about the growth of lending and it complements are different vehicles … We were just waiting for the right time . In 2019 , we saw the opportunity , but nobody expected what would happen thereafter .
The biggest challenge , especially for our model where we do try to syndicate , is to create that volume of over US $ 100 million a year . It ’ s about ensuring that stream of cash flows without interruption . For that , you need to have a good interest reserve during this period of uncertainty . That ’ s a challenge when you ’ re also talking about a higher rate environment . It ’ s really putting pressure on the assets and the borrowers .
The other challenge is where does that forward yield curve go ? What is our exit ? Can you really factor in a possible refinance , which has us push leverage a little bit lower in this environment … We do see improvement in performance over the next three years and the industry as a whole is expecting full recovery through 2025 . So , there ’ s a runway that allows for there to be a cushion , relative to leverage and higher rates , that we feel good about . But there ’ s that recession aspect and how long it lasts . And , does inflation last and will it drag on demand .
H : When will traditional lenders start loosening up in the sector ? CR : We ’ ve talked to a few of them . I think some , especially regional banks , see it as an opportunity and typically need certain requirements for the sponsors . But the bigger players are really having challenges because they ’ re not seeing the typical recycling . Their books are kind of full and they need to keep bandwidth for some larger
Driftwood Lending Partners last year provided a US $ 9 million mezzanine loan toward the recapitalization of the 180-key Home2 Suites by Hilton Charlotte Uptown in North Carolina .
transactions . I think that this is going to be an acute problem for at least six months .
H : Any particular advice for borrowers ? CR : Plan ahead as much as possible , even if you don ’ t want to bite the bullet . If you ’ re having good conversations or traction , try to push something to get a deal done because the waiting game is going to get challenging . If it ’ s an extra equity injection and the right interest reserve , talk to investors in advance to make sure you lock that up . But it ’ s that lack of timing , expecting something to transact quickly , that may force borrowers into a situation where they have to buy or sell when they don ’ t want to .
H : Bigger picture , how will higher interest rates impact M & A ? CR : It ’ s impacting pricing … We are sitting on a portfolio of a lot of CMBS that has five years left . So , from our side , we ’ re happy to continue because we see
performance improving with no need to transact … In the medium- to long-term , there should be patience because there ’ s a bright light at the end of the tunnel .
H : Any closing comments ? CR : With M & A , traditional players and volumes are a little out of whack , which creates an opportunity for groups that are set up and capitalized the right way and want to continue scaling and growing . That ’ s what we ’ re doing – not just on the lending side . We ’ re finding ways to get the development deals done . We ’ re finding ways to get creative on the value-adds of acquisitions and M & A side . We ’ ve committed to growing the management arm and are actively looking for groups that need to find creative ways to transact without having to sacrifice too much on value … We see the long-term value as we ’ re in a much better position as an industry long term than some of the other commercial real estate sectors that have more existential crises .
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