"It wasn't so attractive before when there was so much capital out there," says David Loeb, senior real estate research analyst and managing director for Milwaukee-based Robert W. Baird & Co. "We think this is a trend that we see other companies going into as well."

The Parsippany, NJ-based PREI is launching its first mezzanine lending program, using Dallas-based Ashford Hospitality Trust Inc. as the quarterback for deal sourcing and capital deployment. PREI is kicking in $300 million and Ashford, $100 million, in a 75-25% split on the return, respectively. There is a two-year window to deploy the first funding round, all in the US.

"As with any successful program, it could be expanded, but we'll have to wait and see," James P. Walker, PREI principal, tells GlobeSt.com. "The question is whether we can deploy that $400 million in a way that achieves our return goals."

Walker says PREI was probing ways to invest in hotels last summer when the team decided mezzanine lending was "less risky and had better return for the risk." He says PREI's contacts in the hospitality sector led it to Ashford.

Walker emphasizes it's not a loan to own program. "As with any mezzanine loan, it has to be a property that, if we had to own it, we would be comfortable owning it at that cost basis," he explains. "This is merely a program that sees a gap that developed for capitalizing or re-capitalizing hotels and tries to meet that need. We thought there was probably more opportunity and gap in hotel investments than any other sector."

The JV's program will fund full-service hotels and resorts in upper-upscale to luxury categories and branded select-service hotels in upscale and mid-scale segments. In the case of a portfolio, it can include a small percentage of extended stay and economy assets.

Walker says Ashford has "keyed up" a number of deals, including several portfolios. On average, he says loans will be $25 million to $50 million or up to $75 million for portfolios. The agreement specifies a 60% to 85% loan-to-value range.

The program will focus on existing hotels, but new developments aren't being ruled out. Under the agreement, PREI's equity stake has bought a senior position for each investment. The JV has a first right of refusal, but Ashford isn't prevented from soloing if it wants.

Ashford has seeded the program with a $21.5-million mezz loan it funded last December for secured interests in the 487-room Westin La Paloma Resort & Spa at 3800 E. Sunrise Dr. in Tucson and 412-key Westin Hilton Head Resort at 2 Grasslawn Ave. in Hilton Head, SC. Ashford has long been a lender for the sector, but scaled back about 18 months ago due to pricing, according to a REIT spokesman. "Pricing is coming back their way. It's the right time to be in the market," he says.

The JV will acquire or originate first and second mortgages, stock secured loans, guarantees or preferred equity financing. According to the JV's press release, terms are three to five years for floating rate vehicles and three to 10 years for fixed rates.

Instant Insights /

PREI-Ashford's $400M JV Might Be Sign of Times

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