Matthew Hoffman: Being a hedge-hog can pay off in a down market

As lenders hoard capital in these uncertain times, debt financing for commercial real estate investments has nearly come to an abrupt halt. But Matthew Hoffman, chief investment officer of Weston Capital Asset Management, a hedge fund based in Westport, Conn., sees opportunity in today's marketplace. Hoffman has more than 20 years' experience in global investment markets and has held executive-level positions with UBS and Merrill Lynch.

Instead of investing directly in commercial real estate, Weston Capital channels money into five other hedge funds that invest in commercial real estate bridge loans. In January, Weston Capital launched Weston Real Estate Financing Fund, which has invested $40 million and seeks to place as much as $300 million in commercial real estate. The fund, which has a $1 million investment requirement, is geared to high-net-worth and institutional clients.

NREI recently spoke with Hoffman about his investment strategies.

NREI: How did you become interested in commercial real estate financing?

Hoffman: As an investor, we are always thinking opportunistically on behalf of our clients and looking for generous returns, and this is one space that is generating those types of returns. We feel that the industry is going through some sort of credit dislocation. Commercial banks are no longer lending to all sorts of industries, including commercial real estate projects or property developers. Hedge funds are picking up where commercial banks left off.

We are looking for a blended annual return of about 12%, based on a combination of interest income, fees and prepayment penalties generated by the loans. Because the loans are relatively short term, and are not linked to a project's equity returns, the majority of the return is from interest income.

NREI: Have the investment banking troubles on Wall Street impacted your commercial real estate lending strategy?

Hoffman: Hedge funds, many of which are capital-rich, are still looking at commercial real estate lending as an attractive risk-reward opportunity. Markets like those we are currently experiencing oftentimes create great opportunities. Sometimes hedge funds look at an investment environment like this as the glass being half full.

NREI: When you invest in hedge funds, what do you look for in terms of their commercial real estate investment strategy?

Hoffman: We look for hedge fund managers who lend on a first-lien basis, sometimes second lien. We prefer first-lien loans and look for managers with very low default rates. Generally, the loans have to be short term, 18 months or less. They tend to be smaller projects for acquisition, possibly renovation.

We are also looking for highly collateralized loans where the current market value of the property exceeds the value of the loan by between 25% and 50% or more. The interest rates charged range from 12% to as high as 20%.

NREI: Will you play a market role when traditional financing sources return?

Hoffman: Yes. We find it to be a good risk-reward scenario for our investors.

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