UK-headquartered private equity firm Queensgate Investments this week announced a circa €762 million refinancing of its European and US hospitality business, Generator Group, in one of the largest real estate financing transactions closed so far this year.
The deal, in which US manager Ares Management Corporation and alternative asset managers Värde Partners and Waterfall Asset Management provided finance, was made possible by Generator’s strong post-covid performance, the sponsor said.
“This is one of the largest and most innovative real estate financings that the market has seen in years, involving multiple outgoing lenders across 10 countries,” said Jason Kow, chief executive officer of Queensgate. “We are hugely grateful for our new partnership with Ares in Europe and our strengthened existing partnership with Värde and Waterfall in the US,” he said.
The refinancing, which reflected a 62 percent loan-to-value ratio, is secured against Generator’s portfolio of upmarket hostels and affordable boutique hotels, which are operated under the Generator hostels brand in Europe and the Freehand brand in the US. The portfolio contains 21 properties, with 12,000 beds across 17 cities, including Dublin, London, Copenhagen, Hamburg, Berlin, Venice, Barcelona, Paris, Amsterdam, Stockholm, Rome, Madrid, Miami, and Washington, DC.
The facility has a three-year duration with two additional one-year extension options. Law firm Brown Rudnick assisted Queensgate with the arrangement and structuring of the financing, as well as the legal execution.
In a statement, Tuvi Keinan, partner and practice group leader of Brown Rudnick’s special situations, credit and trading practice group, said global banks had pulled back from large, complex real estate financings due to economic and market uncertainty, creating an opportunity for direct lenders such as Ares, Värde and Waterfall to write senior debt. “This deal is a further example of this trend and marks a positive outcome for all parties,” he said.
The financing package was split into two tranches. The European element was backed by Ares. It comprised around €450 million of debt, including debt facilities in euros, sterling and Danish krone, plus private bond issuances. It is understood that Ares syndicated part of the European debt, with banking groups Goldman Sachs and Barclays participating.
The US element of the refinancing comprised debt facilities of around $331 million, backed by Värde and Waterfall – Generator’s existing lenders in the US. It is understood Värde provided senior debt against four assets, with Waterfall providing junior financing on the same assets, plus senior debt in a further two properties.
Queensgate acquired Generator from London-based investment firm Patron Capital in March 2017 for €450 million. At the time, the portfolio consisted of 8,639 beds. In a US expansion in October 2019, it acquired Freehand Hotels from investment firm AllianceBernstien for $400 million, which gave it ownership of four hotels in Manhattan, Miami Beach, Los Angeles and Chicago, consisting of 1,000 beds.
Queensgate used senior bank debt to finance the 2017 purchase of the European arm of Generator, with the lenders understood to be a consortium of three banks – French lender Societe Generale, Germany’s Aareal Bank, and UK bank HSBC. It also used mezzanine financing from US manager Apollo Global Management. Waterfall and Värde backed the US portfolio purchases, with other lenders financing individual assets during its US expansion.
As was the case with most hospitality assets during the pandemic, Queensgate’s portfolio suffered from a lack of revenue due to travel restrictions limiting consumer visits. As a result, in 2021, the firm is understood to have sourced additional finance from Apollo. Queensgate set up a holding company to house the portfolio and borrowed a €300 million facility from firm Apollo against it.
The loan was in part used to pay down some senior debt and in part to create liquidity to keep the business going during the pandemic, Real Estate Capital Europe understands. However, the improved performance of the assets since the pandemic led Queensgate to opt for a refinancing of the portfolio.
In March, global real estate consultant CBRE said the hospitality sector had seen a boom due to pent-up demand as consumers reacted to the global easing of travel restrictions. Moreover, it said the sector was on route to matching its pre-pandemic performances in 2023.
The Generator refinancing attracted a significant amount of interest from global institutions, including the incumbent lenders. US bank JPMorgan is understood to have been among lenders interested in refinancing the whole portfolio. However, the manager decided to split the refinancing into two geographic tranches.
Queensgate is believed to have explored a sale of the properties last year. The refinancing has been structured, in part, to separate the European and US capital structures, and repay debt at the holdco level.
Real Estate Capital Europe understands Queensgate is working towards an asset-light structure and is aiming to obtain management contracts instead, with the firm still considering a sale of the portfolio – potentially made easier by its separated geographic financing.