ACORE Launches $1B Hotel Rescue Capital Initiative
By Andrew Coen February 17, 2021 4:58 pm
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Early on in the COVID-19 pandemic, last April, when hotel occupancy dropped to a historic low of 24 percent, Acore Capital co-founder Warren de Haan realized serious financial relief was necessary to keep the sector afloat.
De Haan and his colleagues proceeded to form an investment strategy backed by a group of institutions targeting rescue capital for North American hotel operators to navigate the ongoing health crisis and subsequent debilitating blow to the hospitality industry. The initiative culminated on Tuesday with his company announcing that it raised $1 billion to launch ACORE Hospitality Partners (AHP), a new strategy focused on originating and acquiring structured hotel debt investments.
“Hotel owners and operators are draining their bank accounts, they are draining their reserve accounts, and they need to come up with additional capital to pay their lenders, to make payroll, and in addition to that, putting other capital into their hotels,” de Haan said. “At ACORE, we are very well-known as a trusted lender and partner to our hotel borrowers, and we want to help them get to the other side, and at the same time, make a good, adjusted return for our investments.”
The hotel assets most in need of rescue capital, according to de Haan, are instances where the borrower has depleted reserves and where occupancy levels are too low to break even. This results in owners languishing under higher carrying costs for payroll, maintenance and insurance, along with the need to make mortgage payments.
Lenders have largely been willing to defer interest payments up until now, but de Haan stressed that recovery capital will be necessary this year absent a strong, near-term rebound for the hotel industry. Hotel occupancy levels were at 44 percent at the end of last year and are projected to only reach around 48 percent at the end of 2021, according to de Haan. He said economists are forecasting that hotel demand likely won’t reach 2019 levels until 2024 or 2025, since business travel is not expected to fully recover until large-scale conventions return.
AHP will aid hotel-backed senior and mezzanine loans, B-notes and preferred equity investments. The investments will range across the hotel sector from high-end, luxury resorts to smaller, limited-service hotels.
The initiative is centered around hotel assets in “high-barrier markets” with strong fundamentals, such as Miami, Nashville and Austin, Texas. De Haan said other attractive markets for hotel investments tend to be in resort areas that are drivable, such as Key West, Fla., and Southern California, as well as ski lodges where there isn’t an oversupply of hotel properties.
The COVID-induced economic downturn has contributed to a number of hotel lenders getting burned, but de Haan noted that conditions are dramatically different now than the 2008 recession, when leverage was a far bigger problem. In the last credit crisis, hotel financing was commonly executed at 75 to 80 percent loan-to-value, de Haan said, compared to the current cycle where borrowers asked for generally 60 to 70 percent leverage pre-pandemic. He said bridge lenders are faring the delinquency rate is far higher.
“While values are down — and, in some cases, quite significantly — there was a big cushion of equity to protect the lenders compared with the last cycle, and borrowers are more institutional and, generally speaking, deeper-pocketed,” de Haan said.
Another big catalyst driving de Haan to focus on rescue capital for hotels is the multiplier effect that the industry has on the entire U.S. economy. De Haan noted that hotels employed 2.3 million people before the pandemic and the hospitality industry produced more than $600 million of gross domestic product contribution.
