Hey there, welcome to Inside the Deal. I'm Ernie Kittay. This is a show where we talk real strategies, real challenges, and what's actually shaping the commercial real estate capital markets today. No fluff, no filler, just honest insights to help you execute your next deal with confidence. So let's get into it. Listeners, I am incredibly excited today because we're going down a lane that we haven't before, which is hospitality. And we've got Bercadia's superstar, Jen Dakin, on the line here with us. Jen is part of our dominant hotels and hospitality mortgage banking platform based in Washington, D.C. Jen is responsible for providing creative financing solutions to commercial real estate owners and developers with focus on the lodging sector. She is a well-regarded financial advisor with over 28 years, Jen, can you believe that, of multifaceted commercial banking experience. Jen, welcome to the show. Thank you very much. I appreciate it. So 28 years. Give me something interesting. Well, I've lived through a lot of different things. Every complicated aspect of a deal you could imagine, I feel like I've been through. Bulkhead failures or river running into a project, you know, $100 million over cost overruns. You know, I've done it, dealt with it and come through. Jen, before we dive into this, I think it's only fitting since this is the first time we're going down the hospitality road here that we prick your brain a little bit about the hotel sector, right? The industry is gaining incredible momentum and like other sectors, probably maybe hardest hit along with seniors living, as we talked about the other day, is COVID, right? Coming out of that travel restrictions, all those types of things really, really punched this industry in the eye. I'd love to just hear your insights as it sits today. Yeah. Imagine you're sitting at your office one day and all of a sudden your whole roster of clients calls and says, my portfolio of properties is shut down. So is the cash flow stream. Unbelievable. What do you do? And that happened for three months before they were able to reopen and start gaining a little traction back. So that was definitely a bit of a road bump, but we got through it. Today's sector, look, hospitality is a sexy asset class. Everybody seems to love hospitality, but it's not everybody's cup of tea. There's definitely some risk in it, right? Absolutely. You have a little volatility, ups and downs, seasonality that you have to understand. And sometimes things happen that knock certain areas down, whether it's a convention center going offline, whether it's hurricane or weather conditions impacting it. And that all has to be taken into consideration. But I guess some of that happens to other asset classes. But for hotels, you're really operating it day to day. It's an operating business. I mean, it puts a smile on my face to see this industry gaining finally the momentum after, you know, what was a very tough time. And I got to tell you, I think the future is bright. I love this deal that we're going to talk about today. Brickety arranged a highly structured $353 million capital solution on behalf of Chemins, Wilson, Hospitality Partners and Ascendant Capital Partners in connection with the acquisition and privatization of Sutherland Hotels, Inc. The capitalization includes a $308 million senior loan and a $45 million structured mezzanine facility. Together supporting the private equity sponsor's acquisition of the public entity and the execution of a value-add business plan for the assets it is retaining. These hotels averaged anywhere from 89 to 165 units. The senior financing provided by Apollos is a structured 36-month SOFR-based floating rate loan with two one-year extension options. and a future funding component designated for property improvement plans. This was an incredibly creative structure. The financing provided by Ascendant Capital Partners features a customized fixed rate structure tailored to the sponsor's business plan with an accordion feature. I'm excited to introduce Webb Wilson. Webb currently serves as CIO and managing partner of Kemmons Wilson Hospitality Partner. KWHP is the hospitality investment arm of the founding Holiday Inn family, Kemmons Wilson. Webb has led or co-led more than a billion dollars in transaction across Kemmons Wilson Hospitality Partners and Holiday Inn Club Vacations. Welcome to the show. Thanks for having me. Excited to be here and discuss. Sounds great. So, hey, you two have known each other for a little bit. I would love to hear kind of how you guys got together and met each other. Just give me a little bit of that history. Actually, I met Webb through an old client of mine. So very fortunate that it was really a referral. And I called them up and caught up with Webb and his CFO, Cecil Carney. And we just started dialoguing, you know, a couple times a year. And over time, we built a rapport, we'd meet at conferences. And then we really started gaining traction and I think respect for one another. And when I stepped foot into Bercadia, it was, you know, a nice fit. They needed some capital markets advice. And there I was. And Webb, you made Jen build that trust, right? The old fashioned way. Absolutely. No, we were introduced to a mutual friend who actually knew my grandfather. So long history with this other client and got to know her, looked at a few deals together with her. And as we got to this transaction we're about to discuss, we kind of knew the first person we had to call to say, hey, how do we figure this out? How do we sort it? I think what was always great about Jen was she really came with thoughtful advice, insight, perspective, and not an angle to let's win the deal. It's more of like, hey, how can this work for you guys? That means it's time to dig into this deal. There's a real theme of perseverance here. Webb, walk me through this transaction. Let's start from the beginning. Given how many layers there are what were you looking for initially and how did Jen make that happen What made you confident she was the person who could get this deal done So we had the benefit of knowing the company from really kind of like right around COVID time frame We had provided a loan to them and established a good working relationship. They had paid us off. And so we'd kind of stayed in touch as the markets matured. And I think they were thinking about what the future holds. And so we were able to present a offer to them and start moving down a path of an acquisition. And kind of in that timing. We're like, hey, there's a pretty complicated corporate structure here that you've got 10 hotels plus two kind of condo management agreements. The 10 hotels had 10 different mortgages attached to them. So there's no really corporate debt. And then on top of this was a layer of about $100 million face value preferred equity that had accrued a balance of about $22 million or so from dividends declared but never made. And that was kind of through the COVID overhang. It's a pretty significant size transaction. We're trying to figure out with Jen was, hey, we just need a traditional credit solution. But we also had this quirkiness around the preferreds because the preferreds had a right to stay outstanding if they wanted or they could convert and get paid whatever the common share price was. It was capped at a ratio. We weren't really sure what a full capital structure would be like until about a month after we actually closed on the transaction. And so it's an interesting thing to have a barge transaction, which you operate a company for a month and you figure out what your equity is. Yeah, that is a little different than we typically see. And I'm sure it's a little different than the way Jen has been used to. But you had to get in there and you had to understand the whole situation to make sure what was the proper way to get this deal done, it sounds like. Yeah, absolutely. So as we evolved, you know, our conversations and better understandings of how the preferreds work and as the business continue to perform, Jim is right alongside kind of helping us solve problems and thinking about the flex of capital you might need for an accordion, if you will. And so, I mean, that was, you know, really the crux of getting this done was kind of through that accordion concept that generally championed. So this capital structure that after you had a little bit of time to figure out what you actually had here and how you needed to operate it. Talk to me a little bit, both of you, about how you ended up solving it. Well, the request and the initial solution was a certain way. And that way evolved over time because the market changed. You know, we were originally thinking about, as Webb alluded to, there were 10 different mortgages there and some maturities were coming up. And frankly, the deal wasn't closing in time to deal with some of those looming maturities, right? So the seller then had to refinance a couple assets. And that really changed some of the dynamics of the deal. Wait, so explain that to me again. And so the seller, because of maturities, was effectively forced to change the financing, put additional financing on it, which not conducive when you're trying to sell something, right? Especially when it's CMBS financing that they layer on. Exactly. Wow. Really interesting. So that made us revisit how we looked at paying off all the deals because it was prohibitive to pay off at least one or two of them, right? Right. So you had to craft a loan that solved for the financing for eight of them and the assumption of two loans. And then in addition, we were thinking about a small SASB, CMBS execution. The CMBS market was really, really hot. But what happened in the middle of all this was Liberation Day. So poof, boom, big explosion. The beauty of this business and why this business is never a given, right, Webb? you're in the middle of an acquisition, you're in the middle of structuring some interesting financing and then something that's never happened called Liberation Day, which put us all in a blender for a certain period of time, to say the least. For sure. Yeah, like three months, the CMBS market was trying to come back to life, right? But by that time, we have already pivoted to more of a debt fund execution. So we needed more flexible financing. And as Webb alluded to, we needed to you solve for this accordion feature. So we had to wrap that into not only the senior debt, but also the equity meds equation as well. And the goal was to keep all the assets, correct? Yeah, initially. So a true value add strategy, where are you looking to get the lift in the performance of these properties? What's first and foremost and where do you see those opportunities? We were really compelled and excited about this opportunity because of the markets these assets were in. There were well-located markets, well-located assets in these kind of predominantly Southern markets. And then importantly, what we liked about it was Southern Lee had done a great job of actually investing in the core of the building. So when we did our diligence, went through kind of deferred CapEx, it was de minimis across all those assets. And so what we were excited about is that we're going to deploy capital in kind of an ROI brand or customer facing perspective. And so that's really what we're doing now is really running through all our kind of property improvement plans and CapEx plans to kind of tweak that and finalize those ROI improvements, which was also another part of the component for the lender here was PIP requirements and how we flex that capital alongside as well. So you walked into properties with pretty good bones. That's always a great way to start. Which has never really happened before, honestly. So I just want of value add approach. I was going to say, I've been doing this a long time and Jen's been doing it 28 years. And boy, it's nice when you walk into a situation like that, because that is not what we're typically used to seeing. So let me ask you another question. Why was Schulte Hospitality Group the right operating partner for this portfolio? Thinking about their approach, how does that differ from the prior management? What I think stood out for us with Schulte in particular was really their rigor and diligence on how they were underwriting and then layered on with just really great fundamental data in market because they operating number of assets in these markets So we felt very comfortable about where we could get complexing savings or other scale opportunities And so for us, that really kind of brought it to them. And so I think the way they're approaching it, I think they're a best-in-class operator with scale, which was the prior operator was predominantly managing mostly Sutherland's hotels. And so they just, they lacked some of that scale savings. So there's, you know, an ability for us to even bring just savings from an insurance platform perspective from that scale. So curious, with this acquisition and privatization, how does that align with your broader investment thesis in the southeast United States and that hospitality market? I mean, the way we've kind of viewed this kind of from, and you hit it on the beginning of where we are excited about hospitality in general is, you know, there's been really since 1952. So the share of wallet has grown from a consumer base almost unended, you know, for I think it's like 1.3% per year since then, with the COVID having a dip and then kind of coming back to that trend line. And so as we're thinking about that fundamental bull market there with the Southeast having a significant shift in demographics from California to New York, et cetera, population shift. And so what's really interesting, you've got that dynamic going and then you have basically no supply being built because of Liberation Day tariffs, you know, Iran war, et cetera. And so you're able to effectively buy things at 60, 70 percent of replacement costs. That was really kind of the biggest thesis here that we're able to actualize and that we're continuing to look for other opportunities in the space. And so kind of taking that thesis, those markets, investing behind them, we think that's a really compelling spot because you just have limited supply competition long term. It's amazing to see the momentum in the southeast of the United States from so many perspectives. And even you mentioned California, you see growth from California there. You certainly see it from the East Coast. You see it from the Midwest. I've always said that part of the country has been on sale for many years and it's not on sale anymore. It's premium real estate, to say the least. I'm certainly going to want to hear from Jen on this, too. From your perspective, what aspects of Bercadius Capital Markets' advisory role were the most critical in getting what was an incredibly complex deal transaction closed? I think perseverance. Jen and I got to catch up on dinner the other night and told her this. So, you know, I was like, we were not going to be here without her kind of dogged, persistent pursuit and the real belief that this is a great opportunity and we just needed to find the right puzzle pieces. Brickadia in general was extremely helpful in that. And also as we think about, you know, value of the assets and BOVs and whatnot. Jen, you know, you brought this from the ashes. It was in the ashes a few times. You know, this was like a 15-month process. And yeah, it was, there was on life support a few times throughout that year, for sure. But we actually did walk away and kind of put pencils down and thought we were done. I made a call. I called him again. Then all of a sudden we connected and he's like, I think we have something. I had worked with Alex at Ascendant when he was at Highgate years ago. Really sharp young man. And we went through the specifics. And basically I said, look, it needs to look this certain way. We need a certain amount of equity, a certain amount of debt. You need an accordion feature. you know, from a pricing standpoint, this is kind of where we max out. Our listener might not know what you mean when you say accordion feature. So basically, there was a baseline acquisition price. But if the perpetual preferreds converted, then that would mean that they needed to be paid out. And that only happens after you close the deal. To understand properly, you did not know how many of these preferreds were going to stay in until you close the deal, which, yeah, that is a pretty big unknown. It's really hard to get any sort of lender comfortable with an accordion when there's so much ambiguity around it. But we had some great partners, Apollo and Ascendant came to the table. Obviously, there had to be adequate collateral and support there and covenants and structure around it. But everybody was very willing to put their heads together and try and get it done. And I think at the end of the day, we just spent so much time and energy together that we knew this was a good transaction and had more conviction about it just the deeper we got into it and wanted to get it over the finish line. I'm thinking about it from a seller's perspective, right? The fact that you guys figured it out, solved the equation, they were going to have these problems anytime they tried to sell this asset. So it was in their best interest, I would assume, to really hang with you, Jen and Webb, to really try to figure this thing out. I mean, what was going on on the seller side? Because a lot of moving parts here. Yeah, definitely. I mean, they were persistent as well. And they were in a spot where they were going to need to do some kind of capital transaction or, you know, refi's other debt that wasn't necessarily maturing, but, you know, to kind of be able to pull cash to do these things. And Jen, were you there day one? Yeah. As soon as I stepped foot into Bercadia, they brought me in. We started dialoguing about it. They were my second engagement. And yeah. Nothing like hitting the ground running, walking into a new organization and getting a slightly complex transaction. So a true equity partner then came in later on, right? Descendant came in. So we called Descendant asking them to fill the void in the financing in the cap stack. But it's structured. So some of it's equity, some of it's MEZ. And again, that too has an accordion feature because, you know, baseline. And then if they converted, if some of the perpetual preferred converted, it ratcheted out the purchase price. Wow. So the perpetual preferred, I just, this is so interesting to me because having done lending my entire career, that is really a wild card. And you got to have somebody commit to amount knowing that it might be a very different dollar amount How did that conversion go Did a lot of the preferred just go away or did a lot of them stick around or what happened there About 80 converted So that ended up redeeming We were also a little indifferent of what happened And just like the rough math of it was their part papers, you know, shares, $25. They had about five to $6 in accrued preferred. So really, if you just liquidated the portfolio and did the waterfall, they'd be owed about $30. But on the conversion, they were capped at roughly eight shares. And so the math roughly ends up they were getting like 60 cents on the dollar for what they would be owed in a waterfall liquidation. So they were giving up real value for liquidity and whatnot. Hey, we actually have a fun little segment in this. And I always love hearing about confessions of a closer. And here at Inside the Deal, we talk about, you know, that deal, that one that either got away or that one that you made that you were shocked. at home. I've got a great sheet of paper that Kimmons was trying to close in a hotel in Philadelphia. And they were going back and forth with lawyers. And he finally kicked all the lawyers out, kicked my dad out of the room. And the seller just put it on a piece of napkin and said, hey, we're done. The deal's done and got it done. So I've got that. That's the contract. So it was a one page on a napkin, literally framed. On this one, I think I signed 350 pages. I was going to say that that doesn't exist anymore, but it's a good way to look at how this industry used to be on a handshake kind of thing. All right, Jennifer, what do you got? Jen doesn't let anything get away, right? I'm pretty tight. I don't really let things get away from me too often. I usually get 90 to 95 percent of what I want. So not too much slips away from me. But I will say one thing I'm probably good at is working through complicated deals. And I mean, this is a testament of that. I've had some others where, you know, there's just been major complications and a massive multi-hundred million dollar construction deal. You know, taking the leadership and team through the process, I think, is something that I'm pretty good at navigating. But I like solving puzzles. And that's what I really like about my job. And I like really nurturing awesome relationships with great people and getting them what they ultimately want. You know, Jen, since joining, has just been ripping the cover off the ball. And, you know, she doesn't want the short putt. She's, you know, she's looking for that one that's just barely on the green, and she can make it all the way to the hole. So I can tell you this, Jen is tenacious about that. You can't quite see Webb shaking his head, but he's kind of laughing at the same time about the tenacity. We have a fun little segment here called Ask Ernie Anything. Jen and Webb, fun question, thoughtful industry question. any specifics hit me with it this is unscripted so it's when I get a little beat of sweat on my head yeah I love it so I'm always asked what is the best hotel you've ever stayed at and why so actually this is pretty funny my wife and I were flying back Monday morning and we had this conversation but the beauty is I'm on the road all the time Jen knows if you want to find me usually it's Wi-Fi on Delta and we talked about this and there's a couple that really jump out the Four Seasons on the Big Island is a pretty special place. It's just on a bed of lava. It's a unique location and, you know, just obviously well run. There's an Aubertage Hotel in Cabo Esperanza that each room has a pool. I was there three weeks ago. Oh, were you really? Yeah, yeah. See, now if Webb is staying there, then I think that solidifies the fact that this is a man in the industry that knows his hospitality locations and that type of thing. Those are probably a couple of the absolute top just because of great locations, unique. That location in Cabo, as you know, Webb, is pretty incredible. So that Aubergine Esperanza is pretty incredible. It just looks like you're staying on the moon in effect. In fact, I got a picture from the golf course the other day. And if your ball goes into the lava rough, there's no way. You can't even walk on it. So I'm like, it's the ultimate rough. It's hard rock. What do you got, Jen? I want to hear what your most difficult deal was. Jeez, that's a good question. I haven't thought about that in quite a while. It was probably a transaction where, you guys, it was dead several times. There used to be a day when you do bond deals, and they literally had to close by December 31st. The deal was completely dead. The tax implications and everything would just be gone. And those were probably the hardest deals because you just used to work through Christmas. But when those bond deals went away, I actually got to be home for Christmas. We had a couple of years in a row, Jen, where we literally closed these deals at like 458 on the last business day of the year. And the tensions were high. I would have loved to have thrown some of the attorneys out of the room in that case. I'm sure. It was literally like two cars on the highways, chicken, speeding at each other. and who was going to swerve first and who was going to give up something first. And it just got to be a brutal game. And when the tax implications kind of went away on those bond deals, I was probably one of the happiest people around, Jen. And once in a while, one would blow up. And, you know, here you put all this work in. And, you know, at the last minute, and the last minute was New Year's Eve, effectively, if it was a business day. Super, super tough existence back in the day. But anyway, I'd love to thank you both for being here. An incredible story. Best of luck, Webb, with this portfolio. Jen will keep me updated on what's going on. Every deal has a story. Join us next time on Inside the Deal, a commercial real estate podcast by Brickadia as we sit down with another Brickadia producer and joined by a Brickadia client and lender partner to show you the inner workings of how we make deals happen. As you heard two things today, Liberation Day and wars and those type of things. You got to stay on this podcast because things change every week. You won't want to miss it. I'm Ernie Katae and I'll see you on the next deal. Thank you.
