Lone Star re-enters UK hotel market – this time as a lender

The US private equity firm, which sold its last remaining UK hotels in 2018, has written a £100m-plus loan against a portfolio of Hiltons.

Lone Star Funds, the Dallas, Texas-headquartered private equity firm, has joined the new wave of debt providers targeting financing opportunities in the beleaguered UK hospitality sector with a £100 million-plus (€116 million-plus) loan to refinance a portfolio of Hilton branded hotels.

The firm provided the loan to The Ability Group, a property company formed in 1996 and which owns 14 hotels in the UK, to refinance four assets: the Hilton Liverpool, the Hilton Dunblane Scotland, the Hilton London Syon Park, and the Luton Hampton by Hilton. The loan was provided through Lone Star Real Estate Fund VI, an opportunistic capital vehicle, which had a $4.6 billion final close in June 2019 and through which Lone Star invests globally.

For Lone Star, the deal represents a return to the UK hospitality market, albeit for the first time in its capacity as a real estate lender. The US firm was an active buyer of hotel assets in the UK in the wake of the global financial crisis of 2007-08. In 2015, it combined its assets to launch a UK hotels platform – Amaris Hospitality. However, in 2018, it sold Amaris, which comprised 23 assets, to investment manager LRC Group for a reported circa £600 million, in a deal that marked Lone Star’s exit from the UK hotel market.

According to Edward Horn-Smith, managing director of Arc & Co, the London-based real estate debt adviser that advised The Ability Group in the refinancing deal, the transaction demonstrates that certain organisations see an opportunity to deploy capital against UK hospitality assets through debt deals.

He described a recent “wave of liquidity” from private equity funds and investment banks into the UK hotel market. “These funds are plugging the gap of typical bank lenders who have fallen short of the mark. This is the first of several large commercial loans we expect to execute in Q3 and Q4 this year,” he commented.

Horn-Smith told Real Estate Capital that Arc & Co put the financing mandate out to tender and received interest mainly from debt funds and investment banks, due to the risk and return profile of the deal. He added: “Lone Star has been a principal investor in UK hotels, so it knows the space. It is a market it understands well.”

Pricing details of Lone Star’s refinancing were not available. However, in May 2021, hospitality market sources told Real Estate Capital that non-bank lenders are targeting high returns in the sector.

Speaking generally about the hotel financing market, Andrew McMurdo, head of debt advisory at Savills, said at the time: “They are typically looking for an 8-9 percent debt IRR in the space, which means the coupon being charged on the loan is 5.5-6.5 percent, which is expensive money for borrowers, who are used to paying 2 percent.”