New Palladius Capital CFO Talks Expansion Plans

“Having collaborated with Afshin for nearly a decade, I have no doubt his deep understanding of commercial real estate, informed perspectives in finance and accounting and diverse skill set will help create immense value for Palladius and our investors,” said Nitin Chexal, CEO of Palladius. “Afshin joins Palladius at a pivotal time as we prepare to accelerate our rapid growth through the introduction of new products and investment strategies.”

In his 25 years working in commercial real estate, Kateb has facilitated over $2 billion in hotel, multifamily, office, retail and mixed-use transactions. He previously served as CFO and principal at SBE where he shepherded the expansion of the firm’s hospitality portfolio into markets such as Miami, New York and Las Vegas.

Kateb spoke with Commercial Observer about his roots in Iran, his past working relationships with the Palladius executive team, his goals for the company’s new debt fund, advantages of offering fixed-rate loans in today’s volatile market and efforts to expand more into the student housing sector. The interview has been edited for length and clarity.

Commercial Observer: Where did you grow up and when did you discover that you wanted to work in commercial real estate finance?

Afshin Kateb: I’ve got an unusual background. I’m originally from Iran and came to the U.S. on a political asylum status and landed in Las Vegas as the first city. There’s a long story behind as to why Las Vegas, as it wasn’t a choice, but that was one of those cities that was accepting asylees so I ended up there and ended up working as a dishwasher at the MGM at that time, which is Bally’s now. I ended up remaining in hospitality along with my education. I’ve always worked full time and gone to school full time, so I never had the college life, if you will.

The way I got exposed to commercial real estate was really when I joined a company called Maruko, which was a Japanese real estate investment firm, as a controller. They had a range of products — hotels, multifamily, a few shopping centers — and this was during the [Savings and Loans Crisis] days, so I had exposure to a range of products and had to learn very quickly and be able to assimilate not only from an accounting side, but also from an investment side. 

From there I went to Ernst & Young on the real estate side, and that’s where I’d say truly my passion for real estate took a full turn. I was exposed to a range of amazing projects and also repositioning of certain assets and market studies and valuations and then even audits. Long story short, I was there for a few years and left Ernst & Young to work for Destination Hotels and Resort, a subsidiary of Lowe Enterprises. I was there for a couple of years and then ended up being the founding CFO of a company called KOR Realty Group out of L.A. There I added to my knowledge not only from an overall real estate financing standpoint, but also on development, and unique development and historic tax credit, etc. So it was a great journey and I was employee No. 3, and when I left we had 1,600 employees. 

Turning to the present day, what attracted you to this new role at the Palladius? 

When you look at the team composition, in one shape or form we had worked together in a past life. It was an interesting opportunity with their vision of expanding in a multifaceted way. I’m a student of learning, and as an individual you need to constantly learn.  I think we all need to constantly expand our knowledge horizon, whether it be personal or professional. The unique opportunity here was we’re going to do real estate, but we’re going to do all other aspects of real estate such as  industrial. I’ve been somewhat tangentially exposed to industrial, but not very directly, so I get to learn on that side. From the outside I have been constantly well versed on what’s happening on the lender side, but now having a debt fund is fantastic. It’s going to allow me to learn the mechanics of what the debt fund is, and learning that along the way with friends that I’ve worked with. It was a unique opportunity and at a special juncture in my life. It just was the right  thing at the right time for me to do.

What are some of the new offerings or investment strategies that you’re planning to implement?

We’re constantly looking at expanding, and multifamily naturally is one area that we’re looking at. We’ve changed the multifamily approach slightly as we’re looking at new or vintage assets. We are now becoming very academic about what markets we get into and very much data driven. We look at not only macro, but micro data and metro data dissect that. Student housing is another sector we are closely looking at. With the signals of recession there is an opportunity to identify the right investment in the right college. Generally speaking, when a recession hits, certain colleges tend to do better than in non-recession times, as those that are impacted take that opportunity to retool or expand their knowledge horizon. Another one is industrial, which remains a strong area with the supply chains still impacted.  

We’re going to be very surgical about it and at times contrarian. Hospitality is an area that probably saw the most devastating impact of all asset classes during COVID, and it’s recovering. Our view is that in certain select markets that recovery could be pretty robust. 

How does the dislocation in the market set up Palladius with your big focus on multifamily investments?

Multifamily has seen sizable growth over the past few years. It’s been the darling of the industry. But it’s got some, I wouldn’t say challenges, but it’s got some pressures coming this coming year, where you’re beginning to see rent growth moderating in certain markets. You’re beginning to see vacancies increasing slightly, and again that’s going to be driven by what’s happening in local economies and the likes of that. And they’re not immune to what’s happening from an inflationary standpoint, so margins are getting impacted. When you have certain assets that are floating debt or their debt is expiring and sponsors, some of which are syndicators that don’t have sufficient liquidity, are now really in a very hard spot from a refinancing standpoint given the current cost of debt and volatility in the industry, that puts them in a difficult predicament

A platform such as ours that has sizable liquidity and that has the ability, via a facility that we have, to take down property’s cash, that gives us a very good opportunity to be able to take advantage of that potential dislocation in the market. We see a little bit beyond the current fog in that the for-sale residential market is definitely impacted and the cost of ownership has increased quite substantially, so those that were eligible to acquire now have to seriously think about renting. 

Explain the advantages of your fixed-rate debt platform in this current volatile market.

Most debt platforms are sensitive to the volatility in the market, so as a result they’re pricing their assets and pricing their facilities as floating debt, whereas our platform is a fixed rate so we’re accepting the risk. We’ve created a truly unique product to take advantage of the current situation in a way that we can differentiate our product, but also offer a meaningful lifeline to those that have assets that are in good locations and that haven’t stabilized yet, but they’re  working through that stabilization. They don’t want to lose the asset and don’t want to sell the asset because they see there is upside, but they just want to refinance it and then apply themselves a year to two and a half years until debt markets stabilize.

You touched on hospitality earlier, and you have extensive experience with hospitality investments. How do you see the hotel sector shaping up amid these market headwinds?

I’m optimistic. I think hotels saw the most devastating impact in recent history on all fronts, and there are definitely some headwinds when you look at the industry. There are a few factors that are going to continue, and of course the volatility in the debt markets is not helping in that certain assets that were coming out of the pandemic have to get refinanced. You’ve got CMBS loans that are maturing, and those assets are just experiencing the recovery, so the owners would have to decide whether they are sellers given the current market or they have to refinance, and under both scenarios we’re ready to act. There is still a sizable amount of liquidity out there that is looking for a home. The pandemic truly disrupted the industry and created this unique opportunity that you’re gonna see 2008-era pricing and valuation. 

You’ve got slow recovery in certain markets and hospitality, and you have what I call The Tale of Two Cities with the haves and the have-nots. Certain markets have recovered to 2019 levels, and uncertain markets are struggling to recover and they’re digging themselves out of the pandemic and the ensuing impact of the pandemic. Markets like New York, San Francisco and Atlanta just haven’t recovered to that level, whereas other markets such as San Diego, Miami, Tampa have seen very robust recovery. So as a result, you’re seeing some markets doing better, but the markets such as, say, Atlanta or even San Francisco, those markets are still robust markets. They are going to come back. This is the unique opportunity for us to be able to do two things: either assist the owners that have assets that are stabilizing and in need assistance in getting them through the stabilization period via our debt fund and offer them that lifeline, or owners that are basically throwing in the towel and are saying we want to get out of this investment at a lower return, and we will pick those up. We will turn those around, be it via a value-add situation, rebranding, repositioning, doing a major renovation. 

Meetings are beginning to come back. We’re humans and we tend to want to get together, do things together, exchange thoughts together. And so gathering places such as hotels are becoming more prevalent. American Express just recently issued a report saying that, despite the possibility of recession, they believe that meetings and events are beginning to firm up to the point that we’re going to see a far more robust set of gatherings in certain cities. Certain cities are going to have a long-lasting impact as a result of COVID, and other cities are going to benefit from some of that dislocation of demand. 

What are your chief near-term or long-term goals at Palladius?

The platform is growing. We’ve got truly great institutional minds and smart people at the platform, and we need to continue to work on the institutional institutionalization of the platform from processes, from technology and investor reporting. We’re continuing to grow and looking at bringing the right talent to the mix on all fronts, including the debt side and the equity side. And asset management is very important to us, and that’s where we differentiate ourselves. 

As far as our forward-looking capital deployment, we want to continue our multifamily expansion in key markets where demand at metro and micro levels are strong. We want to look at hospitality with great vital signs in certain markets and look at industrial where we think that industrial still has a leg to push in certain markets. We’re monitoring all the markets and looking at student housing, and then tangentially also being aware of certain markets that may be up and coming. We haven’t done anything in data centers or anything like that, but if there’s a unique opportunity for us to be able to do a joint venture with someone or work with someone, there are byproducts of the pandemic that created unique opportunities for real estate that we need to be aware of, and at least monitor.

On a lighter note, what do you do for fun outside of the office?

I really enjoy reading extensively about the geopolitics of regions like East Asia and the Middle East. It just fascinates me. I’ve got a family and love to cook. Sports-wise, I do boot camp and I’ve been doing martial arts for a very long time. Above all I enjoy time with my family. I’ve got a beautiful family and I’m constantly learning from my two beautiful girls.