Boutique debt dependent on sustainability, flexibility
 
Boutique debt dependent on sustainability, flexibility
04 JUNE 2018 7:13 AM

Debt capital for boutique and other hotel types is never easy to obtain, sources say, but it helps if those seeking are flexible, knowledgeable, calm and aligned.

LONDON—Capital is available for boutique and independent hotels in the United Kingdom, but those wishing to secure debt must be flexible, knowledgeable and imaginative, financial and consultancy experts said.

Speaking during a panel titled “The lending and investment landscape” at last week’s Boutique & Lifestyle Hotel Summit, David Orr, co-founder and chairman of Urbanist Hotels, said the hotel industry is “at the point in the cycle that is forcing us to adapt returns and business models.”

The good news, panelists said, is that capital is available. The trick is to understand what capital makes sense for what projects.

“There are different sources of capital for different pieces of the pie. Capital is never easy to find,” said Andrew Harrington, owner of corporate finance advisory AHV Associates.

Lissa Engle, founder and director of Berkeley Capital Partners, added: “It depends on how much of the capital stack you want to assume as debt. For a recent transaction, for £35 million ($46.6 million), we went to family offices that wanted a blended cost of capital. At the bottom of everything is: What is the covenant strength?”

Harrington said debt options currently on the table include senior, junior and mezzanine debt, preferred stocks and equity with different structures.

Trevor Morris, debt finance director at OakNorth Bank, urged hoteliers to be thorough in their approach and calculations.

“If you have your eyes open, you’ll find capital. There is a good stack of efficient capital. Just do not rely on alchemy,” he said, adding he is seeing the attractiveness of freehold deals versus ones with ground rent.

Urbanist Hotels’ Orr said he had recently bought in a ground rent at a development in Glasgow, but that made sense for that particular project.

“Understand the nature of every different bit of business,” he advised.

Morris said his main consideration of a model comes down to the question and analysis of what cash flow is generated over a sensible period of time.

Harrington said debt should not be regarded as a ball and chain around an ankle.

“The reality is that this is not so much debt as just another cost. Fifty percent of bankers are happy with ground rent, which to them is another cost, too. It might lower cash flows, but who cares?” he said.

“Leases are de rigueur during recessions, but it is now management agreements,” he added. “The risk profile is inherently linked with that of the reward. Usually it will be two times (earnings before interest, tax, depreciation and amortization). Riskier would be three times or four times, but that will incur higher charges.”

Sustain
An asset has a better chance of being sustainable and successful if there is alignment between all parties in debt deals, panelists said.

“A sustainable deal is one in which all partners are happy by it throughout its life,” Orr said. “It is good to have rational aspirations, and rewards come from the ability to develop and keep calm. Do not have an over-forensic idea as to what a 5-star asset should be.”

Berkeley Capital Partners’ Engle said as no lender is the same, neither are the nature and strategy of their debt.

“Ultimately, it is about negotiation. Private equity firms differ,” Engle said.

Morris urged that those seeking debt should endeavour to add their own significant capital. “If the property’s value moves, your upside can disappear quickly,” he said.

Sustainability derives a great deal from the comfort partners have for any one type of business model, panelists said.

“We’ve always found leases a little uncomfortable, something that is chipping away all the time at (the revenue generating index). And with (creditors voluntary arrangements), you can’t keep denting landlords and not expect implications,” Orr said.

Not all leases are the same either, Engle said, adding that “some are wrapped up like (hotel management agreements).”

Panelists agreed one possible arrangement of capital is not sensible right now: crowdfunding.

A more practical reason for not going down this route in the U.K., AHV Associates’ Harrington said, is that “it only works with (enterprise investment schemes), and EIS is not available to hotels.”

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