Bayside Capital: Bayside view covers lenders’ troubled European waters

Bayside Capital’s core, three-man London real estate team is conscious of how to best spend its time in a fast-moving, crowded market. Like most investors in distressed property, its remit spans Europe, but unlike others, it is also considering edging into territories that are still off-piste.

London-based managing director Ahmed Hamdani joined Bayside 18 months ago from hedge fund Trafalgar Asset Managers to run the asset-backed distress operation, including real estate. He says: “We’ve picked our spots in places where there’s big banking dislocation and a high chance of finding and delivering on the opportunities.”

Timing is crucial. The UK and Irish markets are moving rapidly, after significant repricing, while “even in Spain, the very easy trades are already done. Pricing expectations have changed,” (see below). Hamdani believes Spain reached the bottom last year. The company is working on buying a large portfolio of assets and debt in Austria, alongside a couple of other parties. “We are also beginning to see more asset disposals in Eastern Europe, where Austrian banks are over exposed,” he says.

Hamdani notes that banks in Italy still have significant deleveraging to do. The group wants to add more staff in its newly opened Milan office, led by Raffaele Legnani. Bayside has been mainly acquiring direct assets rather than non-performing debt, although it does target both and recently made a small loan purchase secured against a mix of assets in Europe. Chris Zlatarev,

brought in from Varde, is focusing on non-performing loan acquisitions. Bayside has bid “on a number” of non- performing loans, according to Hamdani, including Lloyds’ Project East UK hotel loans portfolio, but has come to the same conclusion repeatedly: loan prices do not always reflect risk adequately.

Assets can be cheaper than loans

“In a number of cases we have found it cheaper and easier to acquire assets rather than loans,” he insists. “You can get the same, if not more, as far as returns go, for significantly less risk and work.” To that end, Tuna Atay was hired from Brookland Partners in September to focus on assets stuck in securitised vehicles. Early this year, Bayside acquired the Parque Ceuta shopping centre in Spain from the Windermere VII securitisation and is in an exclusivity agreement to acquire another shopping centre in Germany this way.

Adolfo Favieres joined parent company H.I.G.’s Madrid office six months ago and five more staff are to be hired in London.“There is too much that’s right about the UK for us,” quips Sanjoy Chattopadhyay, a director in Hamdani’s real estate team. “There’s a lot of capital here and the banks are back. A lot of the time we’re priced out.” This also means it is a liquid market to sell into, with a “deep brokerage community”. Although Bayside is selectively pursuing deals here, the opportunity in neighbouring Ireland may have already passed.

“The entire distressed asset buying community descended on the five million population 18 months ago,” Chattopadhyay says. “The market repriced very quickly, but there are still opportunities, although the easy money has been made. You can’t just buy income at a high rate and wait for lever-age to come back. There’s a lot of vacancy so you have to work the assets. There is an opportunity, but still a lot of value traps.”

Irish market may lack depth

Furthermore, the depth of the Irish market has yet to be tested. “The first phase of buyers have come in, but who is going to be on the other end to take it off their hands? People forget how small the market is.” In the UK, at least, Bayside’s modus operandi is to focus on “smaller deals or operational real estate”, Chattopadhyay says. It recently purchased the 378-bed Hilton hotel in London Docklands, which requires substantial redevelopment.

Bayside’s latest purchase is a portfolio of nine office and six light industrial properties, through its new joint venture with specialist industrial asset manager Bauer Group, which is targeting high yielding commercial multi-let assets in the UK. The company has also set up a new joint venture with Irvine Sellar, leveraging off his “good connectivity to work on undermanaged property in the UK”.

Bayside’s model is to “select black-belts in each market for each asset class”, notes Chattopadhyay. It has partnered with M7 Real Estate to buy and manage industrial properties in the Netherlands. The joint venture, MBay Light Industrial, bought 12  properties in November and is seeking further Dutch acquisitions.

Another part of Bayside’s strategy is to provide rescue financing for borrowers that need outside capital to deleverage. It closed a mezzanine loan secured against a Madrid shopping centre in January and is in an exclusivity agreement to provide 60%-plus loan-to-value debt on a deal in Ireland.

Hamdani says: “We see this situation again and again where a borrower has a good asset, but the bank exerts pressure, knowing it will get money back if it squeezes the borrower. The bank says ‘we’re at an 80% LTV, we want to be at 60%; you have six months to deleverage or we’re not rolling the loan’.”

Essentially, Bayside is searching for attractive pricing and the best use of its time. “We have the biggest pipeline of transactions and will now be expanding the team and targeting a fund raising later this year,” says Hamdani.

H.I.G. subsidiary set to start new vehicle on road to European opportunities

H.I.G. Capital-owned Bayside Capital plans to launch its first dedicated real estate opportunities fund for Europe in the next three or four months. The €500m-plus vehicle will target assets, loan portfolios and direct lending across the industrial, residential, office and hotel sectors.

Real estate is Miami-based H.I.G.’s fastest growing area of business. The private equity firm, founded in 1993 by Sami Mnaymneh and Tony Tamer, manages $15bn of assets globally, almost $6bn of which are handled by its distressed European credit subsidiary, Bayside.

With H.I.G. offices in London, Madrid, Milan, Paris and Hamburg, Bayside is on track to close on almost $500m of European real estate assets since closing its first property deal seven months ago: Project Bull (see below).

Ahmed Hamdani, Bayside’s head of European real estate and asset-backed investments, says that before he arrived  in 2012, “H.I.G. was not focused on real estate-related investments in Europe but its brand has been instrumental in helping to build the business.”

H.I.G.’s investor base comprises large, high-quality US pension funds along with European, Middle Eastern and Asian institutions – among the same investors Bayside is seeking to tap for its new real estate opportunities fund.

Currently the team is investing capital from Bayside’s €1bn European distressed fund, raised in April 2013. Hamdani says: “Over the past year we’ve seen the pace at which we can deploy capital and the types of returns we can generate. This justifies the raising of  a dedicated European Real Estate Opportunities fund.”

Next Spanish win is still to come after Bull fight victory

The firm best known for striking the first portfolio deal with Spanish ‘bad bank’ Sareb last August, when it bought 939 residential properties known as Project Bull, has yet to secure a second. Bayside was outbid in the final round, by almost 15 basis points, by Fortress for the Project Teide residential portfolio – Fortress’s first deal in Spain.

This was as an eye opener as to the speed at which pricing has moved. “If you bid on a Sareb portfolio now you could not achieve the internal rates of return we were targeting when we bought Project Bull,” says managing director Ahmed Hamdani. Investors can get embroiled in “big, competitive processes that take months in due diligence, eating up lot of costs”, he says.

Bayside is not bidding for Commerzbank’s former Eurohypo Spanish assets and Colony Capital beat it to Lloyds’ Project Alpha Spanish loan pool. But Hamdani says it has not gone cold on Spain: “A lot of trades need to be done; there are still problems.”

On Project Bull, “prices have increased since purchase and the churn rate is higher than we expected”, he adds. The properties are in the hands of Bayside’s Spanish asset manager, Monthisa.

Market liquidity is an important consideration in the group’s investment analysis. “Sareb is selling a lot of second homes on the coast where there is overbuilding,” Hamdani says. Another important factor is a new visa programme that grants residency to foreigners that invest more than €500,000 in Spanish property. “Chinese real estate agents are coming to Spain to take all the brochures while high-net-worth individuals might never live there, but want the visa.”

New REIT legislation is also increasing institutional interest in the market. There is also strong local demand for good developments. Part of Bayside’s agreement with Sareb was for its Spanish shareholder banks – including Santander Cizabank, Banco Sabadell and Banco Popular – to provide financing for buyers  of the 939 repossessed homes. Sareb is a 49% joint-venture partner in the deal, which was structured as a low-tax fondo de activos bancarios (FAB) vehicle.