Making Bets in the Hotel Real Estate and M & A’s Across the Globe

We speak with Korosh Farazad

Can you tell us about your background and experience in the real estate industry?

I am the Founder and Chairman of Farazad Group of Companies and Director of KIT Hotel (KITH) Capital. Farazad Group consists of the subsidiary companies, Farazad Investments, Farazad Advisory, Farazad Ventures and Farazad Facility Services Ltd.

I am also CEO of Farazad Advisory Limited (FA), an advisory firm that offers structured and professional advice on a range of mixed-use real estate prospects, predominantly in the hospitality industry and trophy asset investment opportunities across the United Kingdom and overseas markets. All guidance is tailor-made to individually represent the client’s interests and to complement their portfolio. ​Combined FI and FA have successfully assisted in advising and structuring projects for funding valued over USD $4.2bn to date combined of equity, debt, and investment sale/acquisition including USD$ 500m hotel assets valued and advised on throughout the world. ​

Prior to venturing out on my own, I worked for Royal Bank of Canada, New York Life Securities and SOIB New York.

How do you approach analysing potential hotel real estate investment opportunities?

Evaluate the Location: Location is one of the most important factors in real estate investing. Look for areas that are in high demand and have strong economic growth potential. Factors to consider include proximity to transportation, amenities, and touristic destinations.

Determine Market Value: You would want to research the local real estate market to determine the value of properties in the area. Look at recent sales data, comparable properties, and market trends to get an idea of what the property is worth.

Calculate the Potential Return: Consider how much money (CAPEX) you would need to invest in the property, including any financing costs or heavy refurbishment. Then, estimate the potential income from the different revenue pockets (i.e. ADR/Occupancy, F & B concepts, events/weddings, etc) or resale value to determine the return on your investment.

Evaluate the Property: Once you have determined the potential value of the property, you would want to evaluate its condition. It is an absolute “must” to hire professional groups to assess the property’s structure, systems, and any potential issues that could affect its value.

Review the Legal and Financial Aspects: Before making an offer on a property, it’s important to review the legal and financial aspects. This includes reviewing the title history, any liens or outstanding debts, and any potential zoning or building code violations. Once again, it is important to bring in top groups to conduct a Financial Due Diligence (FDD) on the books. This is to be sure that nothing pops up a few years down the road, such as unexpected tax or civil liens on the property.

Develop an Exit Strategy: Finally, it’s important to develop an exit strategy for your investment. Consider how long you plan to hold onto the property and any potential risks or market changes that could affect its value. We usually prefer to hold assets between 3-5 years with NO emotional attachment to the asset. On a case by case basis and subject to our capital partners appetite, we would hold the asset entirely subject to our capital partners using “patient capital” on the asset.

We are operating partners with enough equity in our deals to ensure we protect first, our capital partners but also, our shareholders and my personal equity on assets we identify and acquire.

Can you walk us through a successful hotel real estate deal you have closed in the past?

My company has a number of different transactions in play simultaneously. Due to the current market conditions, we are more selective with our process as cost of debt post-acquisition is significantly higher than where it used to be in Q3/Q4 2022. With that said, we successfully raised debt for a ground-up development of a 175-key hotel in Kingston, Jamaica and another ground-up development of a 175-key hotel in Hot Springs, California with a Hotel Management Agreement in discussions with a large global hotel operator. We not only raised the financing on the two assets; we provided an A-Z process by ensuring all elements from Project Manager, Quantitative Surveyor, General Contractors, Interior Designers, F & B Concepts complied with the destination and the theme for those particular hotels. The total combined capital raised for both hotels was roughly US$ 60 million.

How do you stay up to date on market trends and changes in the real estate industry?

Follow Industry News: Regularly read industry publications, such as The Real Deal (my favourite), Real Estate Weekly, Hotel Business, etc. These publications cover the latest news, trends, and analysis in the real estate industry.

Attend Industry Conferences and Events: Attend conferences and events in the hotel real estate industry, such as the MIPIM and the International Hospitality Investment Forum, as well as small events or gatherings. These events offer opportunities to network, learn about new technologies, and gain insights into industry trends.

Network with Industry Professionals: Connect with other real estate professionals, such as brokers, developers, and property managers, to learn about local market conditions, upcoming developments, and other industry insights.

Utilise Real Estate Data and Analytics: Utilise real estate data and analytics tools, such as CoStar, Real Capital Analytics, and Reonomy, to access market data, track property transactions, and analyse market trends.

Follow different brands on social media like Instagram.

Can you talk about any challenges you have faced in your real estate career and how you overcame them?

My network is my net worth! Therefore, I comply with the Market Fluctuations: Real estate markets can be unpredictable and subject to sudden changes, such as fluctuations in interest rates, shifts in demand, or changes in government policies. To overcome these challenges, real estate professionals need to stay informed about market trends, develop a deep understanding of local market conditions, and be prepared to adjust their strategies as needed.

Financing: Securing financing for a real estate investment can be challenging, especially for new investors or in tight lending markets. To overcome these challenges, real estate professionals can work with a variety of lenders, build strong relationships with financial institutions, and be prepared to present a strong business plan and investment strategy to potential lenders.

Property Management: Managing a property can be time-consuming and complex, requiring expertise in areas such as leasing, maintenance, and other covenants within the asset. To overcome these challenges, I collaborate with experienced property managers, develop strong relationships with hotel operators and F & B specialists, and invest in technology and tools to streamline property management processes.

Legal Issues: Real estate transactions are subject to a variety of legal requirements, including zoning regulations, environmental laws, and contract negotiations. To overcome these challenges, real estate professionals can work with experienced attorneys, conduct due diligence to identify potential legal issues early on and develop a deep understanding of the legal landscape in their local markets.

Competition: Real estate investing can be a highly competitive field, with many investors vying for the same opportunities. To overcome these challenges, I differentiate myself by developing unique investment strategies, building strong relationships with industry contacts, and being persistent in pursuing opportunities.

How do you determine the appropriate financing structure for a real estate investment opportunity?

First, I think and visualise what I need to do in my head before I discuss it with anyone. Second, I go with my intuition based on years of experience and making both profitable decisions and some, not so profitable but gaining the experience from them. Then, I conduct my Investment Strategy. The appropriate financing structure will depend on the investment strategy, such as whether the property will be held for the short-term or long-term, and the expected rate of return.

Capitalization Rate: The cap rate is a key metric used to evaluate real estate investments. It represents the expected return on investment, based on the property’s net operating income.

Debt Service Coverage Ratio: Lenders typically require a minimum DSCR before they will provide financing, and a higher DSCR can often result in more favourable financing terms.

Interest Rates: Interest rates always will have a significant impact on the cost of financing and the overall return on investment. Evaluate interest rate options and determine the potential impact of changes in interest rates on the investment’s cash flow and value.

Loan-to-Value Ratio: The loan-to-value (LTV) ratio represents the amount of financing relative to the property’s value. Lenders typically have maximum LTV ratios, and higher LTVs can result in higher interest rates or more stringent loan terms.

How do you balance the needs and objectives of different stakeholders involved in a real estate deal?

It is one of the most challenging tasks you can possibly imagine, because each stakeholder has completely different DNA. First, despite my limited time and tight schedule on a daily basis, I take the time to listen to each stakeholder and understand their motivations, goals, and concerns.

I look for areas where the stakeholders’ goals align. For example, all stakeholders may share a desire for a successful transaction, a profitable investment, or a high-quality property. By identifying these common goals, you can build a foundation for collaboration and compromise and compromising is the KEY to a successful deal.

Next is communication to balance the needs and objectives of different stakeholders. Be open and transparent about the deal’s progress, risks, and challenges. Encourage stakeholders to ask questions and provide feedback.

I look for opportunities to create win-win scenarios that meet the needs of all parties involved. For example, you may be able to structure the deal in a way that provides benefits to all stakeholders, such as through a revenue-sharing agreement or a joint venture.

Not all stakeholders are equal in their level of importance. Identify the key stakeholders, such as lenders or major investors, and prioritise their needs and objectives. This can help ensure that the deal is successful and meets the expectations of those who are most critical to its success.

Can you tell us about your experience working with corporate clients in the financing space?

First of all, 25-30% of our portfolio is within the corporate finance and the M&A sector. I have a young and energetic team of incredible professionals who operate within this space for the company and get the requirements of the clients completed successfully.

Working with corporate clients in the financing space can be a complex and challenging process, as corporate clients often have unique financing needs and complex organisational structures.

To provide effective financing solutions for corporate clients, it’s essential to have a deep understanding of their business. This includes understanding their industry, competitive landscape, and growth strategy, as well as their financial performance, cash flow, and capital structure.

These clients often have unique financing needs and a one-size-fits-all approach is unlikely to be effective. As a financing provider, it is important to be flexible and creative in developing financing solutions that meet the client’s specific needs and objectives.

Building strong relationships with these clients is essential to success in the financing space. This includes maintaining open communication, being responsive and proactive, and providing high-quality service and support.

Financing these clients can involve significant risks, such as credit risk, market risk, and operational risk. It’s important to have robust risk management processes in place to identify and mitigate these risks effectively. This is where we support our lenders to underwrite the deal and present it to them to fully ensure that their risk is also mitigated.

How many clients does your group have in this sector?

We have several clients with a combined value of US$ 300 million. Both companies are in the process of going IPO this year (fingers crossed). One in Seoul and the other in Melbourne. I can tell you that it is one of the most challenging experiences of my career. Asian culture is very different from that of the West, a lot of care and explanation is needed above the regulatory requirements that need to be met to comply with the different bureaucratic government authorities.

Can you speak to your experience working with lenders and investors in the corporate financing space?

Lenders and investors in the corporate financing space often have specific requirements, such as minimum return on investment or acceptable levels of risk. It’s essential to understand these requirements and structure financing solutions that meet them.

They also are often focused on managing risk and achieving a return on their investment. It’s important to have robust risk management processes in place to identify and mitigate these risks effectively.

It’s essential to provide clear and accurate information on the company’s financial performance, cash flow, and capital structure, as well as any risks or challenges.

Negotiating favourable financing terms is often essential to achieving a successful financing outcome. This may involve negotiating favourable interest rates, repayment terms, or covenants, etc.

Can you evaluate any challenges you have faced in your corporate financing career and how you overcame them?

Challenges are the 800-pound gorilla in the room when it comes to corporate financing and clients’ expectations. It is extremely time consuming; however, the first step is to identify the challenge and its root cause. This may involve conducting a thorough analysis of the company’s financial performance, market conditions, and industry trends.

Once the challenge has been identified, it’s important to develop a plan to address it. This may involve developing a new financing strategy, renegotiating terms with lenders or investors, or implementing new risk management processes.

Seeking input from other professionals in the corporate financing space can be valuable in developing an effective plan to overcome challenges. This may involve consulting with lawyers, accountants, or other financial professionals.

Once the plan has been developed, it’s important to implement it effectively. This may involve making changes to the company’s financing structure, developing new financial models, or improving risk management processes.

Monitoring progress is critical to ensuring that the plan is effective. Regular reporting and analysis can help identify any issues and adjust as needed.

Evaluating challenges and learning from them is essential to personal and professional growth in the corporate financing space. Reflecting on the experience can help identify areas for improvement and inform future decision-making.

Where do you and your group of Farazad subsidiaries see yourself in the next 5-years?

The company has grown organically and I sometimes cannot believe where it was 7-10 years ago versus where it is today. We are in the process of being acquired by a large group in Asia; however, this was delayed and we are getting to the end results of the transition. At this moment, I will continue doing what I love and that is being a deal junkie!