Funding options open up

Mainstream lenders look likely to reopen their loan books this autumn, heralding a likely growth in hotel deals. But meantime, a tranche of alternative lenders are taking the opportunity to grow their portfolios.  

Leumi UK, OakNorth and Cynergy are among the challenger banks lending actively in the sector, while other hybrid debt and equity investors are also proactively looking to jump into any opportunities.  

In November, Leumi UK backed Manex Properties with a GBP49m development loan to enable the conversion of a former office building in London into the new 141 room Amano Covent Garden hotel, due to open in 2022. The funding replaced an existing loan on the asset, as well as providing construction finance.  

And in April, Leumi refinanced debt for Starwood Capital on its Grand Hotel project in Birmingham. The GBP27m loan will cover the 185-room asset through opening and stabilisation of operations. Also that month, funding was agreed with L+R for an acquisition into its Atlas portfolio, the Holiday Inn Express Bicester. It was the first time L+R had worked with Leumi, and the pair are expecting to do further business as the group seeks to grow its portfolio.  

Louise Gillon, head of hotel finance at Leumi UK told Hotel Analyst: “High Street banks are largely still not lending, meaning there is more demand for boutique lenders like ourselves. Alternative lenders, mezzanine providers and debt funds, appear to be actively filling some of the gap but obviously on very different terms.” 

Development finance holds no fears, said Gillon: “We have the stoic expertise to know that hotel financing requires a long-term view. Hotel development projects normally take three years to stabilise, and it’s important to understand that growth journey, especially in the first two years. All development projects are different and therefore need a bespoke approach.” 

“In London we are focusing on hotels that have either been maintained very well or possess unique selling points that give them an edge over other competitors in the market. Hotel assets that lack capex spend will likely not prove to be robust investment opportunities in the long-term.” 

OakNorth has been actively lending, too. It recently advanced GBP9m to Valary Hotels, to fund its acquisition and refurbishment of the former Hilton Warwick/Stratford, which will relaunch under Marriott’s Delta flag. And it has backed Bain Capital Credit and Orka Investments in their acquisition of the Park Lane Mews hotel and 17 apartments in London, providing a facility that will support the refurbishment and repositioning of the assets.  

Alastair Carmichael, investment director at hybrid investor-lender HB Titan is seeing conversations move from speculative to active deals. “There is stock available, and people are willing to trade – and they’re starting to see the new normal.” 

“We’re interested in all parts of the hotel market – the view is that there’s a different recovery process, depending on where you are in the market.”  

“We’re generally seeing debt opportunity, in recapitalisation, and normally that recap is focused on raising money for acquisitions, or for sorting out the existing debt structure.”  He expects the last quarter to be more lively: “We expect lenders will start to apply pressure to their stressed customers, from this autumn.” 

Cynergy Bank, a UK challenger bank established in 2018 by entrepreneurs, is positioning itself to grow its activities out of the back of the pandemic. “We’re secured lenders, lending for acquisition, capex and refurbishments and while we haven’t lent on a hotel development yet, we do fund developments in other sectors,” said Steve Crosswell, commercial relationship director. “We like to back a borrower that is active, rather than simply refinance existing loans.” 

Cynergy gave clients covenant waivers, and then worked actively to use the government-backed CBILS programme and its follow-up, to support businesses: “We gave them that immediate breathing space.” As a result, the bank has seen few problems with loans: “The provision number is very small.” 

Gillon sees a solid degree of pragmatism already in the market: “We’ve actively financed new acquisitions over the past 12 months, so it’s clear that buyer and seller expectations can be aligned on well positioned assets. However, we’ve seen assets needing greater investment being slow to transact and as such there still appears to be a discrepancy between the two sides as to what an appropriate ‘cost of risk’ is at present. Certainly, the large discounts in sales prices anticipated have not been seen to date and the high level of investor appetite has supported values in many instances.” 

Andrew Harrington, founder of consultancy AHV Associates, is convinced of the market’s strong return: “On the revenue side, the key point is that when restrictions end, things recover quickly. And the other interesting thing is that MICE business is coming back. That’s the reality – it’s a V shaped recovery.”  

“And transaction volume is increasing – the problem is stock. As long as buyer expectations are right – and things have changed a lot in the last six months – deals will get done.” 

“With hotels and hospitality now opened up once more, we’ve a decent body of trading evidence building up,” said Cynergy’s Crosswell. “Over the next weeks and months, I think most lenders will move away from government-supported funding, and move to conventional term loans.”  

Crosswell expects to see few businesses pushed to restructure. “If a bank has supported a borrower this far, they should be able to survive. However, if you are a leaseholder who hasn’t come to an agreement with your landlord over rent, you could have issues.” 

The other funding phenomenon, said Harrington, is green finance, which is growing in prominence. With investors keen on accredited green finance products, lenders can enjoy a 15-20 basis points reduction in the cost of money.  

“In the last six months, there’s evidence that people are reacting against greenwashing. But if you can demonstrate a commitment to ESG, and energy efficiency, then there’s a huge discount on funding costs.” AHV estimates that Whitbread’s recent two tranches of green bonds are enjoying a 70bps and 130bps cost advantage over standard finance costs.  

And with corporates interested in frequenting hotels that demonstrate strong ESG credentials, Harrington added: “You have a wonderful scenario for hospitality”, with higher room rates and lower funding costs. “I think the yield difference will persist, we’re going to see much more of this – I do believe the best is yet to come.”  

Harrington said he believes mainstream lenders are starting to reopen their new loan books: “I think September will be when things really start.”  

HA Perspective [by Andrew Sangster]: Louis Heren, a legendary former foreign correspondent at the Times newspaper, said in his memoirs that he based his interviews on the question: “Why is this lying bastard lying to me?”. It is a useful mantra in today’s world of PR spin. 

Whenever I speak to relationship managers from the high street lenders, they always say something along the lines of: “We are open for business”. And yet when I speak to their potential clients, they report that new money is not available. There is, what might be politely termed, a “disconnect”. 

Despite entering this downturn in a much stronger state than in 2008, mainstream banks have shown little appetite to lend. This is not just about a lack of ambition on their part, but more a reflection of the external pressures they are feeling to support existing clients while maintaining a robust balance sheet. 

Some new money has been put out but it is clear that the focus is on supporting existing clients and not getting overly exposed with new lending. Thus, the pro-cyclical behaviour of our big banks continues. Rather than lend at the bottom of a business cycle, external pressures force them to resist lending. Only at the top of a cycle, the worst time to be entering the market, do these pressures tend to ease and allow more risk taking. 

Fortunately, there has been a growth of alternatives. Challenger banks, direct lending funds and insurers / pension companies have entered the market. They are not direct replacements for the high street lenders and the pricing is typically much higher. A number of borrowers Hotel Analyst have talked to have used terms such as “eye watering” to describe the costs of some of these loans. 

But money is available, albeit at a price, and generally much more abundant than it was in the last recovery following the Global Financial Crisis. And the higher priced debt can usually be refinanced later as the market eases. 

The US is, as usual, leading the way in creating a structured finance market for lending. Blackstone and Starwood Capital, for example, have put together a huge commercial mortgage-backed securities offering of USD4.65bn to fund the acquisition of Extended Stay. 

And this CMBS play is not alone. Bloomberg reported that the first half of 2021 had the highest CMBS sales for at least five years with USD66.2bn worth of debt pumped into the real estate market, a good portion of it towards hotels. This is despite hotel loans accounting for over 22% of delinquencies within the top 25 metropolitan areas of the US, according to Moody’s. 

CMBS are also gaining traction in Europe. For example, Goldman Sachs announced in June that it was refinancing a portfolio of Dutch office and mixed-use (including one hotel) through a EUR220m CMBS called Bruegel. 

There is currently a trend in the US for single borrower and single asset CMBS but this will no doubt evolve. What is clear is that structured finance is going to play an ever increasing role in the growth of the hospitality and operational real estate sector. 

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