With so many owners and operators still underwater or upside down, there are opportunities for REITs like Medzigian’s to step in and help an asset change its fortunes. Even though the markets continue to improve, industrywide solvency is still a long ways off, he says. “The markets have clearly recovered significantly from where they were, but there are still a lot of under-capitalized owners. There’s still about $1.7 trillion of commercial real estate debt that has the potential to become due between now and 2017,” Medzigian explains. “There are some assets in our portfolio where, in some cases, the owner had no choice—he or she either needed to sell the asset or do a joint venture and raise new equity because they couldn’t refinance the debt on their own.”
According to Medzigian, in commercial real estate, lenders today might be willing to go up to 65 percent loan to value, which means there needs to be significant cash flow in place to cover the debt service payments. If not, there needs to be some reworking of the loan structure. “We view ourselves as capital providers. If somebody has a good asset, and they’ve got a capital-structure problem and they are faced with the choice of selling the asset or raising money to get the capital structure on more solid footing, often they’ll want to keep their asset and raise new capital in order to keep it.”
For Medzigian, each asset requires a unique prescription for building value. In some cases, it’s a capital infusion. In others, it’s a buyout and renovation process. But if it will lead to growth/income and capital appreciation, he’s prepared to be creative and do the heavy lifting.
“Hotels are my first love, and it’s where we primarily focus,” he says. “But we don’t invest in the hotel space because I’m a hotel person. We’re money managers, and we’re looking to generate attractive risk-adjusted returns for our investors.”