OZ Pitch Day - Nov 14th
Developing Hotels In Opportunity Zones, With John Schellhase
Hotel development deals are benefiting from favorable supply-demand dynamics post-COVID.
John Schellhase, assistant vice president of investments at Peachtree Group, joins the show to discuss Peachtree’s approach to Opportunity Zone investments, their focus on developing hospitality assets, and the broader real estate market trends currently shaping investment opportunities.
Episode Highlights
- Peachtree’s overall Opportunity Zone real estate investment strategy, and particular focus on the hospitality sector and favored markets.
- How hospitality and hotel supply-demand imbalance has changed over the past few years, and why it is expected to continue into the near future.
- Why Peachtree is offering their San Antonio OZ hotel development deal direct to investors.
- How hospitality compares with multifamily in the current economic environment.
- Why private credit may be a significant growth area for Peachtree and other sponsors.
Guests: John Schellhase, Peachtree Group
About The Opportunity Zones Podcast
Hosted by OpportunityDb founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in the Opportunity Zones industry.
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Show Transcript
Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m Jimmy Atkinson. Today I’m joined by John Schellhase, Assistant Vice President of Development Investments at Peachtree Group. And John joins us today from Atlanta, Georgia. John, it’s great to see you. Thanks for coming on the show. How are you?
John: Good, Jimmy. How you doing? Thanks for having us on today.
Jimmy: Good. Peachtree’s a big name in real estate development, especially in the hospitality sector. I don’t know if a lot of my audience may be familiar with Peachtree or not. They should be. But I know you haven’t done a lot of direct-to-investor deals. We’ll talk about that a little bit more as today’s episode progresses. But to start us off, can you give us a little bit of background on your firm, Peachtree?
John: Yeah. First off, you know, great question. Peachtree is actually a 17-year-old firm. So, we were founded coming out of the GFC in 2007, really started as kind of a family office. And if you fast-forward, call it 17 years today, we’re a vertically-integrated real estate private equity vehicle. What’s interesting about us is really a couple things. If you look at our business lines, we’re a lender, we’re an acquirer, and we’re a builder. So, on the lender side, we actually lend across all asset types, inclusive of hospitality. That could be bridge, could be construction. We’re one of the larger PACE lenders in the country. And then on the equity side, you know, we own, day in, day out, call it 90, plus or minus, assets, and then we also build. North of a billion dollars in our development pipeline today. And kind of all that adds up to a firm track record of about, currently, call it, rounded, $3.5, $3.6 billion under management, and total firm transaction value north of about $10.5 billion dollars. So, pretty significant track record, both the debt and the equity piece. And the last thing that’s interesting about us is, a lot of firms use vertical integration. Probably, it’s a pretty big buzzword in the industry, but we own our own management platform, so the hotels that we own, we generally operate those assets. We have our construction arm, we have in-house debt and equity capital market. So, you really think about all the services needed to execute upon a transaction or business idea, we’re truly set up to deliver upon that.
Jimmy: Good. So, quite a bit of experience, vertically integrated, been around since 2007, so, you didn’t just set up shop just to do OZ deals in the last few years, although you do have quite a few OZ deals that you have done, and are continuing to do, in your pipeline. We’ll revisit that in a minute. What about you personally, John? I got a little bit of background on you. How’d you get to where you are today in your career?
John: Yeah. So, I’ve been in the hotel space almost 15 years now, call it 14 and change. Really been in the development space now for about eight, nine years. I started actually working in the asset, working on-property for a couple years with some of the big brand names out there you’re familiar with, Marriott, IHG, Loews, etc. Spent about eight years at IHG corporate, leading development asset management for them. So, working with the different owners, helping them figure out how to actually develop their asset. And then, recently, just about a year and a half ago, joined Peachtree Group, where today I lead joint venture development, which is us partnering with other developers across the country to help them think about their development, and ultimately capitalize their asset, presenting great opportunities for investors, in a lot of markets and product types that they normally wouldn’t have access to today.
Jimmy: Okay, a lot of great experience under your belt as well. A lot of bona fides there that you bring to the table, John, so I’m glad we have you here today to talk about hotel development and what’s going on at Peachtree, and Opportunity Zones and your OZ platform. To start us off, let’s zoom way out, and just take a look at the overall real estate landscape for a moment. There’s a lot of different types of investment strategies when it comes to real estate. There’s core, core plus, value-add. There’s ground-up development. When we’re talking about OZs, though, when we’re talking about Opportunity Zones, we’re almost always talking about ground-up development. You could do a very heavy value-add, as long as you double the basis in the building. But for the most part, I’d say 90%-plus of OZ real estate deals are doing ground-up development. Why are you still focused on development at Peachtree? And is development still feasible, given today’s macroeconomic conditions, rising interest rates, or I should say, high interest rates? They might actually be coming down pretty soon here, but why development?
John: Yeah, you know, it’s interesting. If you look at development, and we’ll isolate it just in the hotel space, to simplify the conversation. Look, it’s hard today, right, for all the reasons you said, and more. But it’s actually a really interesting time to be looking at hotel development today, for a couple reasons. One is, if you look at one of the big macro themes, it’s always supply and demand. And no shocker, supply, for all those reasons you mentioned, right, interest rates, construction costs, etc., is really, call it below 1% today, which is where, the lowest it’s been in a really, really, really long time. But the demand story is really interesting for the hospitality industry as a whole, right? You take a step back, and you look at some of the long-term kind of shifts in our economy, COVID clearly moved us to a more experiential-based economy, where people wanna be out in the world, and that’s not a short-term trend, right? That’s really a long-term macro trend. So, demand is generally forecasted to be north of 2% today. So, anytime you can get a 1%-plus spread between supply and demand, that makes it really interesting to develop.
And, like, a lot of asset types, but particularly in hotels, a new product is generally where people wanna stay, it really commands kind of the higher rates in whatever sub-market that product’s in. So, if you think about hospitality today, we think it’s a really great time to develop. It doesn’t mean it’s easy to develop. The bar is really high to solve for that. But if you can get the right product in the ground, in the right sub-market, you’ll think, we think you’ll be really rewarded a couple years down the road after opening that asset.
Jimmy: And you mentioned demand’s less than 1%… Sorry, supply is less than 1%. Demand, north of 2%. What do you mean by that? One percent and 2% of what? Are those growth rates? I didn’t follow that.
John: Yeah. So, just total growth rates, right?
Jimmy: Growth rate. Okay.
John: So, just kind of year over year. I’ll give you an interesting statistic. So, if you look at tourism spend on the demand side, right, if you look at global tourism spend across every country in the world, global GDP has an annual average growth rate of, let’s call it a rounded 2.5%. There’s a group called the World Travel and Tourism Council, international coalition of people, economists, etc., that think about kind of where travel demand’s going. And going forward, by 2033, they think travel tourism demand will be about 5% annualized growth, so double the historical average. And that’s really interesting, right, and kind of speaks to that supply and demand imbalance I talked about, which is another reason why we think development is a really strong use case today, and a really great investment opportunity to be exploring, in the right market and the right product.
Jimmy: It’s interesting. A lot of the first several Opportunity Zone Funds that came to market in 2018, 2019 were hotel funds. And then, of course, March of 2020 hit, everything shut down, people stopped traveling, you couldn’t travel. Hotels were pretty much closed. And then even when things reopened, people were scared to travel, the level of service wasn’t what we were used to it having been just even a year prior. Hospitality really suffered as an asset class. How has it rebounded since the pandemic? It has rebounded very nicely since then, I think. But you tell me. Can you kind of characterize what’s transpired over the last few years here?
John: Yeah, it’s interesting. If you look at hospitality on the macro side today, in almost every market, assets are performing at or even slightly above where they were, compared to 2019. So, from a revenue perspective, it’s really, truly back, and we can all see that, right? If you look at kind of the TSA numbers, if you kind of follow that on a national or monthly spread, it feels like every time some news channel reports, the TSA line at the airport is longer and longer and longer. And that’s just really a symptom of people wanting to travel. And guess who benefits, right? Hotels. We’re a direct beneficiary of that change in consumer behavior.
Jimmy: And what else do you like about hospitality long-term, as an asset class? And then how do you compare it to different asset classes that might be understood by investors better? And specifically, I’m referring to residential, multifamily in particular, seems to be, like, the plain vanilla darling of real estate, especially with regards to, being this is the “Opportunity Zones Podcast,” and we talk about OZs a lot, it is the largest asset class in OZs. How do you compare and contrast it against multifamily?
John: Yeah, it’s actually my favorite question, so I’m glad you asked that. If you look at hospitality, hotels normally trade at a much higher cap rate than multifamily. So, hotels generally trade, call it 7% to 8% to 9%, you know, market, asset-specific. In multi, the depths of where they were over the past couple years was trading at, like, 4% or even less, right, in kind of some interesting markets. So, you fast-forward to, call it 2024 today, no shocker. I’m sure you’ve talked about it with your listeners. Multifamily, clearly, office and other asset types have had double-digit drops in some of their valuations, right, in terms of where they’re being valued, and what those cap rates look today. Here’s an interesting statistic. Hotels trade at a greater risk premium spread. And so, their valuations today are actually the least impacted of any asset class out there. So, on average, it’s a single-digit drop, compared to, you know, let’s call it office, depending on how you wanna buy or believe that, it’s 35%. Multifamily, call it 20%, 25%. And that makes hospitality really attractive. So, you have really strong in-demand growth stories, with a valuation that has been not materially impacted at all whatsoever. It makes the investment case for hotels really interesting for not just us, but also all of our investors as well.
Jimmy: And then, of course, we’re talking about, you know, recently what’s happened. But then, long-term, you pointed to that travel tourism study, going out to 2033, showing a 5% growth rate expected to hit by then. We’re currently at a less than 1% supply growth rate. Do you expect those trends to continue, or is supply picking up now? Or, I guess it’s hard for supply to pick up right now, though, with interest rates as they are, but you tell me.
John: Yeah. Look, supply in development is hard to… You have interest rates that are, you know, significantly elevated compared to where they were, call it 2019, 2020, clearly. You know, does a couple basis points help that? Probably not, at the end of the day. You have construction costs that in most markets is up significantly compared to 2019. And so, that makes it really hard and really prudent and important to find the right deal in the right market, to make sure that you’re really thinking about development responsibly, and not just doing a deal to do a deal. And that’s how we’re really structured at Peachtree, is taking advantage of all those macro trends I talked about, but thinking about what are those really niche opportunities to define the right market in the right location with the right product with the right sponsor, to be able to deliver risk-adjusted returns, but also compensating for ultimately what the investor needs to see as well.
Jimmy: Right. So, what are some of those markets that you like? I know you’ve got a deal in San Antonio that we’re gonna be discussing in some detail, but what other markets, in addition to San Antonio, do you really like, that’s in your pipeline that you’re developing right now?
John: Yeah, no. So, no shocker. We’re, like a lot of people out there, big believers in the smile states. So, for us, we kind of define that as, let’s call it Arizona, over to the East Coast, Carolinas, up through the Midwest. So we kind of maybe call it a pseudo smile T version. I just made that up. No trademark, I promise. But we’re big believers in Texas today. And if you look at kind of macro demographic trends of population movement, obviously business environment in Texas is doing incredibly well. We have active developments, or soon-to-be-active developments in Dallas, in Austin, and in San Antonio. So, if that kind of tells you anything today, we’re highly invested in the long-term growth of Texas. And San Antonio, which we’ll touch on more in a little bit too.
Jimmy: Yeah. So, the pseudo-smile states, but heavily in Texas. So, John, this is a deal, this deal in San Antonio that you’re working on, it’s your first Opportunity Zone deal that you’ve offered directly to high-net-worth, accredited investors. But it’s not your first OZ deal, by any stretch of the imagination. Peachtree has had two prior OZ Funds that you’ve raised capital for, multiple deals within each fund. But this was the first one you’re offering direct. So, a two-part question for you is, one, can you talk a little bit about your Opportunity Zone platform to date, those first two funds, the deals that you raised for, what you like about OZs, and then also, why is this one, this particular hotel deal in San Antonio, why are you offering it direct?
John: Yeah, a couple really good questions in there. So, maybe let’s start with a little bit of, like, how we have thought about our Opportunity Zone strategy. And as you mentioned, we fully raised and now deployed two funds solely around Opportunity Zone development in the hotel space. But the way we think about the platform and those two funds, and then this San Antonio deal is, we’re solving for a really good deal, that just happens to be in an Opportunity Zone. And that’s a really important distinction, our investment philosophy and criteria. I’ll give you a couple examples. So, inside of those two funds today, under construction, we have a Hampton Inn in Maui, Hawaii. Not something you would normally think of, right, inside of an Opportunity Zone. We have a beautiful Curio going up in Paso Robles, California, an AC under construction in Detroit, Michigan.
And so, I use those as examples, really, to highlight, we’re solving for a good deal, with the right product, in the right location, and just happens to be in an Opportunity Zone. And so, when you fast-forward to this San Antonio opportunity, that actually came together by, really, the culmination, this is the last deal inside of our second Opportunity Zone Fund, but we liked the deal so much to capitalize it, we’re taking capital from that fund, and then, as you mentioned, a direct raise as well, and that’ll joint venture together to capitalize the deal, and that’s the same philosophy. You think about the Opportunity Zone program, you normally wouldn’t input Riverwalk, one of the most visited tourist attractions in the country, in San Antonio, Texas, together with Opportunity Zones. But we saw that, we loved the deal, it happened to be in an Opportunity Zone. So, by the culmination of that last fund, we have a direct investment opportunity for people today for a hotel development just off the Riverwalk.
Jimmy: Yeah. So, tell us, I wanna hear a little bit more about this particular deal. Where, exactly where in San Antonio is it? You said it’s just off the Riverwalk, but tell us a little bit more about it, if you could.
John: Yeah. So, it, today, is one block off the Riverwalk, on the west side of San Antonio. It’s on Main Street, for those of your listeners who are familiar with San Antonio. And we are building a 171-room ground-up Residence Inn by Marriott. The project will start construction here in call it the next 30 to 60 days. And what’s really exciting about this opportunity, we own the land. We bought the land last fall. We’ve gone through the entitlement process. We have a fully-negotiated GMP, or gross maximum product, with a well-known contractor in the San Antonio market. And lastly, maybe most importantly, we’re actually in the best part of the Riverwalk. And so, for those listeners who are familiar with San Antonio, familiar with the Riverwalk, I’m gonna kind of virtually slice the screen in half here for a second. So, the east side of the Riverwalk, that’s where the Convention Center is. That’s where a lot of the kind of the summer leisure travel comes from. That’s one half. The other half is continued leisure demand, but you have educational demand from UT San Antonio, government demand, a lot of business demand, demand from the military bases in San Antonio. Those of you listeners who don’t know, San Antonio actually is the culmination of five military bases. It’s called Military City USA.
And so, being on the west side of the Riverwalk versus the east side, we’re in a really good position, because we’re able to capture demand from a multitude or diverse set of demand drivers. So, what does that mean? When the convention summer season’s going really strong, we’re only gonna draft and go higher off that. And when that’s maybe a little slower, let’s call that November, December, we’re not relying on that, and we still have all these really demand drivers. And the penultimate statement, or the punchline here is, if you look at that kind of split screen again, the west side of the Riverwalk actually significantly outperforms the east side of the Riverwalk. And we’re gonna be on the west side, which is a really attractive pro forma kind of underwriting opportunity.
The last thing I’ll just share is, for those of your listeners who are familiar a little bit with the hotel space, anytime you can build a Residence Inn by Marriott in an urban location, you win. And the reason is there are so few today across the country. So, we’re able to build one. We’re actually building one in an urbanized environment. And lastly, Marriott was so excited for this opportunity, they’re gonna give us what’s called $2 million of key money. And basically that means they give us cash at opening, which we put back forward into the underwriting for our investors. And the reason they do that, fundamentally, is they only give this out normally, you know, for big, complicated resorts, and Ritz-Carltons and crazy deals. But they have a long track record and history with us. And they know that doing this, in this kind of a market, is a really difficult proposition, and really want to incentivize the deal. So, ultimately, the one-liner here is we’re building in the highest-performing part of the Riverwalk, with the right brand, with significant support from Marriott, and also in a way that fundamentally takes a lot of the risk out of the equation, if you think about development in terms of pre-development entitlement, etc., kind of risk.
Jimmy: Terrific. And you guys are gonna be presenting this deal at our upcoming OZ Pitch Day, on November 14th. I’ll make sure to send around lots of information about that in the coming weeks, but you can learn more about OZ Pitch Day if you head to ozpitchday.com. We’ve got quite a few signed up for that already. John, I actually wanna just share my screen here, and take a look at the map. Since we were talking about San Antonio, this is a map, on my website, opportunitydb.com/map. You can see where all of the Opportunity Zones around the entire country are. And so, I think you’re talking about here, in San Antonio, you’re probably talking about this census tract between 35 and 37 here, which would cover the Riverwalk area. But where exactly are you? Am I on the right track here?
John: Yeah. No, you’re super close to it. So, if you zoom in a little bit there, and follow that middle of the river, go left a little bit here…
Jimmy: Right.
John: Keep going a little bit left. See that “City of San Antonio,” dead middle of the screen…
Jimmy: Right here. Yep.
John: We are just on the opposite side of that street.
Jimmy: Okay.
John: So, pretty good location.
Jimmy: Yeah. And then here’s the, my cursor is tracing the river right here. And there’s lot of hotels, bars, restaurants on either side of this river. This is the world-famous San Antonio Riverwalk. Great place to visit. I’ve been down there a couple times, visiting down from, I’m located in Fort Worth, so it’s a great, great spot to hit up, and very lively, and it’s pretty much entirely in an Opportunity Zone, this entire location here in San Antonio. So, yeah. Really incredible development opportunity, and I can see what you mean right now by that, John. You mentioned earlier that you are vertically-integrated, you’re a lender, you’re acquirer, you’re a builder, you’re a PACE lender, but you do also JV with the right organizations. Can you talk about some of the JV development deals that you’re currently engaged with, and your strategy behind those.
John: Yeah. I think it, a kind of a simple way to look at it is, we’re really set up and designed to partner with other developers across the country. And that’s an advantage point, not just for us, but giving investors, such as your listeners, the opportunity to access great deals. And so, we’ll go back to that San Antonio opportunity that we have out today. We partnered with a local Texas developer who found this land site that you just showed on your screen in San Antonio, Texas, through just purely relationships, right? Not a brokered opportunity. And then we’re really set up then to help capitalize that deal through both equity and debt. We then manage the asset, and really set that developer up today to do what they do best, which is fundamentally focus on executing development. And so, we do that all across the country. And that’s how we’re really designed to take advantage of what we talked about earlier, with this kind of interesting development opportunity on the macro landscape, but have access, and get people opportunities to think about development deals all across the country. And that’s how we’re able to get most of our development deals, through off-market opportunities, and provide people really interesting investment options.
Jimmy: Terrific. Well, I really appreciate all the insights that you’ve provided so far today, John. We’re kind of winding down the interview, running out of time here, but I did wanna get your big-picture thoughts on any trends that you’re keeping an eye on within the real estate investment universe, any trends that you think that other real estate investors should be aware of.
John: Yeah. Look, I would say today’s a really interesting time to be in real estate. Like you mentioned, we’re a lender, we’re an acquirer, and we’re a builder. So we have a really wide viewpoint across the real estate landscape today. And even within that on the lending side, we play across all asset types, not just hospitality. And I think, for us, we really look, one, at development, and it’s a big opportunity, but also private credit is a huge opportunity. And we have a long track record within that. And so, as people consider options, that’s really something that they can think about as well, in addition to development.
Jimmy: I wanna talk about private credit for a minute, because it’s come up on this show and on our sister show, “The Alternative Investment Podcast,” a handful of times in the past. But I don’t know that I’ve talked about it here too much recently, but what is meant by private credit, and how can investors access private credit? How is it different than equity in any sort of asset? What is it exactly? What type of returns can you expect? Don’t get in trouble with your compliance department…
John: Yeah. So, we’ll save the return piece for your preview day later this fall, to keep me out of the trouble list. I only get near that on Christmas, unfortunately. But if you think about private credit, historically, there’s been a lot of regional bank lenders and local bank lenders in the space. And for a myriad of reasons, those have largely backed away, and it’s a lot harder to get debt today, if you’re looking out there as a sponsor. Peachtree has been in the private credit space for 17 years, both originating, executing, and servicing in those investments. And so, really, it’s a sponsor coming to us with a development opportunity, says, “Hey, I need a construction loan. I can’t get one today in the public markets. Would you give that to us?” Or, “Hey, I have a maturity coming up. Can you help me with a refinance? And so, instead of going to call the public or a regional bank for that, institutions, private lenders, such as Peachtree Group, are able to step in and help those sponsors with such opportunities, just because they can’t access the public debt markets today. And that provides really interesting opportunities for investors into Peachtree, into private credit… really interesting return profiles, from a risk-adjusted perspective.
Jimmy: Very good. Well, if I have anyone in my audience, an investor or an advisor, perhaps, who has a capital gain, maybe they’re interested in learning more about this Peachtree OZ offering or some of your other investments on your platform, maybe they’re interested in the private credit now, where can my audience go to learn more about Peachtree?
John: Yeah. Really simple, peachtreegroup.com. It’ll give an overview of all our strategies, our team, our different fund opportunities. And for any of those who reach out or are interested in the San Antonio opportunity, our team is listed on there as well, and we’d love to talk to you about it.
Jimmy: Perfect. And as always, I will have show notes available for today’s episode at opportunitydb.com/podcast. And there I’ll have links to all of the resources that John and I discussed on today’s show. And please be sure to subscribe to us on YouTube or your favorite podcast listening platform, to always get the latest episodes. John, thanks again for joining me today. Really insightful. Really appreciate your time. Thank you.
John: Thanks, Jimmy.