Article Summary: Driftwood Capital has made some fundamental changes and additions to grow its network of investors and chase more deals in the hotel space via a plan to spend $3 billion over the next five years.
Driftwood Capital has made some fundamental changes and additions to grow its network of investors and chase more deals in the hotel space via a plan to spend $3 billion over the next five years.
Primary Category: Ownership
CORAL GABLES, Florida—Driftwood Acquisitions and Development, now known as Driftwood Capital, has turned over a new leaf by rebranding, restructuring and scaling up to grow its network of investors and allow flexibility to add new platforms in the future.
On 24 January, the Coral Gables, Florida-based privately held real estate firm announced its plan to spend $3 billion over five years through development, acquisitions and a new mezzanine lending platform. The company said it will target development and acquisition deals in the $30-million-to-$150-million range, and issue loans in the $3-million-to-$50-million range.
Carlos Rodriguez Sr., CEO of Driftwood Capital, said the decision to scale up comes with several benefits, especially at a time when growth in the industry overall is slowing.
“If there is a recession, we’ll have a modified power to be able to execute and buy or develop hotel assets across the country at good prices,” he said, noting he anticipates “flat growth” and not a downturn for the industry in 2020.
Rodriguez said more high-net-worth individuals are looking for alternative investments, and Driftwood Capital’s platform will be able to provide that.
The decision to rebrand the company as Driftwood Capital came from wanting to pave the way for acquisition and development opportunities outside of just hotels, such as office, multi-family and other commercial real estate assets. The move has opened the company up to doing mixed-used deals as long as there is a hotel component, he said.
“We figured Driftwood Capital would identify us better on a going-forward basis in order to have flexibility to add more platforms,” he said.
Driftwood currently owns 4,508 rooms across 19 hotels and has 916 rooms across four hotels under development. Properties in the owned-hotels portfolio are under Hilton, Marriott International and InterContinental Hotels Group brand flags.
The Driftwood Capital model
Rodriguez said his company operates on a unique real estate asset syndication model, which was implemented when the company launched in 2015. Due to wide acceptance of this model at Driftwood Capital, he said it has “grown tremendously.”
How it works is Driftwood will close on a deal, then syndicate out loans to its network of investors, while still retaining 10% ownership of each deal, he said. This allows investors to diversify and create their own portfolios, he said.
“Our GP funds allow us to do this, and then our network of investors that we’ve been patiently growing is one that allows us to syndicate,” he added.
Crowdfunding is another component, he said. About 10% to 20% of each deal is crowdfunded. In addition, Driftwood has its own web-based platform that allows direct investment as well as an aggressive sales team.
Rodriguez said the company is targeting development and acquisition deals in the $30 million to $150 million range simply because “it is easier and quicker” for them to execute, and then move on to invest in another deal.
He said it typically takes his team three to four months to syndicate a deal. Bigger deals come with more complexities; but that’s not to say Driftwood won’t ever go bigger.
It just “needs to be a very good deal for us to be willing to tie the money down for a long time,” he said.
For example, Driftwood Capital is currently developing a $250-million, 502-key oceanfront Westin Resort in Cocoa Beach, Florida.
Driftwood has expertise underwriting deals for both acquisitions and development, he said several lenders approached him with interest in teaming up, which led to forming a mezzanine lending division.
“It provided another avenue for us to do business,” he said. “People were asking to use our expertise in underwriting hotels, and (expressed) that they would feel more comfortable lending if we were a part of it.”
Lenders traditionally provide mezzanine loans of $10 million to $50 million, he said, but Driftwood Capital is aiming for a range of $3 million to $50 million.
“I don’t mind doing $5 million or $6 million loans, because at the end of the day, all we’re about is servicing our network of investors and providing them alternatives that are profitable for them and for us,” he said.
New management team
To support Driftwood Capital’s upgraded efforts, the company has hired David Steiner as managing director of capital markets; Nelson Parker as managing director of development; and Paul Sacco as chief investment officer.
Rodriguez said the mix of knowledge they each bring will help ramp up growth on the hotel side and eventually on the commercial real estate side.
It’s a challenging time in the industry as revenues are flat, margins are squeezed, labor is tight and cost of construction is on the rise, Rodriguez said.
“It makes it a little bit more difficult to be able to underwrite and pencil things in,” he said, adding that there is a lot of capital in South Florida and plenty of investors are chasing deals. “But when you’re playing in a sandbox that is a lot bigger like we are, where we don’t mind going to Hawaii or Alaska or Seattle or Texas … this allows us to be able to find the needle in the haystack.”
Though there’s always deals to be found, the company only executed one in 2019, which meant turning down three other deals that combined were worth as much as that one, he said.
“We had to pick and choose which deal to do … and we let go of the other three we could have had if we had more money,” he said, noting that loss of deals also helped guide his decision to scale up.
“I want to have dry powder ready, so that when there’s a deal that does pencil, (Driftwood Capital) can take advantage of it,” he said.
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Headline: Driftwood to chase more deals through new platform
Article Date: 2/6/2020
Article Time: 10:38:00 AM