For Nick Weber, former boss of Mount Kellett’s European business and founder of real estate fund management firm Henderson Park, the right investment opportunities tend to have a story behind them.
In the 18 months since Henderson Park’s launch, the firm has pursued a value-add strategy amid a late-cycle European property market. The assets the firm has picked up – including the largest hotels in Paris and London and a grade A office building in Madrid – have a distinctly prime feel to them. But, as Weber explains, the current market creates opportunities for such properties to generate ‘opportunistic’ returns.
“If you look at our pipeline, 75 percent of deals come from situations where something needs to happen, either motivated by debt maturity, by swaps burning off, or by a tenant that cannot be held much longer,” he says.
To buy well, Weber continues, there needs to be an ‘off-market’ aspect to a deal. It could be a bank pushing a property owner to repay or refinance its loan, or it could be a seller eager to seal a swift deal after failing to achieve an open-market sale. “It doesn’t necessarily mean distressed situations, but most of the deals we’ve done have involved a motivated seller,” Weber adds.
Weber is well-positioned to source such opportunities. After relocating to London from his native US with Goldman Sachs in 2000, he launched a mortgage business and built a special situations unit. Former Goldman star banker Mark McGoldrick was a mentor at the bank. He reunited with McGoldrick at the latter’s private equity firm Mount Kellett in 2009, where his most notable deal was the sale of hotel chain Jury’s Inn to Lone Star following a restructuring.
He struck out on his own in July 2016, launching Henderson Park, with $500 million of backing from US investor Stone Point Capital, as well as Middle Eastern players Kuwait Investment Authority and Wafra Investment Advisory Group. By October this year, it was understood to have raised $970 million of investor capital – with additional co-investment bringing its equity to around $1.4 billion.
Weber does not seek publicity, but meeting him in his central London offices, located in a Georgian rowhouse close to Victoria Station, Real Estate Capital finds him eager to discuss the current market, his firm’s place in it, and how debt will fit into the strategy.
Wave of maturities
Henderson Park’s first deal, in September 2016, was the plush Le Méridien Etoile hotel in Paris, bought from Mount Kellett and Cedar Capital. Subsequent deals include a UK multi-family portfolio, a five-star Athens hotel and two of the UK’s largest hotels – the London and Birmingham Hilton Metropoles.
“They are large, institutional assets, some of which are throwing off a huge amount of cash flow. That doesn’t sound very opportunistic,” admits Weber. “We’re buying in core locations, maybe value-add assets, but generating opportunistic returns.”
Definitions such as core and value-add “get blurred every which way”, Weber argues. Henderson Park is targeting net returns to investors of 14 percent to 16 percent, meaning gross returns in the order of 18 percent to 20 percent. “I think that’s a mix of value-add and opportunistic. There’s a real blurring of lines and it’s near impossible in this market to distinguish.”
The UK Hilton Metropoles are a case in point, he explains. “We bought London and Birmingham’s largest hotels, and together they have combined revenues of around £100 million (€112 million) and throw off nearly £31 million in cash, but they need a lot of capex. It’s not a core deal, probably not even core-plus, but we definitely believe we’ll earn opportunistic returns.”
The two assets, bought for exactly £500 million, were sold by private investor Tonstate, owned by 84-year-old property mogul Arthur Matyas. The assets were understood to have £420 million of relatively expensive debt attached to them. Tonstate had initially tried to sell the assets for £700 million. Weber and Matyas are understood to have built a relationship and for weeks had a deal agreed in principle over a handshake.
Weber praises Matyas who he explains did not default on a single debt payment during the entire economic crisis. “I know he wanted certainty that we’d do a deal. I told him I’d pay £500 million – not a penny more, not a penny less. We shook hands on a deal and I paid him that exact amount three months after we had that conversation.”
In the next four to five years, says Weber, the wall of European real estate debt which is due to mature will create situations where quality assets, which have been underinvested throughout the crisis, need to be recapitalised. Henderson Park, he argues, is in a good position to watch for the stress in the system and deploy capital in assets which can generate their targeted risk-adjusted returns.
“Aside from the UK and Ireland, and to an extent Spain, Europe’s banks haven’t really sold much. Most moved their loans to a hold-to-maturity book. It was absolutely the right play. Equity values have come up and banks have started to earn money, so they are able to provision their loans,” Weber explains.
Swaps, sold to sponsors at the height of the market, are gradually burning off, alleviating another barrier to owners readying assets for sale. “Something like $500 billion of debt is coming due and a lot of that debt was struck when rates were very high, so a large proportion of it was swapped. Banks need to deal with their loans. When they reach maturity, they cannot extend or hide them anymore. So, it’s really the wave of maturity that is driving a lot of activity,” Weber argues.
Sellers in such situations want certainty, rather than the last dollar, Weber believes. The ability to spot such deals and get the timing right is essential, he adds, pointing to the 2015 sale of Jury’s Inn during his Mount Kellett days – the success of which he says was due to correctly reading the investment market.
“We were one of the first to take a restructured company back out to market,” he remembers, “it was all about understanding asset and capital flows; understanding whether money is coming in or whether the tap has been turned off.”
In its short life to date, Henderson Park has proved to be a nimble investor across Europe. Investment has so far been weighted towards hotels – clearly a favoured sector of Weber’s – but has also taken in offices, residential and, after the launch of a joint venture in September with US investor Hines, student housing.
Weber envisages Henderson Park’s investment focus to be equity rather than debt for the foreseeable future. “We can do debt, but today’s opportunity is much more on the equity side,” he says. “However, we need the ability to move up and down capital structures, as well as across asset classes, and be nimble and able to react to cycles.”
Debt deals while at Mount Kellett included buying the £106 million junior loan on London’s CityPoint office tower for less than £20 million, eventually selling it to Brookfield for more than £75 million in 2014, delivering a 56 percent IRR and more than four times return on the investment, as the Canadian investor sought ownership of a property beset by a complicated legacy debt structure.
“We look to make equity returns, whether buying debt or equity. You need to be able to invest through a cycle; you can’t over-lever deals, you need to buy in great locations and with great partners. There are certain rules which will allow you to survive and thrive even through cycles.”
As for how Henderson Park approaches sourcing debt to finance its own investments, Weber says his own experience in the European markets helps. “I’ve been here 18 years – we have an experienced team and so we know a lot of the debt lenders.”
To date, the firm’s deals have been funded with senior finance obtained from banks. French bank Natixis financed the Le Méridien Etoile deal with around €215 million, while Germany’s Aareal provided £330 million for the Hilton Metropole hotels. In its Spanish venture, Deutsche Bank was chosen to provide debt.
“We tend not to work closely with debt funds, because they are generally trying to provide higher-leverage whole-loan financing,” Weber explains. “We tend to be 60 percent to 65 percent loan-to-value borrowers. The odd deal might have 70 percent LTV for a period of time, but it is generally less. We’re not high-leverage guys; we like to sleep at night.”
Weber mentions the Le Meridien Etoile deal, for which it opted for a 60 percent LTV loan with Natixis. “We swapped our debt so the total cost was 2.3 percent, bringing the debt bill to around $4.5 million. The hotel’s cash flow is three or four times that, which means I’m not losing sleep over it.”
Several lenders had pitched to provide mezzanine finance, including investment banks, private equity funds and a family office, all offering up to 900 basis points for loans up to 75 percent LTV. “We already had very attractive returns and multiples in our projections, so why would we look to juice the IRR and worry about a $10 million debt bill per year versus $4.5 million?”
Finance is readily available to the right sponsors, Weber insists. “Certain borrowers get access to things in the market that others don’t. The market differentiates quality of borrower and operating partner.”
Finance is available outside the core markets, if the asset is of the right quality, with a stable cash flow, Weber says. When it bought the Los Cubos office building in Madrid in October, Spanish banks were willing to provide debt, albeit with cautious levels of leverage, up to around 55 percent. To ensure speedy delivery, it went with Deutsche Bank. In Athens, the Ledra hotel purchase in June was financed by a local lender Eurobank.
Asked what headwinds the market faces, Weber immediately mentions the UK’s EU exit: “Brexit has thrown up a challenge in the UK, but our view is that, while some people may leave London, it will remain Europe’s main financial hub. I just don’t see a mass exodus to Dublin, Frankfurt, Paris. Looking at it from a London residential perspective, even if 100,000 financial services people leave, that’s half of 1 percent of London’s housing stock.”
In the wake of Brexit, Weber says “some air” has come out of the London offices bubble: “We’ve just started looking at one or two deals in the office space where we’d turned down 20 deals before.”
Although interest rates will rise, Weber predicts the eurozone will remain low for a while, with “very rational” rises in the UK. As for tailwinds, Weber mentions the Macron effect in France: “We felt that Paris was long-term cheap and there’s real energy in the market now” he says.
As for how he would like the market to view Henderson Park, Weber is clear: “We’d like to be seen as a serious player, a player that has conviction on deals. We’re not a follower. We don’t necessarily need to be a leader, but we want to be seen as a firm that goes after great, large deals and is not afraid to roll up our sleeves to make it happen.”
A protégé of Mark McGoldrick, the investment banker turned private equity chief known in the press as ‘Goldfinger’, Nick Weber has held prominent roles on Wall Street and in European private equity.
In 1994, Weber joined Goldman Sachs in New York. “I came out of chemical engineering and ended up on Wall Street,” he says. “One of my first bosses was Steve Mnuchin, the US treasury secretary.”
Weber began working with McGoldrick in 1995 in Goldman’s New York mortgage department. In 2000, he relocated to Europe with the bank to launch a European mortgage department, before heading to Hong Kong to run its non-Japan distressed business and returning to London to build the bank’s special situations unit.
In May 2009, he rejoined McGoldrick, at the latter’s private equity firm, Mount Kellett. Weber’s deals included leading the purchase and sale of the Jury’s Inn hotels group, with a 90 percent-plus IRR and 3.25 times equity multiple.
Mount Kellett was hit by its oil and gas investments and reached a deal with Fortress Investment Management to co-manage funds. “I stayed at Mount Kellett through September 2015 to monetise the book before leaving. I felt it was the right fiduciary thing to do. Something like 80 percent of the European real estate was turned into cash before I left.”
After taking some time off to figure out his future, Weber struck out on his own in July 2016, launching Henderson Park. He remains good friends with McGoldrick, who is “front and centre” on his reference list for investors, he adds: “Mark’s as smart and commercial as they come.”
WHAT MCGOLDRICK SAYS ABOUT WEBER
A mentor to Weber during his time at Goldman Sachs and Mount Kellett, his former boss, renowned fund manager Mark McGoldrick, spoke to Real Estate Capital’s sister title, PERE, about his former colleague.
- On his Goldman Sachs years: “He was hard working, very smart and had a clear affinity for real estate.”
- On his eye for quality in the distressed market: “He was very good at networking, originating off-market transactions. He knew everybody, everywhere.”
- On his market profile: “At Goldman you can’t talk to the media. We sort of had the same thing at Mount Kellet. Nick was one of those guys under the radar, working hard, getting deals done. But talk to people in the business, all over Europe, and everyone knows Nick.”
- On how he does business: “He always has an angle to source things off-market so he’s not in competition with people. He’s formed a lot of JVs, has great relationships with co-investors.”
- On being a reference for Weber: “I don’t give many references but … I trust his judgment and think he’ll do well by his investors.”
- On launching his own fund: “It’s hard to get something up and running with a lot of moving pieces in this heavily regulated environment. Getting $1 billion is a big deal.”