UK portfolios on the block

UK brokers are set for a busy first half of 2020, as a series of major hotel investment deals come to fruition. The portfolio packages have set the scene for a return to more normal levels of transactions in the sector, as investors look to a strong post-pandemic market.  

However, the three major packages on the market are testing investor resources. Debt funding remains expensive while mainstream lenders are busy handling government-supported loan programmes, and shy of taking on further hotel sector exposure. Newcomers to the lending space are making debt available, at higher rates, while private equity debt is also on offer for a price.  

Carine Bonnejean, managing director of hotel consultancy at Christie, reckons there is more than GBP1bn of assets currently on the market. “There is a lot more activity in the market, and there’s a lot of buy side advice going on too.” Among Christie’s current instructions is the sale of the Qbic hotel in east London, which has attracted strong interest. Being offered free of branding, Bonnejean says the buzz is indicative of the strong desire brands have to secure a goodsized London hotel.  

“I suspect the three portfolios will go at sensible prices – the issue will be debt,” said Andrew Harrington, founder of AHV Associates.  

First to find a new owner will be the Cerberus portfolio of UK Holiday Inns, named Project Horizon in the market. The portfolio is the balance of a portfolio of 18 hotels that Cerberus bought for GBP225m in 2015, acquiring the package from a joint venture between Lehman Brothers Real Estate, Canadian property company Realstar and Singapore-based investor GIC Real Estate. On purchase, Interstate Europe were operators of the hotels. 

Best offers are understood to be in, at a level of around GBP180m, with final round bidders said to include Henderson Park, Apollo, Patron and Marathon.  

Cerberus revealed its plans to sell up in 2019, declaring it would dispose of four assets from the portfolio separately. One of these was the Edinburgh City West hotel, sold in early 2020 to London & Regional’s Atlas Hotels subsidiary for renovation, extension and conversion to the Holiday Inn Express banner. It also sold the Holiday Inn Maidstone-Sevenoaks to Orida Group, in a deal revealed in late 2019.  

Obtaining bank financing in the current market is a challenge for buyers. AHV’s Harrington warned that the big four banks are not, for the moment, lending to new customers and are unlikely to be actively back in the market for six months. The alternative is to draw funds from the challenger banks, though at higher rates. Cynergy is returning to the market, and others such as Metro will follow, said Harrington: “These guys are going to be very busy.”  

“There’s a lot of alternative lenders, but the cost of money is double digits,” noted one agent to Hotel Analyst, privately. He added that private equity players are also moving into debt offerings – as has been seen recently in Queensgate Investments’ refinancing, where Apollo has contributed close to EUR100m of additional debt funding. With a mandate to deliver promised returns, such funds have to look to lending: “If you’re not buying, at least you’re lending.”  

Bonnejean at Christie confirmed: “There’s a lot of debt funding activity. It’s one of the challenges, but there are sources of debt.”  

Next up is the QHotels portfolio, being sold by accountants PwC, on behalf of investor Aprirose. The package, which is currently being checked out by potential bidders, could attract offers of around GBP200m for a portfolio of 19 properties, many of them edge of town or resort-oriented. In total, 19 properties are included, of which 17 are subject to long ground leases, with two having occupational leases.  

Aprirose bought the QHotels portfolio, numbering 26 properties, in 2017 for GBP525m. It subsequently sold the 312 room Midland in Manchester, for a reported GBP115m in 2018, to Scandinavian landlord Pandox. The same year, it hired Tim Shearman to head up an internal hotel management platform, Almarose, with Kew Green on hand to help get the machine up to speed.  

Subsequently, five of the properties in the portfolio were rebranded to Hilton’s DoubleTree flag, and two became launch properties in the UK for Marriott’s Delta brand. The portfolio on offer includes these, but is understood to exclude another trophy asset, the Queens Hotel in Leeds, which is subject to major renovation.  

Mainstream agents are consoling themselves with the throught that the brief originally saw PwC going to market seeking a strategic partner, but has now morphed into a sale. “It’s such a mixed bag,” commented one agent, “it’s almost certainly a break-up.” They also noted that Tripadvisor comments suggest significant capex will be needed.  

And a third major portfolio on the market comes from Shiva Hotels, which is looking to sell a package of five operational properties under Hilton flags. Four of the five are around London: Hilton Heathrow T5; DoubleTree London Excel; Curio Lincoln Plaza; Hampton Waterloo; while the fifth is the DoubleTree York.  

Shiva will use the proceeds to support a new programme of London hotel development, with at least three pipeline projects already announced.  

Both the QHotels and Shiva properties are subject to ground lease deals, which will not only depress sale prices, but are also likely to complicate sale proceedings. Such contracts give third parties – typically funds – a guaranteed annual payment over a long term, with liabilities remaining even in periods such as the pandemic, when property incomes have been minimal or non-existent.  

“It’s a real test of ground rents,” commented one agent. “The real challenge is when you go to sell them on to hotel buyers.” 

HA Perspective [by Chris Bown]: 2021 is off to a good start – but will pricing be stifled by a lack of cheap bank lending? Or will that simply mean best offers come from the private equity players? Either way, deals look to be getting done, and with the likelihood of further distress-driven opportunities over the coming months, transaction volumes for the year are set to be back up there.  

And so to ground rents – financial engineering, of the sort right now that looks like it might have a wobbly bearing. At 2018’s Deloitte hotel conference, Andreas Scriven, the consultant’s head of hotels, delivered a gentle warning about ground rent deals: “Some of the structures you’ve seen put in place will unravel in the next two or three years.” With a liability to pay a sub-rent over many years to come, the QHotels and Shiva deals will give an insight into the extent to which the market writes down their impact. 

Who will buy? Both the Horizon and Shiva packages offer blue chip branded stock, with the expectation of solid income returns, and the potential for some upside. QHotels could be broken up, and may offer opportunities for a brand such as Warner Leisure, which has previously noted its desire to expand – and under new owners Blackstone will be looking to make a mark.   

There could be some other big opportunities as the year unfolds. As an exmple, one agent suggested that Queensgate, which recently refinanced its portfolio, is likely to offload its major London redevelopment opportunity, the Kensington Forum, having fought successfully for planning permission. Perfect for an investor with deep pockets, and a longterm belief in London.   

Additional comment [by Andrew Sangster]: Deloitte this week published its latest edition of The Hotel Sentiment Survey. Conducted between 24th February and 10th March, the survey of 101 senior figures in international hospitality (65% UK and the rest mostly continental European) found most believing that lockdown disruption is going to last well into 2022. 

Respondents split 28% into first half of 2022, 19% second half and 24% into 2023 and beyond. Just 29% believe disruption will end at some point this year. This is a shift further back from two earlier surveys, in October and July 

Expectations of a return to peak performance has also shifted further out, with 90% now believing there will be no return to previous peaks until 2023. 

So far, so much bad news. But transactions and expansion has now emerged as the second priority over the next four weeks, only below cash flow, and above stakeholder relationships and financing / lender considerations. The hospitality sector is gearing up for activity despite the immediate challenges and the expectations of pain extending. 

The key difference between the latest survey and the previous ones is that vaccines are now a reality and the range of options of an exit from the impact of lockdowns has narrowed considerably, even if the narrowing has been towards most people’s worst– case options. 

The current period will continue to be challenging. Even though it is possible to “look through” to 2023, the exact extent of the pain between now and the point of full recovery is still tough to read. There is a huge amount of “noise” in the market, with many contradictory signals. 

So far, there has been little sign of distressed pricing. But there will be some, particularly for unloved assets and those where there remains uncertainty about long-term hangovers from the pandemic 

In the US, what is reported as the first deal by a US Reit has been announced with a discount of approaching 25% on what it would have been expected to sell for in 2019. The hotel in question was a prime asset, the 448-room Hyatt Regency Austin in Austin, Texas. The USD161m in cash paid by buyer Host Hotels was at a 10% cap rate and 8.8 times EBITDA multiple based on 2019 numbers. Hyatt will continue as manager of what is a classic “big box” meeting-orientated property that had recently undergone significant renovation. 

The weight of capital waiting to be deployed means that prices in general are likely to remain robust. But clearly, significant discounts are out there. 

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