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Industry observers have said for a while now that there is money waiting on the sidelines, looking for opportunities to buy. Reven Capital, a newly formed firm based in La Jolla, CA is one of those firms. The outfit is headed by Chad Carpenter, its chairman and chief executive officer, who was formerly with Equastone Real Estate Investment Advisors. Reven is looking to purchase about $250 million in hotel assets over the next 18 to 24 months and $100 to $150 million in residential assets over that same time period. In the hotel sector, the firm is targeting properties in the top 30 US markets, including some second-tier locales. Management is looking at multifamily mostly on the West Coast. Carpenter recently spoke with GlobeSt.com about Reven Capital’s strategy.

GlobeSt.com: Why have you launched this new venture now?

Carpenter: The reason to launch Reven Capital now is to invest in different real estate asset classes that are hopefully closer to the bottom of the market. Unfortunately, the market has really been hit hard, and there are going to be great buying opportunities out there, and we’d like to invest in them.

GlobeSt.com: We haven’t seen a whole lot of transactions take place yet. When will people start selling?

Carpenter: I’m starting to see the trading in the residential area. We’re looking for distressed residential lots, and we’re starting to see some trading there at significant discounts. We’re seeing a tremendous amount of debt getting traded. The bid-ask has been still a little bit far apart, but the reality of it is that these assets that are empty or owned, the values are coming down. In most asset classes, you’ve got vacancy increasing and revenue going down. Generally, if net income comes down, values are going down, and because of this recession, it’s going to take longer to lease and sell some of this real estate. So people are underwriting lower revenue streams and longer lease-up times, and that’s putting pressure on value. Even though the deals aren’t trading, sellers are eventually going to sell at the lower end of that bid-ask.

GlobeSt.com: What are you going to do with these assets operationally? Will you have to reposition many of them?

Carpenter: Every investment will have a different business plan. The first thing you’re to do is buy it at a significant discount of what it was worth a year or two ago. Then, clearly, any added-value techniques, whether it’s a capital improvement or streamlining expenses or running the property better, you want to do all of those value-add techniques to increase net income. Every asset is on a case-by-case basis. But you absolutely want to invest the dollars to get the highest return on your investment as the market recovers.

GlobeSt.com: How are you arranging all of this on the financing end?

Carpenter: Right now, our plan on the residential lots is to pay cash. On some of the hotels, we will be looking for debt. When we get out there and learn what the current quotes are and loan ratios, we’ll have a better handle on that. If the debt’s not out there, or the lenders are willing to loan significantly lower loan to value, that’s just going to put downward pressure on the values because you’re going to have to put more equity in the deal. You’ve got to get a return on that equity. But the plan would be to use some sort of debt if available.

GlobeSt.com: Who are the sellers you’re seeing in the market right now?

Carpenter: We’re seeing institutional insurance companies, banks selling loans. A lot of these banks don’t want to foreclose, so they’re filing their notice of default, going through the trustee-sale process, and they’re trying to sell the note right before the foreclosure process so they don’t take the title. We’ve seen quite a bit of that.

GlobeSt.com: Your focus is on multifamily and hotels right now. Would you consider pursuing any other sectors?

Carpenter: There are opportunities in all of the asset classes, but they’re selective. The reason we like residential is because it was the first asset class to go into the devaluing process. It started when subprime and residential started going down the pipes. So our thought is that residential is closer to hitting bottom. We’re not sure if its hit bottom, but its closer. We look at the hotels versus retail and office, and our thought process is that they are daily rentals. They don’t have long-term leases. So you might have a hotel that was running at 80% occupancy, and now it’s running at 50%, literally within a couple months, versus an office building that might have to burn off leases over three, four and five years. The net income on a hotel is declining almost immediately over night versus the asset classes that have the longer term leases. Office and retail are struggling, vacancies are going up, rental rates are going down and tenants are going out of business, sublease space is increasing and there is a lot of stress there. But we just thought hotels would hit bottom before office. But that doesn’t mean you can’t find a great office-building buy. We’ve got offers out on a few right now.

GlobeSt.com: Are there any particular types of hotel properties you like more than others?

Carpenter: We’re focused on the upscale luxury. The RevPar on upscale luxury is getting hit harder than the lower-end brands. That’s because there are other services like food and banquets and all of the other revenue generators at the larger hotels. They have less occupancy, so they’re getting hit harder on all of the revenue streams. RevPar is definitely down higher from a percentage standpoint at the lower end hotels, and we think that’s going to continue to trend.

GlobeSt.com: What do you think is the biggest challenge you will face with this venture going forward? Competition from other buyers?

Carpenter: I think there is a lot of capital sitting on the sidelines, a lot of institutional and smart capital. But in this environment there will be less people competing for deals, so we’ll find our fair share of deals. I don’t see too many challenges there. I’m very confident we will be able to source and acquire very good investments.

The biggest challenge is not knowing where the bottom is. My biggest concern is not buying too early and over-paying too early and then having a decline in value. But if you look at every historical asset-class trend, the values go down, and over time, they come back up. This cycle, which is different from the last recessions, with the credit markets having so much trouble, is going to take a little longer to come back. We need to understand that it’s going to take longer.

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