Westfort Advisors & Newmanor Law Roundtable

Navigating the new property finance landscape

Westfort Advisors & Newmanor Law co-hosted a roundtable event last week, with a group of lenders, borrowers and insolvency practitioners to discuss the property finance landscape and the challenges and opportunities presented by the current market.

With values in retreat and lenders remaining cautious about the future trajectory of the market, many borrowers looking to refinance are facing a ‘funding gap’ which needs to be plugged by new equity or whole loan solutions. Clearing banks are restricted as to how much leverage they can offer due to interest cover ratios and stress testing parameters, and consequently challenger banks and debt funds are becoming increasingly busy and able to play in a space lower down the risk curve.

Whilst there is general consensus that the base rate has peaked – and may even come down slightly earlier than expected next year (although a number of attendees thought the drop of 0.75% by next summer seemed optimistic), there are still concerns about the economy tipping into recession and the impact of the ongoing crises in geopolitical landscape. Although the number of UK company insolvencies is on the rise, it was pointed out that this is, to some extent, a belated legacy of the pandemic financial ‘safety net’ being removed. As such, the volume of insolvencies – even though it is spiking at present – is actually almost on a par with the long-run average. Also, aside from the few well publicised enforcements on some big ticket assets, the feeling was that we are currently not see a lot of secured lender enforcements. However, this is expected to gradually change and particularly with development sites the situation is acute with around 6,000 contractors in very critical financial health.

The clearing banks are showing restraint in terms of enforcement and may find it more appealing to sell loans to funds who are more aggressive in their approach with defaulting borrowers.

Lenders are conscious that cash for discretionary spend has reduced. Retail and leisure assets are being viewed as essential and non-essential through the prism of Covid. Residential, student and health-care are still seen as solid sectors. The office sector however is facing particular stresses not least because of the new Minimum Energy Efficiency Standards (MEES) requirements around energy efficiency. The cost of retrofitting properties is often economically unviable but without repositioning these assets, many secondary offices will become stranded.

There was discussion of what the next move will be from global investors who continue to raise capital and could be poised for a spate of value-buying across the UK property sectors. In tandem with this, it is widely expected that new debt funds will proliferate and play a key role in transitioning UK property into the next phase of the cycle.

Whilst “Survive until ‘25” is becoming a common mantra across the property sector, it was agreed that neither investors or lenders will just be able to sit out the current difficulties and will have to be proactive in their approach. The key will be full circle advice whereby parties obtain early advice and keep their discussions going between all stakeholders.


Westfort Advisors arranges £45m bridge loan to facilitate acquisition of Manchester’s historic Corn Exchange

Specialist lender Cohort Capital has financed the purchase of the Corn Exchange in Manchester, which was recently acquired for an undisclosed amount by a private investor advised by Westfort Advisors.

The £45m bridge facility was secured against the 141,000 sq ft, grade II listed building as well as a portfolio of other mixed-use UK assets. The market-clearing, short-term facility allowed the buyer to leverage their investment at very short notice, affording them the flexibility to procure senior, term-loan financing later this year.

Built between 1896-1903 and most recently redeveloped in 2017, The Corn Exchange is an iconic former market hall in the heart of Manchester’s city centre, comprising a restaurant and leisure venue on the ground, lower ground and first floors, and an aparthotel on the upper floors.

The property has 18 leases with an average lease term of 17 years and, whilst largely stabilised, still offers some scope for improving occupancy and tenant mix to further enhance value.

Richard Herring, co-founder at Westfort Advisors said:

“This is a fantastic outcome for the investor but also for Cohort, both of whom managed to weather some severe headwinds – not least September’s mini-budget – while managing to remain pragmatic and flexible throughout the process. Key to the deal’s success was the diversity of the collateral package, the quality of the Corn Exchange, and the calibre of the sponsor. Special thanks should be paid to our legal advisors at Farrer & Co and to Matt Thame at Cohort, who were instrumental in getting the deal across the line.”

Matt Thame, Founder of Cohort Capital said:

“It’s been an eventful year for the private debt markets. But we have definitely seen an increase in situations where lenders have not performed on their initial debt terms. With this deal, we were able to deliver with certainty and speed – which in the current market goes a long way, especially with acquisition opportunities which have real deadlines attached. Having a reputable introducer and advisor like Westfort assisting with the closing process made the underwrite much more straightforward. Now the ‘Goldilocks’ period of low inflation, rates and growing assets prices has come to an end, having an experienced debt advisor who introduces quality business but also exits existing loans to term debt couldn’t be more important – for lenders and borrowers alike.”


Node closes €30m refinancing of Spanish portfolio

Urban living owner and operator locks in a new facility for collection of boutique residential assets

  • What Node refinances portfolio of residential assets in Spain
  • Why DRC Savills Investment Management provided fresh loan that also includes a capex facility
  • What next Node currently has a pipeline of over 7,000 beds across Europe

Node, the urban living owner and asset manager, has refinanced its Spanish portfolio of urban residential rental assets and ancillary retail with a new facility, React News can reveal.

The loan, structured as a refinancing and capex facility, was provided by DRC Savills Investment Management (DRC SIM). The deal was arranged by Westfort Advisors.

The portfolio includes more than 300 beds in historic townhouses located across city centre locations. Node will continue to operate and further enhance the product after partnering with DesignAgency on the concept and interior design.

Anil Khera, NODE said:

“We are excited to continue our long-standing relationship with DRC and its founding partners, as we prepare for our next chapter of growth”

Mark Gibbard, principal at DRC SIM, said:

“The team is thrilled to have supported Node as they grow their footprint of assets across Spain. This deal underlines DRC SIM’s ability and commitment to deploy our debt strategies into strongly performing real estate assets with experienced sponsorship, such as Node.”

The portfolio refinanced by DRC SIM represents Node’s boutique offering in Spain. Node currently has a pipeline in excess of 7,000 beds across Europe, which includes more than 3,000 units in Madrid, Barcelona and Bilbao with larger-scale development assets opening from 2024.

Richard Herring, Westfort Advisors, added:

“Given prevailing challenges in the capital markets, the successful closing was testament to the attractiveness of the financing terms, the quality of the portfolio and the exceptional motivation and pragmatism demonstrated by all parties.”


Westfort Advisors Hire Former Aviva and LGIM Originator, Steve Boyle

Westfort Advisors has today announced the appointment of Steve Boyle as a Director, as it continues to expand its Debt Advisory capability across UK and European markets.

Steve has 20 years of origination experience, having previously worked with Aviva and LGIM, before moving into client-side debt advisory in 2017, where he has successfully leveraged his underwriting expertise and in-depth market knowledge.

Steve has a wealth of experience financing commercial assets across all sectors and across the capital stack; he will play a major role in maintaining Westfort Advisors’ partner-led and technically focussed approach.

So far this year, Westfort Advisors have advised on c.€450m of debt transactions across Europe. Steve’s hire follows the appointment of Joshua David in June, who joined the firm as an Analyst.

Steve Boyle said:

“I am delighted to be joining Westfort. I am sure my experience and knowledge of the market will neatly supplement an already top quality team, who have been busy in 2022 delivering debt advice on property across Europe.”

Richard Herring, Co-Founder of Westfort Advisors said:

“We are delighted to welcome Steve to the Westfort team. Steve’s track-record and experience will provide invaluable insights to our clients as the markets continue to move with the geopolitical landscape. Steve’s knowledge and perspective will further enhance our service offering and will no-doubt be significant in delivering the next phase of our business growth.”


Westfort Advisors arranges financing of UK regional hotel

Westfort Advisors have negotiated a market-clearing facility to refinance the acquisition and refurbishment of the Staverton Park Hotel in Northamptonshire.

The hotel is owned by Zetland Capital Partners and offers 247 rooms and a PGA European-tour standard 18-hole golf course. It was previously operated as a DeVere but, following the acquisition in 2021, has been rebranded as the Staverton Park Hotel & Golf Club. The competitively priced, stretch-senior loan will refinance Zetland’s initial acquisition and facilitate a significant capex/refurbishment plan across the Hotel and Golf Club.

Nicholas Kalamaras, Head of Hospitality & Leisure at Metro Bank said:

“It was a real pleasure working with Westfort Advisors. The transaction is an excellent one for the Northants county, which will see the owners Zetland Capital providing significant investment into one of the key hotels and golfing complex’s in the area. We look forward to seeing the hotel refurbishments being completed.”

Deepak Drubhra, Co-Founder of Westfort Advisors said:

“Hospitality investors are seeking to optimise returns from operational assets and lenders in that space are being competitive and able to support projects that have strong fundamentals. This funding will allow Zetland to unlock the hotel’s potential as being a leisure destination in the Northampton area and we thank Metro Bank for their support and execution on this market leading financing package.”


Westfort Advisors arranges €53.5m facility for Threestones Capital with Societe Generale

Threeestones Capital has secured a €53.5m facility from Societe Generale to fund the acquisition of six nursing homes in Germany and to refinance two nursing homes in Spain for its TSC FUND – EUROCARE IV investment vehicle. The facility was arranged by Westfort Advisors and is the first cross-border CRE debt financings in the nursing home sector of 2022.

The transaction increases the fund’s portfolio by 800 beds, bringing its current total to over 6,500 beds and nearing €2b AUM The properties are all leased on long term leases to leading care operators.

Threestones Capital, Beka Pipia, Portfolio Manager said

“The specificities of healthcare real estate have guaranteed significant resilience to the asset class during these unusual macroeconomic times, characterized by high inflation, slowing growth and a commodity shortage. We expect the demand by large institutions for the segment to continue to grow as they get increasingly allured by the inflation-indexed cashflows and affirming demographic trends.”

From Societe Generale, Fernando de Galainena, Head of Real Estate Structured Finance Spain stated:

“We are delighted to have accompanied Threestones Capital in this financing. This is the first transaction of Societe Generale with Threestones Capital and our idea it to continue supporting them with their healthcare strategy around Europe.”

Deepak Drubhra, Co-Founder of Westfort Advisors said:

“Our team is delighted to work on this transaction with Threestones to deliver a cross-border financing solution. We are confident that this structure will enable them to increase their portfolio across Germany and Spain. We are also grateful to the Societe Generale team for their support and pragmatism throughout the process, and execution of a market clearing financing package.”

Threestones Capital were advised by K&L Gates (Legal, Germany), Pavia-Ansaldo (Legal, Spain), Auxilium Financial Risk Management (Hedging) and Westfort Advisors (Debt Advisory).

Societe Generale were advised by Ashurts (Legal), Euro Transaction Solutions (Insurance Advisory) and Savills (Valuations).


Westfort arranges debt facility for hotel portfolio in Spain

On behalf of a London-based Private Equity firm, Westfort Advisors has successfully arranged and structured the financing of a portfolio of hotels located across Spain.

The transaction forms part of a wider value-add strategy to recapitalise, reposition and rebrand under-managed but well-located resort hotels. The competitively priced financing package further enhanced returns on a portfolio, which had been acquired at an attractive entry yield on historic (pre-pandemic) EBITDA and which is very well placed to benefit from operational and market recovery over the next 4-5 years.

Many thanks to our partners at BentallGreenOak for their pragmatism and drive throughout the deal.


Westfort arranges £40m loan to facilitate Zetland Capital’s UK pub portfolio expansion

Zetland Capital, advised by Westfort Advisors, has kickstarted an expansion of its portfolio of pubs across London and the south of England with the acquisition of five establishments, including three in Brighton, with a £40M facility provided by OakNorth Bank, the UK bank for entrepreneurs, by entrepreneurs. In addition to the three pubs in Brighton, the deal will see the acquisition of properties on Hayling Island in Hampshire and in Woodford Green, Essex.

Zetland Capital’s portfolio of pubs, which is operated by Portobello Brewery, includes the flagship Westow House in Crystal Palace, which has recently added 22 ensuite bedrooms, along with other locations including Effra Social in Brixton and Pratts & Payne in Streatham.

Deepak Drubhra, of Westfort Advisors, said:

“Despite the impact of the pandemic on the leisure industry, this transaction demonstrates there is a long-term confidence in sector recovery and high demand for innovative and entrepreneurial operators with a diverse and high-quality offering. Based on Zetland and Portabello’s strong credentials, Westfort have delivered an optimal financing solution with OakNorth Bank to finance the acquisition of this portfolio and support further expansion.”

Deepesh Thakrar, Senior Director of Debt Finance at OakNorth Bank, continued:

“At OakNorth Bank, we don’t take a broad-brush approach when it comes to analysing a business. Even in challenged sectors, there will always be strong businesses, so we see this is as a good opportunity to support a strong sponsor with a portfolio of pubs in good locations, run by a well-regarded operator.”

Mark Crowther, Executive Chairman of Portobello Starboard, said:

“We are delighted to have completed this acquisition and to partner with Zetland Capital. Zetland’s backing will enable us to invest in these great pubs and our fantastic teams, supporting the recovery and to acquire further pubs in the South of England. Given the challenges pubs have faced over the last two years, there aren’t many lenders who would consider supporting the sector at the moment. However, through looking at the portfolio’s past performance, as well as taking a forward-look view of its future potential, OakNorth Bank was able to put together a facility which will keep these pubs thriving and enable us to further expand the portfolio.”


UK Hotel Market Update

After a hugely challenging period, abated by government stimulus and senior lender forbearance, the UK hotel sector is starting to receive positive forecasts for 2022 with some indicating a 25% increase in occupancy and 9% increase in ADR across the UK and a 63% increase in occupancy and 33% increase in ADR for London alone.

The regional hotel market, in particular, received a significant boost in 2020, following the easing of lockdown restrictions; the “staycation” market remained strong throughout 2021, with unprecedented trading performance in select coastal and countryside locations.

2022 may prove more of a challenge, with overseas travel restrictions loosening and possible pent-up demand for foreign holidays impairing domestic demand. Notwithstanding this, recent PwC Research indicates that 37% of people still plan to holiday within the UK in 2022. On balance, we would expect similar performance in 2022 to 2021 for these regional locations.

The return of events, conferences and meetings will have a direct impact on regional hotel recovery. Larger events with longer planning cycles may take further time to recover, especially if uncertainty persists around potential restrictions. Business travel, in general, could potentially stabilize at a lower level than 2019, due to the widespread adoption of teleconferencing and tightened business travel policies.

The London hotel sector has suffered a lack of both international tourism and domestic business travel. These have combined to make for an exceptionally difficult trading period. The luxury hotel market in London has seen occupancy as low as 18%, which is in part down to the absence of high-spend tourists from the USA and the Middle East. Mid-market and budget hotels have fared best from domestic tourism demand. Despite the ups and downs over the years, London hotels have traditionally bounced back, with trading reaching new heights.

Despite the positivity from forecasters, the hotel sector still faces major concerns as a result of inflation. Inflation has increased sharply in the UK, reaching 4.2% in November, the highest figure in almost a decade. The hospitality sector is suffering as a result and further exacerbated with supply chain disruption and labour shortages.


Investment Market

In terms of capital values and yields, the hotel market was one of the worst impacted sectors from the pandemic. Valuations are currently down by over 10% from 2019 levels and prime yields have increased by 25-50bps, according to a report from Invesco. This reflects the size of the impact on operating performance, as well as the increased uncertainty over future performance and restrictions.

Over the course of the year, we have seen growing confidence in the sector, with investors looking to take advantage of the reduction in values. This is particularly the case for prime hotels with fixed income leases, which provide more certainty of income than is offered from hotels on management agreements. As such, in the UK, yields on prime hotels dropped by 10bps in London Hotels and 40bps in the regions.

In general, in order to benefit from a quicker recovery as travel continues to return, investors favour hotels operating in the leisure market and in areas where new supply will be limited. This reflects the performance so far, with pent-up demand for holidays being quickly realised, and a much slower recovery expected for corporate travel. Corporate travel is also more likely to be restricted in the long run by the evolving working practices caused by the pandemic.


Debt Market

The hotel sector has become an increasingly important sector in CRE lending, with debt origination to hotels growing by 141% since the GFC. While this used to be primarily domestic bank territory, with UK banks having a 62% market share in 2004, this has now evolved to a much more mature and diverse lending market.

Lenders significantly raised pricing during 2020 lockdowns, as a result of the marked increase in risk. A report from Bayes Business School found hotel senior lending margins increased from 270bps at the end of 2019 to 349bps in H1 2021, showing the increased perceived risk in the sector. They also looked for more protection with targets on Interest Coverage Ratios (ICR) rising from 1.8x to 2.2x, with some lenders requiring 4x for managed hotels that do not benefit from strong brand association.

While banks and insurers remain the largest lenders in terms of total exposure, holding 92% of outstanding debt as of June 2020, in terms of new loans they effectively retreated from the sector last year and have yet to re-enter. We expect this to change in the coming six months, (assuming no regression with respect to Government Covid guidance); albeit at a very conservative leverage.

Traditional lender preference will be for well-located hotels within gateway cities or strong tourist towns that can demonstrate post-pandemic performance i.e. occupancy/ADR/income levels that are trending up and indicate continued recovery (albeit may not be reaching pre-pandemic levels). Lenders will generally require four years of trading history, in order that they can underwrite future performance and take a view on VPV – hence there is a general preference for hotels with HMAs as opposed to lease contracts. Leased hotels will be considered, but the tenant will need to be investment grade.

The future business plan and capex requirement will be a core focus in this regard. One consideration will be the proportion of income derived from F&B; with 20% being the common, maximum threshold. Brand will generally be a secondary priority versus underlying trading performance, although any form of income guarantee from the operator (assuming strong financial standing) will be meaningful. The Sponsor will generally need to be highly credible, with a demonstrable track record of managing hotel investments. Equity distribution will be restricted based on business plan performance (i.e. cash trap covenants and mechanisms). Most will require strong interest cover ratios, although amortisation will not necessarily be required, given the growth business plan and the relatively conservative base on day one. However, all the above is of-course contingent on the prevailing Government advice with respect to Covid and anything that could have a future impact on the hotel/leisure sector.

Given this withdrawal of the largest lenders in the sector, there have been two key reasons that have kept the sector reasonably stable and liquid over the last 18 months.

Firstly, we have seen that lenders have shown remarkable forbearance on existing loans, with respect to covenant breaches and extensions of loan maturities. This was due to a variety of factors including Government and regulatory pressure, an understanding that there were very little borrowers could do to control the situation and the fact that in the middle of the pandemic, most lenders would not want to be taking these assets on to their books. We are now seeing lenders re-evaluate their position and start to apply pressure on borrowers. This has left some previously stable businesses in situational distress as they try and find their footing in this new market.

Secondly, while the traditional banks have retreated almost completely, we have seen a rise in activity from non-bank lenders, i.e. mainly debt funds, who have been able to step in and refinance loans held with banks or to finance new acquisitions. These lenders will look for higher returns than their bank counterparts, however, they are willing to look at a wider variety of assets and structures, as well as offering higher leverage and speed/certainty of execution to justify their pricing.

The higher leverage on offer is particularly important in circumstances where values have dropped significantly or when looking to increase returns on value-add strategies. Alongside this, we have also seen a lot of activity from challenger banks, who are nimbler in the current market and have the appetite and expertise to underwrite operating risk. These challenger banks tend to sit in between the traditional clearing banks and the debt funds, both in terms of leverage and pricing.

Below, we lay out some of the themes we have seen in recent months when financing hotels:

Transitional Hotel Plans

As a result of the marked change in market conditions, we have seen a number of opportunities where sponsors are looking to purchase and reposition or modernise assets, through extensive capex plans and through changing the hotel operator. Westfort Advisors has successfully sourced debt terms with acquisition or refinance and capex facilities both in the UK and Europe, with debt funds keen to support value-add business plans. Lenders will require a well-thought-out and credible business plan and an experienced operator with a strong track record.


Loan Structures

One particular trend we have seen is the increasing negotiation going into loan mechanics and interest reserves, and the flexibility that has been shown by non-bank lenders in order to offer a product that will both keep borrowers accountable against the business plan and at the same time provide sufficient headroom for market fluctuations without defaulting. We have seen this come in the shape of delayed covenant testing, guarantees, borrower and lender funded interest reserves and special pandemic related clauses in the covenant testing. Whilst there is a hive of activity in Europe in tourist countries such as Spain, Portugal and Greece, many lenders are cautious of the legal environment in these countries should they have to enforce. As such, many are only willing to consider deals with a double LuxCo structure to protect them in a downside situation.


Regional Hotels

As previously mentioned, regional hotels have benefited from a quicker recovery in the UK as lockdown measures were lifted. This was in no small part down to the fact that international travel was restricted. While this has led to regional hotels outperforming their big-city counterparts in many instances, the feedback we have seen from some lenders is they see this as a short-term bounce and one that is not necessarily sustainable as international travel continues to return. Given the time horizon of senior loans is typically 3-5 years, these lenders remain more comfortable with hotels with strong fundamentals in established city centres.


Brand Names

The increased uncertainty has seen lenders turn to familiar names in order to give themselves and their credit committees more confidence in the credibility of business plans and performance going forward. A report from Bayes Business School found 78% of lenders preferred to finance hotels with a franchise or renowned brand image. As such, those looking for finance in the sector, are incentivised to look to partner with or sign-up big-name brands to increase their chance of raising funds.

In conclusion, financing in the hotel market remains achievable, albeit more expensive than before the pandemic. Borrowers are also having to look outside their traditional bank finance in many cases, especially when looking at anything other than extremely core, long-let assets. One potential concern to watch out for will be when refinancing is required for loans that mature over the next year. Whereas last year many lenders were willing to offer short term extensions, now that the market has returned to some form of normality, there will be more pressure on borrowers. Where values remain lower, this may cause issues and many borrowers may have to adjust and move to more expensive non-bank finance.


Westfort advises Zetland Capital Partners on UK Hotel Acquisition

Westfort Advisors acted for Zetland Capital Partners LLP (Zetland) as the sole arranger of an acquisition and capex facility, underwritten by Starwood European Finance Partners Limited (Starwood); enabling the purchase and repositioning of the 338-bedroom Macdonald Manchester Hotel and the 156-bedroom Macdonald Holyrood Hotel in Edinburgh.

The acquisition, for an undisclosed sum, is one of the largest hotels transactions completed outside of London in 2021; the hotels will be managed by Zetland’s JV partner, Hamilton Hotel Partners.

This was a complex transaction, executed against prevailing uncertainty in the hotel sector and under considerable time constraints. We are delighted to have been involved in such a successful financing  – made possible by the pragmatism of all parties, in particular Zetland, Hamilton Hotel Partners and Starwood.