Are Banks Still Lending in This Climate?

Main Photo: Dumbleton Hall, one of the most recent loan clients of OakNorth

Date: May 2021

Location: UK

Name: OakNorth Bank

No. of Keys: TBA

Who They: OakNorth Bank, launched in September 2015 and founded by entrepreneurs Rishi Khosla and Joel Perlman, OakNorth Bank provides fast, flexible and accessible debt finance (£500k to £50m) to the UK’s Missing Middle – growth businesses that are the most significant contributors to economic and employment growth, but that still struggle to get access to the debt finance they need.

To date, OakNorth Bank has lent several billion pounds to businesses, directly helping with the creation of tens of thousands of new homes and jobs across the UK. They have borrowers across a variety of sectors, including: hospitality and recreation (including hotels, resorts, restaurants and bars, fast food outlets and limited service restaurants), healthcare (nursing homes and retirement villages), consumer goods, vehicle and parts manufacturing, capital goods manufacturing, household professional services (including educational services), nurseries, business support services, SME residential and commercial property development and investment.

OakNorth Bank’s commercial lending is supported by a loyal base of deposit customers. It’s award-winning savings platform offers a range of Financial Services Compensation Scheme (FSCS)-protected products to savers at all stages of life. It is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, in the UK.

Teams are based across the UK: they have offices in London and Manchester and regional hubs in Bristol, Birmingham, Leeds and East Anglia.

How has OakNorth Bank been supporting the hospitality sector: Since OakNorth Bank’s launch in 2015, they have completed more than half a billion pounds of loans to some 35 hotels within the hospitality sector and have continued to support strong management teams and hospitality businesses throughout the pandemic. These businesses range from regional boutique hotels to some of the most prominent names in the industry – see a snapshot of past and recent deals below.

Many lenders have shied away from the hospitality sector over the last 12 months, seeing it as too risky to lend to, especially on new-start projects. Traditional banks’ risk models tend to lump all businesses into one of a dozen or so categories – for example, all restaurants, bars and hotels are classified as “Hospitality” – which disregards the fundamental differences in how these business operate and makes it harder for banks to identify the most vulnerable businesses in their portfolio.

The experience of a pizza delivery business throughout this pandemic will have been very different to a Michelin-star fine dining restaurant for example. Equally, the experience of an all-inclusive destination resort is likely to have been starkly different to an airport hotel or a business conference hotel. The only way banks can effectively assess credit risk is by taking a granular, loan-by-loan approach.

At OakNorth Bank, they say they take a granular, sub-sector, forward-look view, taking into account the uniqueness of every business. Some examples:

Dumbleton Hall: In April 2021, they provided a bespoke debt facility for the acquisition and redevelopment of the Grade II-listed Dumbleton Hall Hotel in the Cotswolds. Built in the mid-1800’s as a classic stately home, Dumbleton Hall became a hotel post WWII, offering 39 rooms, a wide variety of event spaces and 19 acres of gardens, woodland and lake. The project is being led by the team behind Chatham Park Development, a US based property developer and will see the hotel upgraded from a 3 to a 4-star plus establishment, as well as the addition of five new rooms and more event space. It will be operated by Bespoke Hotels, the UK’s largest independent hotel group.

Staycity Group: In November 2020, they completed a £30m loan to Staycity Group, Europe’s leading aparthotel operator, to fund its expansion plans, which will see it open another 10 aparthotels in 2021, and operate 15,000 apartments by 2026/27. Founded in 2004, Staycity is an Irish-owned pan European aparthotel business with over 20 properties across the UK, France, Ireland, Italy and Germany. The business operates under two brands – Staycity Aparthotels and its premium Wilde Aparthotels by Staycity.

Arora Group: In October 2020, they completed a £50m loan to the Arora Group, the private group of property and hospitality companies founded in 1999 by prominent British Indian businessman, Surinder Arora. The Arora Group is made up of three parts: Arora Hotels, Grove Developments and Arora Property, and has a large portfolio of properties across the UK, including over a dozen hotels, as well as residential and commercial office units. Arora Hotels owns and operates a mix of independent and franchised properties, including: The InterContinental London ‒ The O2, the Sofitel London Heathrow and Fairmont Windsor Park.

The loan provided Arora Group with the financial firepower to take advantage of opportunities arising from the COVID-19 pandemic. The Arora Group has also been participating in the Government’s hotel quarantine programme and implemented a Test and Rest package which includes a self-administered COVID-19 test kit and accommodation for the night. Both of which are creative ways to ensure it stays open during lockdown and keeps making revenue.

The Jade Hotel: In July 2020, they provided a bespoke finance facility to The Jade Hotel, a family run establishment in South Kensington. The Jade Hotel is a 30-bedroom hotel and given its proximity to a number of attractions (the V&A, the Natural History Museum, Royal Albert Hall, the Science Museum, etc.), is very popular with both domestic and international tourists. The business had been keen to make some changes for some time – redecorating all 30 rooms to give them a more modern and spacious feel, adding another five rooms, refitting all the bathrooms, and making repairs to the roof and front exteriors – but there had never been a good time.

This is because carrying out the works would have meant having to either close down the hotel for several months whilst the works took place, or causing a lot of disruption to guests which would have undermined the quality of their experience. However, COVID-19 gave the business the opportunity to carry out all this work without any added disruption to the business (which had to be closed anyway due to the pandemic). Now, thanks to the loan from OakNorth Bank, the business is ready to re-open and welcome guests later in the year once travel and holidays are allowed to resume.

Signet Hotel Group: In May 2020, they provided a £3.7m debt finance facility to the Signet Hotel Group, a partnership fronted by Hector Ross, the former COO of Bel & The Dragon, a collection of country inns that we lent to in 2017. The finance was used to refurbish and upgrade the Grade II listed Mitre Hotel, Hampton Court, which the Signet Hotel Group acquired earlier this year. The boutique hotel now offers more junior suites following the refurbishment, as well as a 60-cover riverside restaurant, a 70-cover brasserie and bar, a large external riverside terrace and three dedicated conference rooms and private dining areas. The Mitre dates back to 1665, having originally been used as an ancillary accommodation for Hampton Court Palace, before being rebuilt in the mid-18th Century.

What makes OakNorth different from your competitors: “Due to our expertise across both property, property development and SME trading deals, we’re able to create a bespoke facility that allows the hotel business to buy the site, develop the hotel and cover the initial costs of operating it. This is quite unique as other lenders will typically make the borrower take out a facility to acquire the site, then a development facility to build it and then they have to refinance it if they want the capital to run it.

This process is time-consuming and frustrating as it means the borrower has to constantly interrupt their plans to get more capital from their bank. We’re also one of the few lenders that will provide a financing solution for the whole process and can extend it over a five-six year term. This type of facility needs to work for both us as the lender and for the borrower, so typically interest payments will be higher during the initial buy and build / development phase.

They will then reduce once the borrower completes the development and the hotel is operational, and then reduce again once the hotel hits its forecasted numbers. By covering buy, build and stabilise under an agreement with ratcheted rates, the borrower cuts out the need to spend time refinancing once a new hotel is built out.” said Deepesh Thakrar, Senior Director of Debt Finance at the bank.

What does OakNorth Bank look for when lending to the hospitality sector: They lend to profitable, high-growth businesses with experienced management teams. When it comes to hospitality businesses they specifically look at the following factors:

 What is the Average Room Rate (AVR)?
 What is the Revenue per available room (RevPAR)?
 What is the occupancy rate of the hotel?
 What percentage of the hotel is tourism vs corporate? What percentage is food and beverage vs rooms? What percentage is conference vs wedding for rooms?

Now that we’re in pandemic times, they will also look at what creative steps the hotel has taken to stay open / keep making some revenue, such as:
 Dark kitchens or offering delivery of Michelin-star food like the Connaught and the Dorchester have been doing.
 Participating in the hotel quarantine schemes like Arora Group is doing with its airport hotels as well as it’s “Test and Rest” package.
 Another one of their hotel clients offered heavily discounted rooms to key workers and those who needed to quarantine from family homes or socially distance.
 Additionally, some hotel airports have isolation contracts in place for key workers.
 All of these factors will help us determine how resilient the business could be if the UK was to go into another lockdown, if tourism didn’t resume to pre-pandemic levels for years, etc.

What Will it Cost: OakNorth Bank tell us that they sit somewhere between the High Street banks and the crazy rates we all know are available in some quarters…Ask us at THPT to effect an introduction.

THPT Comment: OakNorth Bank and to a lesser degree, Bank Leumi standout as the best of the alternative banks that are lending during this difficult time…with some fine examples above that back-up this claim…

First Seen: An interview with OakNorth Bank by THPT

The Hotel Property Team (THPT) is a small group of highly experienced business professionals. Between us, we provide a range of skills and experience which is directly relevant to those involved in the hotel property market.

For more information – Visit www.thpt.co.uk or email info@rrh.hmf.mybluehost.me.