Paulson Group to Restructure Debt on Ex-Morgan Stanley Resorts
Lenders including Paulson & Co., Winthrop Realty Trust and Capital Trust Inc. face a Feb. 1 deadline to negotiate a debt extension on resorts seized from Morgan Stanley’s real estate funds in a foreclosure auction.
“The plan is to speak to all of the senior creditors and restructure all of the debt,” said David Broderick, a partner with Allen & Overy LLP, who represents the winning bidders in yesterday’s auction.
About $1.5 billion of debt on the properties comes due next week, including a $1 billion securitized mortgage backed by five of the resorts, according to data compiled by Bloomberg. The Paulson group held junior debt that helped finance Morgan Stanley’s 2007 acquisition of CNL Hotels & Resorts Inc. for $6.7 billion, positioning them to foreclose on the equity ownership after the bank defaulted on the debt.
A debt restructuring may require the winning investors to contribute capital in exchange for a longer maturity. Last April, Blackstone Group LP’s Hilton Worldwide hotel chain completed a deal to reduce debt incurred in a 2007 buyout by almost $4 billion and extend the maturity by two years. The company bought back $1.8 billion of debt and converted $2.1 billion of junior mezzanine debt to preferred equity.
Luxury hotels were hurt more than their cheaper competitors by the recession. During the recovery of the last year, high-end properties have shown the biggest increases. Occupancy at luxury hotels climbed to 66 percent in 2010 from 61 percent the prior year, said Smith Travel Research Inc. of Hendersonville, Tennessee. Last year’s figure compares with a 64 percent occupancy rate for all hotels in the top 25 U.S. markets.
‘Iconic Destination Resorts’
Three of the CNL resorts are in Florida, two are in California, two are in Arizona and one is in Hawaii.
“Whether this transaction makes sense all depends on the capital structure,” said Robert Stiles, executive vice president and head of the western U.S. region for New York-based real estate broker Cushman and Wakefield Sonnenblick Goldman, who isn’t involved in the transaction. “These are largely iconic destination resorts that will have long-term appeal.”
The properties are the Grand Wailea Resort Hotel and Spa in Hawaii; the La Quinta Resort and Club and adjacent PGA West golf course in La Quinta, California; the JW Marriott Desert Ridge Resort and Arizona Biltmore Resort and Spa, both in Phoenix; the Doral Golf Resort and Spa in Miami; the JW Marriott Grande Lakes and Ritz-Carlton Grande Lakes, both in Orlando, Florida; and the Claremont Resort & Spa in Berkeley, California.
“These assets will perform nicely in the next five years, with some of them having bigger hurdles to overcome than others,” Stiles said in an interview.
Decline in Revenue
The Doral, Claremont, Grand Wailea, Arizona Biltmore and La Quinta resorts have all suffered from a decline in revenue per available room and low debt service coverage ratio, according to Bloomberg data from last month.
“Based on operating figures for the first six months of 2010, none of the properties is performing above original underwriting,” Realpoint LLC, a Horsham, Pennsylvania-based credit-rating company, said in a January report about the five properties.
Yesterday’s auction marks another setback for Morgan Stanley, which booked about $4.4 billion in real estate losses in 2008 and 2009 after the credit crisis pummeled property values and soured deals made at peak prices.
Gains in Funds
In the past four quarters, Morgan Stanley has reported gains in its real estate funds as the commercial property market began to recover. The firm had profits of $431 million in merchant banking related to principal investments held by real estate funds, according to Morgan Stanley’s fourth-quarter earnings release, issued last week.
Erica Platt, a spokeswoman at Morgan Stanley, declined to comment. Beverly Bergman, a spokeswoman for Boston-based Winthrop, referred questions to Paulson, whose spokesman, Armel Leslie, declined to comment. Douglas Armer, head of investor relations for Capital Trust, didn’t respond to two telephone messages and an e-mail seeking comment.
The foreclosure by the mezzanine lenders followed a Jan. 6 restructuring of $600 million of corporate debt used to finance the 2007 purchase of the resorts from an affiliate of Orlando, Florida-based CNL Financial Group Inc., which is no longer associated with the portfolio.
The parties agreed to extinguish $200 million of that debt and convert $400 million into equity, according to people with knowledge of the restructuring, who asked not to be identified because the information is private.
Future Capital Raising
Morgan Stanley’s special property group is part of the lender group that seized control of the assets, according to the people. Morgan Stanley’s real estate funds retained the right to participate in future capital raising, they said.
Morgan Stanley financed its CNL acquisition with $1.5 billion of senior debt, $1 billion of mezzanine debt and $800 million of corporate debt, of which $200 million was previously converted to equity.
Winthrop and Bill Ackman’s Pershing Square Capital Management LP previously tried to wrest control of Manhattan’s Stuyvesant Town-Peter Cooper Village with junior debt and ended up selling their stake to representatives of the senior lenders, who were poised to foreclose on the apartment complex.
To contact the reporters on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net; David M. Levitt in New York at dlevitt@bloomberg.net; Nadja Brandt in Los Angeles at nbrandt@bloomberg.net
To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net
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