Ohana president on ‘interesting’ credit and bias toward new

Ohana president on ‘interesting’ credit and bias toward new

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AUSTIN, Texas – When asked about ADR and
RevPAR expectations for the properties his company invests in, Franco Famularo,
recently promoted to president of Austin-based Ohana Real Estate Investors,
said he would rather keep two other numbers in mind.

“One
of the things that we’ve always focused on, and it’s probably our number-one
focus, is net operating income and cash flow, which I think has garnered a lot
deeper appreciation in this high interest-rate environment,” Famularo said.
“People greatly appreciate cash flow again, and maybe speak less in terms of
ADR and RevPAR and things like that.”

Famularo
is also the chief investment officer for Ohana, which he joined in 2015. While
the company’s headquarters is in Austin, he and most of the investment and
asset management team sit in its Redwood City, California, office.

Ohana
Real Estate Investors owns about 12 hotels and resorts in the U.S., primarily
in the “SMILE” pattern (East and West Coast and the Sunbelt). For the most
part, Ohana owns 100% of its properties.

Famularo
said the company wants to double its portfolio size between hospitality and
residential properties over the next three years.

Ohana acquired the 276-key Claremont Club & Spa, a Fairmont Hotel in Berkeley, California, for $163.3 million last May.

Ohana acquired the 276-key Claremont Club & Spa, a Fairmont Hotel in Berkeley, California, for $163.3 million last May.

‘Interesting’ credit market

Ohana
also has an active credit portfolio and makes loans for hotel and other real
estate projects, which runs the full spectrum from college student housing,
multifamily, for-sale residential, and senior private-pay living.

At
one point, Famularo said the portfolio mix leaned 70-30 toward hospitality. But
he said the mix is now closer to 50-50, at least on the credit side.

Famularo
said that Ohana was weighted more toward sunshine leisure destinations (think
resorts) before the pandemic and immediately after. However, beginning in the
summer of 2021, the company began to pivot more toward urban markets. He said
the company’s pendulum will return to sunshine leisure as that market
normalizes.

On
the credit side, Ohana can speak for the entire “whole” loan or partner with
other lenders for the secondary or mezzanine loan.

Not
long ago, Ohana didn’t find the credit market that interesting. 

“Credit
wasn’t that attractive… There wasn’t much of it in the first year of the
pandemic,” Famularo said. “Then it wasn’t that attractive once everybody got
vaccinated and the party started. But with the Fed increasing base rates
throughout 2022 and sentiment souring, that started to shift.”

Famularo
said that the shift changed the company’s interest.

“In
the first half of 2023, credit, in our opinion, was academically interesting,
but there weren’t a lot of opportunities,” he said. “In the summer of 2023,
credit shifted for us from being academically interesting to being actually
interesting because we started to see people willing to transact, which was on
the equity side as well. So, credit has become more interesting, and we’ve seen
much more opportunity.”

But
Famularo said the hospitality credit market has also become interesting for
others.

“We’ve
seen a lot of what we would describe as generalist lenders – lenders that invest
across several property sectors and don’t have internal hospitality expertise. As offices become, basically, a no-go for them, they’ve started to look for
other destinations for their capital,” he said. “We’re seeing some of them flow
into the hotel space. They focus on very specific profiles of assets, and part
of our goal is just to be aware of how they think about the lending space and
try to find inefficiencies that they might overlook.”

Bias toward new real estate

Famularo
said Ohana has a type of real estate asset it is looking for, hospitality
included.

Ohana acquired the 196-key Hilton Brooklyn New York for $110 in December.

Ohana acquired the 196-key Hilton Brooklyn New York for $110 in December.

“We
have a bias towards newer real estate, and we think this is a market
environment where we can gain exposure through our credit and lending
activities, or our acquisition activities, and gain exposure to recently built,
high-quality real estate at an attractive valuation,” he said.

“We
have been weighted towards urban and infill properties over the last 24 months
because capital markets were still fairly bearish on many of those urban areas,
and performance data was starting to show attractive gains.”

Famularo
said Ohana has also noticed a disconnect in the market with full-service hotel
properties.

“There’s
been a duality or disconnect with the full-service hotel market since the
pandemic, where leisure performed extraordinarily well over the first couple of
years, and urban was still struggling to ramp up,” he said. “Then the tables,
really throughout 2023, started to shift… But urban continued to grow and
recover, and cash flow has continued to grow. Whereas leisure started to pull
back, and you started to see, depending on the market, notable declines and
deceleration or negative growth in many of those leisure markets as they reset.”

While
Famularo said Ohana is still focused on urban markets, he can see that shifting
as leisure performance normalizes. 

Credit for new construction

Famularo
said Ohana also specializes in giving credit to hotel properties that are built
but are still in the process of opening.

“A
lot of what we’re seeing right now is someone built a property, they have an
expensive construction loan, they just got their certificate of occupancy and
just turned their lights on,” he said. “A lot of mainstream lenders won’t
finance that. We finance that property because it doesn’t have a demonstrable
performance history.

Quote

One of the things that we’ve always focused on, and it’s probably our number-one focus, is net operating income and cash flow, which I think has garnered a lot deeper appreciation in this high interest-rate environment. People greatly appreciate cash flow again.

Franco Famularo

“That’s
the type of thing where we get involved and use our sector specialization and
internal expertise to get comfortable with the business plan and what that
ramp-up might look like,” Famularo said. “We’ll refinance that, and the
borrower likes that because typically, our debt is cheaper than that
construction loan.”

How they spend capex

Famularo
said one of the reasons that Ohana has a bias toward newer properties (or, more
realistically, something built over the past 5-10 years) that it acquires or
lends to is because of how the company wants to spend capex.

“Where
we want to spend capex dollars is for offensive, creative ideas where we see a
discernible return on that investment, rather than spending capex on deferred
items or stuff behind the walls or on systems, where it’s hard to see a real
return,” he said.

When
Ohana does look at older properties, it’s “almost always something that’s gone
through a very significant renovation, and in many instances, a
transformational renovation before we get involved, whether that’s us buying it
or lending to it.”

Famularo
said Ohana is hoping for more stabilization in the hospitality market by the
end of this year.

“The
theme for us in 2024 is when we get to the end of this year and look back, we
will have sunshine leisure properties and urban properties both finish the year
on a more stable path,” he said. “For sunshine leisure, that means continued
normalization and likely declines in cash flow, and for certain urban markets,
that means continued improvement in cash flow, either back to 2019 levels or
even in certain instances above 2019 levels.”

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