Newly established alternative asset manager Drill Capital is the latest firm to tap into real estate investment opportunities in the booming US energy sector. In the hopes of capitalizing on the influx of oil and gas workers, engineers and travelers to the Utica Shale formation in eastern Ohio, the New York-based firm closed its first deal last month, investing $5.2 million in a ground-up hotel development. Located in the town of Carrollton, the 83-room hotel will respond to the rising demand for lodging accommodations in the region when completed in the second quarter of 2014.
Drill invests exclusively in assets related to North America’s thriving energy production sector, which brings in $80 billion to $90 billion per year, according to founder and managing partner Farid Guindo. “It’s fascinating how this activity is transforming parts of the US from an economic perspective,” he told PERE. “We’re very excited for what’s to come in terms of positioning ourselves in an area of real estate where we can really benefit from this wave.”
Guindo founded Drill Capital in July, after building his career in the energy sector at commodities-focused investment firm Ospraie Management and in the natural resources groups at Lehman Brothers and Barclays Capital. Currently, his firm is looking to make more investments in the Utica Shale region, where there is a lower barrier of entry than in the more developed shale regions like the Bakken formation in North Dakota and Montana and the Eagle Ford formation in South Texas. “We look to areas that are in the early stage or at the discovery phase of the development lifecycle because that’s really our competitive advantage,” he said.
Meanwhile, older and larger firms have been taking advantage of the real estate opportunities surrounding developed plays throughout the past year. In November 2012, Kohlberg Kravis Roberts purchased 164 acres in Williston, North Dakota—the hub of oil drilling in the Bakken formation—with joint venture partners Pfeffer Capital and CP Realty. This spring, the New York-based private equity giant began developing a housing community to accommodate the influx of new residents. Principal Real Estate Investors has similarly profited from the shale drilling revolution. The firm’s two-tower office project in Houston’s Energy Corridor, currently under construction through development partner Trammel Crow, gained its anchor tenant ConocoPhillips in May.
While staying out of the range of these large firms, Drill has a robust pipeline of four more hotel investments in the Utica Shale region in its sights, including another development scheduled to break ground by the first half of 2014. The firm also is considering launching its first commingled fund, targeting around $25 million and focusing on deals where “big real estate players can’t play.” With these “bite-sized” deals of between $5 million and $7 million, Drill hopes to achieve IRRs of 25 percent or more.
After exhausting opportunities presented by shale plays, Guindo plans to move on to opportunities presented by liquefied natural gas (LNG) production, as he sees the construction of facilities to produce and export LNG to Europe and Asia generating further economic growth in such areas as Louisiana, Maryland and British Columbia in the next three to four years.