Tactics: Investors of Distress

Photo: Jason E. Kaplan
Paul Brenneke, founder and executive chairman of Sortis Holdings

The investment firm that sees opportunities in companies made bankrupt by COVID-19.

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For Paul Brenneke, founder and executive chairman of investment firm Sortis Holdings, the COVID-19 pandemic has created “once-in-a-lifetime” investment opportunities. The firm launched a rescue fund to capitalize on the economic fallout from the virus. The fund targets distressed companies, particularly in hospitality, retail and office.

Recent high-profile acquisitions include Sustainable Restaurant Group, the owner of Bamboo Sushi, and Rudy’s Barbershop. In this interview, Brenneke discusses what opportunities he sees in businesses hit hardest by the pandemic.

This interview has been edited for length and clarity.

You bought Sustainable Restaurant Group, the owner of Bamboo Sushi restaurant, when it was in bankruptcy. Why do you see this restaurant having long-term viability?

We focus on great brands that have cult-like followings and that we think can be successful coming out the other side [of the pandemic]. Sushi has also proven to be really good to-go and delivery food. A lot of cuisines do not travel well. Sushi travels well because it is room temperature and it doesn’t get too cold. It is also something people don’t make at home. We found that segment of the business to be very robust.

What changes do you plan to introduce to the Bamboo Sushi brand?

Small changes. The brand is great. They just got caught at the wrong time trying to expand outside of the Portland market right at the beginning of COVID. They were trying to open four restaurants, starting in December. They got three of them open and one is under construction.

It is poor timing more than anything. Now we are in there, and we can fine-tune things to be more efficient.

What opportunities do you see for acquiring further restaurants hit by COVID-19?

There are a couple of others we are in conversations with — either in bankruptcy or pre-bankruptcy. We really focus on the quality of the brand pre-COVID and then what the business plan is during COVID. Not every restaurant can do to-go food that makes them viable.

Outdoor dining in the Northwest was great for a few months. That season is ending, so you have to have other plans to get you through the winter. Those are the things we are looking for when we are talking to people.

I have been really surprised at how creative people in the restaurant sector have been and the ideas they have come up with: everything from selling products in the grocery store to selling more grocery-like goods out of their restaurants.

1120tactics2Paul Brenneke, founder of Sortis Holdings   Photo: Jason E. Kaplan

How do you see restaurants influencing real estate development?

I am concerned about placemaking in real estate. A lot of developers, when the market is good, get fixated on building more space. I am fixated on creating interesting places. That makes the real estate more successful.

There are all kinds of retailers thinking of incorporating restaurants into their stores. We are involved with Submarine Hospitality in Portland, which owns Ava Gene’s and Tusk. They are involved with a project with Snow Peak, an outdoor retailer, which just opened a flagship store in Portland that has a restaurant in it. They are making the restaurant experience part of the retail experience.

It is a really great idea to show how retail and restaurant go together; it is a destination that people want to come to. Once upon a time, the department store was like that; they had food and grocery — like the Harrods model. A lot of department stores in the U.S. have more commoditized goods in their square footage. They lost that destination experience.

What opportunities do you see for investment in the hotel sector?

Hotels are another segment that I think will be ripe for investment. We are getting close to our first two hotel deals. They are running very low occupancy now, but they are in great locations and are great properties that will be great post-COVID.

We are very focused on properties and brands where we think there is a business plan that will come back faster than others. One end of the spectrum is leisure travel — there were some hotels that were booming over the summer because of people trying to get out of the cities. Those will come back faster than commoditized, business-traveler and convention-centric hotel businesses.

Those will take two to three years [to recover] because that kind of travel takes a year to plan.

The hotel deals we are working on are with a company called Lighthouse, which is a technology-driven management company. Everything they do is contactless: They don’t have a front desk or room key or any of that experience. It is more in line with Airbnb-type thinking.

I can see that becoming what happens to hospitality coming out of this; it drives down labor costs and is a different operating model than a hotel.

In May the rescue fund was used to purchase Rudy’s Barbershop. What attracted you to that business?

It is a great brand. The founders created Ace Hotels also, which is another incredible brand. Rudy’s has international exposure. The products are in all the Ace Hotels nationally and internationally. That is a good business in good times. It is profitable. We believe it will ultimately be a 200- to 300-store operation given time and the right team.

We believe we can take the product business online and that it will be bigger than the salon business.

What will be the most profound impact on real estate as a result of the COVID-19 pandemic?

It will have the biggest impact on retail. The trend was already going in the wrong direction for retail. COVID has accelerated this rapidly. We have worked for years on more interesting and experiential retail — things you can’t shove through the internet — which will drive retail in the future.

That means entertainment, food. Retailers that have commoditized goods that you can find on Amazon are probably not going to survive this.

What is the future of office real estate?

You have two schools of thought: One is that COVID has changed the world and nobody is going to work in an office again. The other side is that things will pretty much go back to normal. I am in between. I lean toward the idea that things will look more normal in the future.

We were already trending toward a more flexible work environment. Technology has allowed us to do that. This has got people thinking about what can and can’t be done in that flexible work environment.

I am a huge believer in the interaction that happens in the work environment. As we come back to work over the next six to nine months, it will hurt some landlords. But I don’t think the office will see the kind of pain we are seeing in restaurants and hospitality.

I don’t think the changes will be that dramatic. Having everyone work out of their house forever is not a good long-term solution.

What potential do opportunity zones offer in a post-pandemic economic recovery?

There is not much financing out there for ground-up development. It will be challenging in the near term to do much in an opportunity zone. There may not be financing for 9 to 10 months. If you look past that, opportunity zones are a great program.

We are selectively looking for a deal or two in an opportunity zone that will work post-COVID.

Do you see more investment opportunities outside of urban areas like Portland?

I am just built to be more urban-centric. The suburbs are a little too commoditized for my taste. I don’t think I can add a lot of value in suburbs. There are a lot of chain businesses, less creativity.

Right now, the close-in neighborhoods are thriving — abnormally so — because all the office workers who can’t go downtown are staying in their neighborhoods. The urban cores will have challenges. They will come back. There is too much they have to offer.

Of all the cities we are involved in, Portland will have the most challenges. Seattle has Amazon, Facebook, Google, Microsoft. They have a lot of gravity to pull people back down. Portland is built differently. Our bigger companies — Nike and Intel — are not downtown.

A lot of smaller, creative businesses are downtown and they got hurt. Portland’s downtown has been most impacted by cultural challenges. The way Portland is built means it will take time to come back. But San Francisco and Seattle will bounce back and will look much more normal by next summer.

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