take advantage of COVID-19 pricing discounts available today, or do they wait for bigger discounts to emerge in the months ahead? Lenders have been happy to kick the can down the road and see what happens with a vaccine or additional government stimulus, because they don’t want to take back properties and the operating costs that come with them.
“We’re finding it extremely important to be patient during these times, because we just don’t know what’s going to be around the corner,” says Van Tuyle. Because of the moratorium on evictions and foreclosures for the past several months, there hasn’t been a lot of the forced distress that was the case in the last recession. “That will likely be coming in 2021, depending on what the political climate and rescue packages look like, but we’re preparing to make this a longer haul focus,” he says.
One example of a property BH Properties bought in August is a former Gander Mountain in Corsicana, Texas in the greater Dallas metro. “It was starved for capital as it needed some capital improvements. At the same time, we see multiple exits there,” says Van Tuyle. The building measures roughly 87,000 sq. ft., with high ceilings and a large parking field. Potentially, it could be adapted for industrial use or another retail use, and that optionality of having more than one path to stability is key in this market to increase your chances of success, he says.
The source of capital and the structure behind the investment strategy does influence how patient an investment group is willing to be to pursue stressed or distressed debt and equity investments. Having a multi-dimensional approach, whether that is across sectors or across different markets in a region or globally, helps to provide the right level of patience and flexibility, says McNamara.
CBRE Global Investors generally takes the approach of deploying capital prudently while bringing down risk to the return. “You don’t want to be in a position of catching a falling knife,” says McNamara. “However, if there is an ability to access high quality, better located assets at some reasonable discount and bring down the overall risk to your return, that is more of a focus area than waiting for bigger discounts to evolve when there is still so much uncertainty on how things are going to unfold.”