Driftwood CEO sees the new light

When you invest, develop, lend and manage, you serve multiple constituents with different expectations. For Miami-based Driftwood Capital, which has transacted on more than US$3 billion in hospitality assets and uniquely provides a network of more than 1,200 accredited investors access to direct investing after deals close, the big takeaway about managing those expectations through the challenging past two years has been the importance of ongoing education and communication through all four of its platforms. As Carlos Rodriguez, Sr., CEO of Driftwood Capital, puts it, “At the end of the day, it’s all about trust and letting everyone know where you stand and what is happening.”

Especially for those investors who were looking for dividends and returns during the middle of the pandemic, Rodriguez said that constant communication about what actions were being taken to resolve challenges allowed Driftwood to build more trust. In fact, he firmly believes investors are more likely to invest with Driftwood again and at the very least stand by the organization and its decisions.

The good news is that Driftwood, which currently has a growing portfolio of some 23 full-service hotels and eight new ground-up hotel developments, continued to pay dividends on some of its properties during COVID, and in February Rodriguez said all Driftwood hotels throughout the pandemic stayed current with their banks. But, again, he emphasized how lines of communication were open and information was flowing with webinars, newsletters and more. “Investors were very satisfied and happy with us,” Rodriguez said, adding he had been through it before after 9/11 and again in 2008. “I can tell you we’ve never worked harder in our lives. We were doing re-forecasts for our hotels on a weekly basis, made the cuts necessary to keep everything going, and even played bank… And we came out fine – we came out great, and now we are ready to grow again.”

“At the end of the day, it’s all about trust and letting everyone know where you stand and what is happening.” – Carlos Rodriguez, Sr.

The way forward

Current growth for Driftwood Capital includes the development of the US$300 million Westin Cocoa Beach in Florida, as well as the US$185 million Riverside Wharf/Dream Hotel in Downtown Miami, Florida. At the same time, Rodriguez said Driftwood is interested in acquiring or merging with another management company to better compete and create synergies; it wants to invest heavily in hospitality-related technology companies; and, for the first time, Driftwood is going to open its development platforms to institutional investors.

Driftwood has been very active on the acquisitions side, as well, having closed in mid-February on the 326-room Scottsdale Resort at McCormick Ranch in Arizona. It plans to complete a multimillion-dollar renovation that will convert the hotel to a Curio Collection by Hilton, and by the second quarter of 2022 open the opportunity to its accredited investors. In September 2021, it acquired the 240-room Sheraton Old San Juan in Puerto Rico with plans to invest and convert it to a Tribute by Marriott. In October 2021, Driftwood Capital acquired the new, 111-room boutique Wylie Hotel in Atlanta, which has also been turned over to investment syndication.

“There’ll be a few more deals coming later in the year as CMBS loans mature and some owners may not be able to refinance,” Rodriguez added.

More generally on the acquisition front, from a pricing perspective, Rodriguez said, Driftwood is finding some discounts, but not as much as initially anticipated and certainly not for leisure assets where he said some investors are overpaying.

Driftwood will continue to be opportunistic, according to Rodriguez, and consider city center, big box hotels if they are trading at a big discount that provides Driftwood with a healthy return based on the associated risk. “We’ve taken down a couple of deals that way during the pandemic – actually before the vaccine came out,” Rodriguez said. “I don’t mind doing those deals as long as we’re compensated for the risk.”

The newly acquired Scottsdale Resort at McCormick Ranch

Having said that, Driftwood more recently has been doing lifestyle hotel deals – again and always opportunistically. “We’re seeing strength in the upper-upscale and lifestyle deals,” Rodriguez added. “But, again, that doesn’t preclude us if you bring me a portfolio of limited-service hotels. I will still underwrite it and look at it, and if the numbers are right [the less sexy deals seem to require higher returns for investors], we will do it.”

In the next breath, however, Rodriguez added, while there is room to drive rate and good occupancy at more upscale and resort hotels to offset escalating costs, development on the limited-service side remains more challenging because the price elasticity is not as available in that segment.

Lending again

Driftwood is also seeing increased activity on the lending front. “We’re very enthused with the volume of loans that we’ve been able to produce,” Rodriguez said. “A lot of hotels need to be refinanced and are looking for other lenders like us to help, especially as CMBS loans mature.”

In general, Rodriguez said he is starting to see lending loosen up. “I’m starting to see banks come back after being shut down to new hotels,” he said, adding that rates have actually been coming down because more capital becomes available again.

“Despite interest rates going up, you’re having compression in the risk tolerance… So, as time progresses and the industry performance picks up from the pandemic, you’re going to see more competition for loans and more banks opening up for lending,” Rodriguez said.

In fact, he predicted that over the course of the next 12 months, more and more banks will return to hospitality-related lending. “Having said that, the other part is, again, making the numbers pencil out on construction side, or on the refinancing side, or CMBS loans that are maturing. Will the numbers be good enough to be able to meet the hurdles for underwriting? That’s the question mark.”

Even on the development side, Rodriguez said Driftwood is finding more opportunities, especially on deals that were already in progress, but for one reason or another “had a hiccup.”

“Inflation is a bigger issue for construction costs and as a result, some deals are not penciling,” Rodriguez explained. “We’re talking about 10% increases in costs, and I’ve seen up to 15% and 20% increases. That puts a damper on construction, and people are having a tough time finding the loan or the capital to do them.”

So, again, enter Driftwood, which Rodriguez said has the wherewithal to write the check that can get the loan done or raise the money for Opportunity Zone or EB5-led hotel deals. “There are still deals that we can find,” Rodriguez added. “We are constantly underwriting a lot of deals in development. But I would also say the ones that are probably a bit more difficult at this time are new development deals.”

Bullish on performance

Rodriguez’s optimism stems first from hotel performance on the leisure side with some hotels in the Driftwood portfolio already surpassing 2019 results and others “getting there.”

Driftwood acquired in September 2021 the 240-room Sheraton Old San Juan in Puerto Rico

While still challenged on the business hotel side, especially in states where COVID-related restrictions were stricter, Rodriguez said by March he was starting to see the light. “We’re definitely seeing reservations picking up for group business,” he said. “I just finished a call with one of our general managers of a city hotel who reported record numbers for weddings with 103 already on the books for this year.”

With news like that, a very bullish Rodriguez said, internally, Driftwood expects to surpass 2019 numbers in most of its hotels sometime next year. “We expect the ramp-up to continue with business hotels starting to catch up with resorts, and even do a little better, sometime in 2023, and even better in 2024.”

That news will be music to the ears of Driftwood investors, a majority of which are looking for their distributions as soon as possible to give them cash flow.

“Don’t lose faith. We’re back and we’re going to be back even stronger,” Rodriguez concluded. “I am very bullish on the industry. I think we’ll do well. And you know, this was a hiccup – a very bad hiccup, but it was just a hiccup.”

1 comment
  1. Patrick Pavlik
    Patrick Pavlik
    April 5, 2022 at 4:48 pm

    Great article Jeff!