Blackstone Group LP (BX), the largest U.S. hotel owner, is in talks to borrow about $450 million to refinance debt on San Diego’s historic Hotel del Coronado to take advantage of lower interest rates, a person with knowledge of the plans said.
Blackstone’s real estate unit holds 60 percent of a joint venture that took ownership of the hotel in a February 2011 recapitalization, for which Deutsche Bank AG (DB) provided $425 million of debt financing. The owners have the option to repay that debt after two years, according to the person, who asked not to be identified because the information is private.
Borrowers are benefiting as investor demand for commercial- property debt surges with the Federal Reserve holding its benchmark lending rate at about zero for more than four years. The extra yield bondholders demand to own top-ranked securities linked to everything from skyscrapers to shopping malls rather than Treasuries has fallen to 106 basis points from 199 basis points a year ago, according to a Bank of America Merrill Lynch index.
A $225 million portion of the 2011 loan on the Hotel del Coronado from Deutsche Bank was packaged into bonds alongside other commercial mortgages and sold to investors as part of a $609 million commercial mortgage-backed securities, or CMBS, deal in October 2011, according to data compiled by Bloomberg.
The $225 million, interest-only loan matures on March 9, according to Bloomberg data. It has options for three one-year extensions.
Issuance of commercial-mortgage bonds is poised to climb 50 percent to $60 billion in 2013, according to Deutsche Bank. The market is reviving after shutting down when credit markets froze in 2008. A record $232 billion of such bonds was sold in 2007, Bloomberg data show.
Blackstone’s partners in the Hotel del Coronado are Strategic Hotels & Resorts Inc. (BEE), the property’s asset manager, and KSL Resorts, its operator. Chicago-based Strategic held 34.3 percent after the recapitalization and closely held KSL had 5.7 percent.
The 125-year-old Hotel del Coronado has been visited by 11 U.S. presidents, starting with Benjamin Harrison in 1891, as well as inventor Thomas Edison, writer L. Frank Baum, aviator Charles Lindbergh and baseball legend Babe Ruth, according to the hotel’s website. The property served as the backdrop to the 1959 Billy Wilder film “Some Like It Hot,” which starred Tony Curtis, Jack Lemmon and Marilyn Monroe.
Last year, Blackstone, Centerbridge Partners LP and Paulson & Co. refinanced their 2010 purchase of Extended Stay Hotels, enabling them to recoup about half their equity investment, two people with knowledge of the transaction said at the time.
JPMorgan Chase & Co. and Deutsche Bank are marketing about $3 billion in bonds linked to the Extended Stay debt in the largest CMBS offering since 2007.
Renovated in 2005, the Hotel del Coronado, known locally as the Hotel Del, was appraised at $586 million in January 2011, more than twice the $225 million securitized loan, according to Morningstar Inc. (MORN)
The debt-service coverage ratio, or cash flow available to meet interest payments, rose to 5.65 in the nine months ended Sept. 30, from 3.27 when the loan was underwritten, according to Morningstar. Occupancy at the hotel increased to 70 percent from 67 percent.
“As the asset is performing well, we do not consider the loan to be a default risk or value concern,” Frank Innaurato, a managing director at Morningstar Credit Ratings, said in an e- mail today. “An extension of the loan is likely.”
Aside from the $225 million securitized loan, there’s a $50 million junior-participation loan and a $150 million mezzanine loan on the property, according to Morningstar.
Blackstone, the owner of Hilton Worldwide Inc., has been expanding its hospitality investments, which account for almost half its real estate assets. The company last year purchased the Motel 6 brand, and agreed in November to buy Apple REIT Six Inc., an owner of 66 hotels.
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