Signs of distress start to appear

Those active in the accommodation sector are watching for signs of distress and opportunity, as the effects of the pandemic wash through hotels and allied niches.  

While activity has been low to date, two recent restructuring moves have indicated what could be the start of a more active season. Co-living brand The Collective has seen its UK businesses placed into administration, while UK listed hostel brand Safestay is undertaking a review, following a tentative takeover approach.  

The Collective appears to have been troubled by a combination of a cashflow hit to its operating businesses, and Covid delays and financing issues forcing delays on its development pipeline.  

In June, The Collective called in Credit Suisse for a strategic review. The company had three operational properties, two in London and one in New York; it also had major commitments to a variety of pipeline projects including seven sites in London, five in the US and one in Dublin.  

The company’s operational sites had suffered through the pandemic, with lower occupancies and a need to pivot into new markets as demand for shared space living waned.  

The administration covers UK parts of the business, with assets outside the UK held separately. Among the liabilities the company was struggling to service, it is reported, was a GBP140m loan agreed Immediately prior to lockdown, in February 2020, with GBP87m from Deutsche Bank and GBP53m from UK lender GCP.  

“It is incredibly disappointing that a sale of the group has not been achieved,” said administrator Matthew Callaghan at FTI. “We will continue to work with the various stakeholders to ensure a smooth transition.” 

GCP has already issued a statement saying that, alongside co-investors and an operator, it is proposing an acquisition vehicle to take on six assets – the three operating units at Old Oak Common, Canary Wharf and the Paper Factory in New York, and three development projects in London. “As part of the proposed transaction, some of the existing debt from the Co-living Group would be assumed by the acquisition vehicle. This, together with the funding provided to the acquisition vehicle to fund the credit bid, is intended to be repaid as assets are disposed of.”  

In the US, Gamma Real Estate, a lender to one US development project, in Williamsburg, Brooklyn has appointed Cushman & Wakefield to sell its USD49m loan interest in the scheme, as The Collective has fallen behind on payments.  

The Collective had 1,623 operating units and an ambitious development pipeline of nearly 7,000 units across the UK, US, Ireland and Germany. The 546 room Old Oak Common project in west London was The Collective’s first development at scale. In 2017, the building was acquired by Red Door Ventures, an investment vehicle owned by Newham Council, in a deal understood to have valued the building at close to GBP120m.  

In autumn 2019, DTZ Investors announced a partnership with The Collective, to establish a co-living fund. The plan was to raise around GBP650m for the COLIV fund, growing it to around GBP1bn over a decade. The Collective would act as asset and property manager for assets held, with the fund backing a 222-room development in Harrow, west London to start. DTZ and The Collective both put in GBP10m, alongside a further GBP50m contributed by seed capital investors.  

Jo Winchester, executive director, co-Living and student accommodation at CBRE, told Hotel Analyst that The Collective’s issues do not suggest there’s any fundamental issue with the co-living sector. “I don’t think the model is fundamentally broken – there is a huge number of people who are single person households, without much choice – co-living is creating an additional choice for them.” Operational assets are trading well and seeing strong demand, with occupiers enjoying flexible tenancy agreements.  

Winchester noted some UK planning authorities are still wary of the concept, while The Collective did experience challenges in obtaining hotel consents on large projects.   

At Safestay, the board has begun a strategic review after revealing that it had received a “very early stage and highly conditional approach”, effectively triggering a formal sale process for the London listed company.  

Consultants PwC have been appointed to advise on options. Safestay chairman Larry Lipman commented: “We recognise that this is a natural point, as we relaunch the business post covid, to undertake a strategic review, in order to maximise value for all shareholders. This process will reveal whether there is additional value for shareholders compared to the upside we believe we can deliver.” 

The company reported that, since reopening its properties across Europe from May, it has seen a growing volume of individual and group bookings, giving confidence that trade would return to previous levels. But with mandated closures, and a fall in business as covid-19 shook the confidence in sharing rooms with other travellers, Safestay was forced to take drastic action to shore up its finances.  

Two property assets were sold, releasing GBP16.8m, as the company did what it could to reduce overheads during the pandemic. The largest of these sold in March 2021, when Safestay accepted a GBP16m offer from hostel operator a&o for its Edinburgh site, which it owned freehold.  

Safestay launched on London’s AIM junior market in 2014, with shares opening at 60p; but since mid-2016, have consistently traded below that level. Revenues of GBP4.02m in 2015 grew to GBP18.4m in 2019, as the company added hostel sites across Europe, many of them leased. As recently as March 2020, it completed the acquisition of sites in Bratislava and Warsaw, at which point Safestay had 21 operational hostels across Europe.  

HA Perspective [by Chris Bown]: The Collective looks to be the first high profile casualty in the broader accommodation space, to fall foul of the pandemic. Having built the brand from a solid base, it looks to have been caught out by being thinly stretched on an aggressive development pipeline. With lenders suddenly nervous, building work delayed by Covid, and operating revenue streams temporarily substantially down, debt servicing became a challenge.  

For the future, it looks likely that the sites may be split up, some potentially repurposed as student accommodation – and maybe the brand will survive too. GCP, which is looking to take control of The Collective’s UK pipeline, has reportedly received lots of indications of interest. But the big US adventure looks likely to be at least much reduced in pace, if not written off altogether.  

Safestay’s issues have also been to do with its expansion efforts, though the cashflow hit to hostel operators was even more brutal than that dished out to hotels. The company had to sell its few freehold assets to maintain its cashflow and pay rents, and has at least retained its network of European sites, ready for the time when carefree youngsters can once more jump on a budget flight and enjoy travel. 

One consultant suggested the most likely bidder could be Safestay’s major shareholder Pyrrho Investment, which holds 29.42% of the stock and could therefore see the moment as an opportunity to exploit a still soft share price ahead of recovery. He added that, with most of the sites being leasehold, there was little in the way of a property asset play – and no obvious rivals who would welcome splicing Safestay’s European presence to theirs.  

Management insist their tough decision of selling the company’s prime asset in Edinburgh was necessary, but also delivered sufficient funds to put Safestay in a position to grow again. Where will best value lie?  

Additional comment [by Andrew Sangster]: If any investors thought that the mid-stay and long-stay market was fireproof, the administration of The Collective should serve as a wake-up call. 

Back at the start of the pandemic and associated lockdowns, The Collective looked to be well placed to be a survivor. One of its lenders GCP Asset Backed Income Fund said how the was in negotiations to house key workers and looking at reallocating short-stay rooms for long-stay use. 

This is precisely the sort of flexibility that is supposed to give accommodation offers like The Collective greater resilience than hotels. GCP said back in April 2020 that the company was in a strong cash position with the ability to weather the drop in occupancy. Alas this proved not to be the case. 

It is still the case that, on the whole, extended stay offers a more resilient business model, assuming whatever challenges come next follow the same pattern as this last one. It might not be so. And of course, even if you pick a more resilient segment, there remains execution risk, particularly in development. 

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