Jali Witness Investment and Hotel Equities in August launched Jali Investment, a hospitality real estate investment platform that will include development, acquisition, and value-add opportunities that enable individual investors to participate.
With an emphasis on education and perspective on the industry from a team of multi-generational hoteliers, each deal offered through the platform is thoroughly vetted by the sponsors. The idea is to help individuals better understand the hotel investment marketplace with the Jali team offering, for example, specifics on the meaning of hotel investment acronyms, explaining current headwinds and their impact on hotel operations, and sharing planning considerations when building a real estate portfolio.
As multi-generational hoteliers, Witness Investment Principals Sagar Patel and Aakash Patel, bring extensive hotel investment and operational experience to the newly launched platform. Hotel Equities rounds out the founding partnership with experienced developers and operators Fred Cerrone and Brad Rahinsky.
Sagar Patel said every deal will be different but generally, the sponsors will have control and recapitalize the equity, or do it all at closing based on timing.
While initial deal specifics weren’t available at the time of HOTELS reporting, Patel did share some broad strokes on what to expect – like a new Hilton/Marriott select-service development project within a top 25 MSA within the Midwest.
Rahinsky said the timing was ideal to launch Jali with cap rates at historic lows for the hospitality asset class, adding that hospitality’s dynamic rate pricing performs particularly well versus other sectors during uncertain inflationary periods. “Whether we are dealing with stabilized assets or institutional grade developments, hospitality CRE allows for predictable yields throughout the asset’s life cycle,” Rahinsky said.
HOTELS reached out to Witness Investment Principal Sagar Patel to learn more about the unique crowd-funded development plan.
HOTELS: Why crowdfunding? Who has the background?
Sagar Patel: We see a large trend for individual investors that are looking for diversification and exposure to real estate. Crowdfunding has been growing 10% YOY over the last 10 years. Hospitality investment is even more niche than general real estate and we believe we could benefit from having a platform that has deep experience in this space. As such, we combined the hospitality expertise of Hotel Equities and Witness Investment with Marshall Clark who worked at Cadre and Crowdsteet and has deep expertise in digital market and investor recruitment.
H: With so much capital on the sideline, shouldn’t it be easy to source capital with more traditional methods?
SP: The issue is that this capital is concentrated with large funds and institutions and there is a lack of flexibility with these sources in terms of placement and investment thesis. We have found that there are so many great sponsors with 30-plus years of experience in development and management but have never gone beyond friends and family to raise capital. This platform aims to connect those great groups with deep expertise in hospitality with investors that are looking for more than just a transaction but a platform that will help them build their real estate portfolio and educate them on the details of hospitality investing.
H: How much demand is there for this product?
SP: Based on the success of crowdfunding and its growth, I think there is tremendous opportunity for this type of investment offering.
Hospitality is a niche segment and while there is some exposure on the other crowdfunding platforms, Jali is looking to specialize in this space. Our team’s history of being hotel owners, operators and developers provides a unique and in-depth perspective on investment in this asset class.
In our history, we have always had friends and extended family ask us about investment opportunities. I can only imagine there are so many groups like ours where the same is true. Jali will provide the platform and mechanism to scale the equity raise capabilities of strong and experienced hotel sponsors that do not have the capacity or existing relationships with other capital partners to help capitalize their projects.
H: What is the makeup of Jali investors?
SP: The Jali investor will be someone that is accredited and looking for a balance of cash flow and long-term appreciation. One of the primary motivations for starting Jali was to provide the same access and opportunity to build a portfolio and generational wealth through real estate.
H: Why is the educational piece truly so important to Jali?
SP: We want to be beyond a transactional platform that allows for investment into the deal flow. We also want to provide insight and education on the prominent topics pertaining to hospitality investment as this helps to engage the investor community beyond just one deal but allows them to truly understand the nuances of this asset class and allows better assessment of deals that meet their long-term planning needs as they build out their portfolio.
We also believe this will help investors understand their investment better not only at the onset when they commit and invest dollars but throughout the lifecycle as they start to see returns and get reporting from sponsors on performance.
H: What does the pipeline look like for the platform?
SP: As a starting point, we have a healthy set of deals within our network to be able to launch the platform.
We have tried to curate a variety of types of investment opportunities within hospitality for people to choose from, including a new development extended-stay hotel in the Midwest and a recapitalization of an existing asset in the Sunbelt region that is cash-flowing and performed well through the pandemic.
We hope to add some additional opportunities in the near future that also highlight tax efficiency (Opportunity Zone or Delaware Statutory Trust deals).
H: Is the bid-ask gap tightening up and what is your forecast?
SP: I think the bid-ask spread is certainly better than it was six to eight months ago as the debt market really tightens for lending – both in terms of dollars for hospitality as well as the rate.
There is still hesitancy from many lenders about too much exposure back into hospitality due to concerns over an economic slowdown due to inflation and high interest rates. Additionally, this has also led to many sellers holding off on going to the market. So, we are seeing a slowdown in deal flow. As such, while the gap between seller and buyer expectations seems to be getting smaller, there has been less deal flow to review over the past few months.
H: Do you expect to source distressed deals when CMBS starts coming due?
SP: I think this is a real opportunity given the refinance options will be limited based on the current debt conditions. However, I think this will depend on overall hotel demand strength.
There is still a strong belief that hotel demand will generally remain strong in 2023 and will gain more clarity on the impact of the Fed policy on inflation. As a result, hotels will continue to use their daily pricing power to push ADR and help offset higher costs of goods, labor and even debt until the interest rates start to level off and there is more optimism or guidance that rates will start to move the other way.
H: Describe the technology behind the platform?
SP: We are using a combination of a CRM platform for management of investor communications and pushing new deals and a back-end investment management software. This allows for efficiency for the investor and the platform when it comes to new content (education, deal flow, general updates). Investors will be able to have one place to see all of their investments through Jali.
H: What have been your biggest learns to-date?
SP: We are working on the kinks on the deal timeline, launch process and communication frequency. In fact, we recently sent a survey to our investor community to better understand what educational topics they want to hear more about, what their ideal investment/check size amount is for any one deal and how often they want to be communicated with.
H: What is your biggest challenge for the launch considering market conditions?
SP: Overall hesitancy based on the macroeconomic picture is probably the largest hurdle. Additionally, there is real yield now in traditionally safer investments (cash, bonds, etc.). So, many people are being patient until there is a clearer picture of inflation and long-term Fed policy.
Although hotels provide a nice inflation hedge due to daily pricing opportunities, there will be concerns about dampening demand over the looming economic slowdown which will impact consumer and business spending.
We think that this is a real concern, but there are still markets with robust demand generators that can better weather this concern than others.
H: How confident are you in the ability of the Jali platform to thrive considering near-term macroeconomics?
SP: I am highly confident in our ability to source great sponsors and deal flow despite the short-term challenges. Many groups like ours have faced tough economic situations in the past and have been able to grow and come out stronger.
This is why the depth and breadth of the sponsor are so crucial in our philosophy because the value of the deal and investment is in the long-term and not dependent solely on the next 18 months. We want sponsors and developers that are disciplined and have enough experience to understand which levers they need to manage to navigate the short term and thrive in the long term.
H: What’s your expectation on asset pricing remaining stable, rising, or dipping based on macros?
SP: This is a hard question to answer, but I expect that we will see a stabilization of values. I tend to believe that we will not see a large drop off in construction pricing back to or lower than pre-pandemic levels. A large part of this is that labor is much more expensive and while material cost has stabilized and, in some cases, declined, prices will stay elevated compared to pre-pandemic levels. We will not see those large increases we saw in 2021 and 2022.
I believe this combined with inflation coming under control to the Fed target of 2% to 3% will help stabilize pricing and more deal flow will be transacted on as there will just be more clarity in the macroeconomic picture. I think if prices start to really fall it will be indicative of a larger and deeper recession and a pullback in demand.
H: What is the exit strategy?
SP: I am not sure we have given this much consideration at this point. Our main objective is to grow and cultivate a very strong community of investors that want to add hospitality real estate to their portfolio by curating a strong flow of deals backed by experienced sponsors.