SAN DIEGO-Some $260 million of nearly $630 million in debt that encumbers the landmark Hotel del Coronado has been placed in special servicing as upscale and luxury hotels continue to suffer from the economic downturn. The placing of the debt with special servicer LNR Partners is not likely to lead to foreclosure, analysts say, but it raises a number of possibilities as the debt heads for a January maturity.
“I don’t think there’s a big likelihood of seeing this as a foreclosure,” says Alan Reay, founder and president of Irvine, CA-based Atlas Hospitality Group. However, Reay says that the $260 million that has been placed with the special servicer, which is CMBS debt, could be “in play” if LNR so chooses.
The hotel is owned by a joint venture called SHC KSL Partners LP, according to a public filing by Chicago-based Strategic Hotels & Resorts Inc., which owns a 45% stake in and is the general partner in the joint venture, which also owns an adjacent residential hotel-condominium development called North Beach Venture. According to the filing by Strategic, the $260 million in CMBS debt is part of $610 million in non-recourse mortgage and mezzanine loans that the joint venture entered into in January in 2006, which matures in January 2011.
The $630 million encumbering the hotel also includes a $20 million revolving credit line, which also matures in January. Diane Morefield, CFO of Strategic, said in the company's recent earnings conference call that, "Our negotiations on the restructuring of the debt due in January 2011 on the Hotel del Coronado continued to progress," during the third quarter. "We remain in very proactive discussions with all of the existing lenders," Morefield said.
Reay says the January 2006 date is important in understanding why the debt is troubled. “Any loan that was originated after 2006 is running into trouble,” the Atlas president says. Such loans were financed on record valuations, took on a record amount of debt at high loan-to-value ratios and have since suffered record declines in RevPAR, he explains.
Larger hotels and resort properties that were financed after 2006 are especially likely to have troubled loans, according to Reay. He says the size of the hotel is a factor because CMBS lenders focused on larger hotels and trophy properties as the most desirable for securitization.
Strategic said in its recent filing that the JV that owns the Hotel del Coronado “is in the process of negotiating the restructuring of its mortgage and mezzanine loans.” It states that there can be no assurance that the joint venture will be able to refinance or restructure the debt and that in the event of a default, Strategic could lose its investment in the hotel. However, analysts David Loeb and Andrew Wittmann of Milwaukee-based Robert W. Baird & Co., in a report that was issued after the hotel debt went into special servicing, say that, “We expect Strategic to work with the special servicer to obtain an extension of the maturity date.”
Situations like that faced by the Hotel del Coronado usually result in one of three outcomes, according to Reay. Either the borrower negotiates a loan modification and extension without any additional paydown, the lender agrees to modify the loan and extend it but with a paydown, or the debt goes into special servicing as it has with the Hotel del.
“Once the debt goes into special servicing, it is in play,” Reay says. He says the good news for the hotel’s owners is that the property is worth substantially more than the amount that is in special servicing. “The bad news is that the special servicer could decide to sell that loan, and there are companies out there that are buying loans to get at assets, so Strategic would have to be cognizant of that.” Recently, he notes, LNR recently marketed a number of other hotel loans that were in special servicing.
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