Bayside Capital is a distressed real estate investor looking to deal directly with the borrowers rather than the banks. Jack Sidders takes a look at its business model
If you have been servicing your underwater loan on your well-let medium-sized property for the past five-plus years, Bayside Capital wants to be your friend.
The HIG Capital-owned real estate investor, a relatively new entrant to the market, has demonstrated interest through a raft of deals in the past nine months. But it has seen rapidly diminishing returns in many of the loan sale markets in which it has been active and now wants to work with borrowers instead of banks.
“When the banks are ready to sell a big asset, they will tell the world about it. We are trying to focus away from portfolios and on to single-asset transactions,” says Ahmed Hamdani, head of the company’s asset-backed real estate business.
The company has instead been strategically approaching borrowers which took out loans before the market crash.
Typically the properties will have been starved of capital expenditure, says Hamdani, with borrowers able to service their loans but unable to pay for improvement works.
“What we found is that we can focus on the borrowers themselves who don’t want their loans thrown away,” he says.
“They will have a plan to create value and we have found that is a much better entry point. Then we can approach the bank with a fully underwritten solution.”
The strategy is typified by a deal Bayside made in December 2013, when it agreed €18m (£14.8m) of mezzanine financing for the 50% owner of a shopping centre in Madrid.
“The part-owner didn’t have very much capital and the banks knew it was a good asset,” says Hamdani.
“They knew they could press the borrower and there was a maturity coming up.”
Under pressure to deleverage from 70% LTV to 50%, the borrower approached Bayside to provide a mezzanine piece, one they secured on “rich terms”, according to Hamdani.
“We are seeing more and more of these kinds of transactions,” he adds.
The deal was the company’s second in Spain. The first was a trailblazing agreement with bad bank Sareb to take a 51% stake in a €100m portfolio of 939 houses and flats in August last year.
The company is also active in the Netherlands, where it has partnered with M7 to buy light industrial properties. And it is in negotiations to buy non-performing loan portfolios in Austria and Italy.
In the UK it has now closed two deals and has several more in negotiations.
The first was the purchase from Pandox of a 378-bedroom Docklands hotel (pictured), which was on the market for around £50m.
Bayside’s strategy hinges on reletting the hotel when Hilton’s lease expires in September.
It believes the asset has underperformed its potential because Hilton operates another major hotel at nearby Canary Wharf.
Since then it has bought a 15-building portfolio from Prospect Estates. It comprises 170,000 sq ft of offices and 425,000 sq ft of sheds. The price reflected a 12% yield.
Five of the buildings are on the business park in Milton Keynes.
The deal was completed in a joint venture with Bauer, which will provide asset management to the portfolio.
But Hamdani says the group is only just getting going, despite the rapid repricing in several of the markets on which it has focused.
“We have a very long pipeline that will see us doubling the size of our team in the next six months.
“We have invested $500m (£297m) in the past nine months and our pipeline of deals is almost double that.”
To fund the next wave of investment, the company has begun raising for a $500m European property fund, following on from its $750m first fund.
The company has also established a joint venture with developer Irvine Sellar and it is “at an advanced stage” of negotiation on a number of transactions.
