Deutsche Bank’s $610 million floating-rate mortgage loan on the historic Hotel del Coronado places its value at $745 million , more than $1 million per room , and has set an all-time high for any hotel in the state.
“We’ve not seen anything sell for over $1 million per room in California history,” said Alan Reay, the president of Costa Mesa-based Atlas Hospitality Group, which publishes regular reports on hotel transactions and development within the state. “There may be other hotels with as much cachet and someone may come along at some point and offer to pay more per room, but to date that hasn’t happened.”
The debt, which wipes out a $400 million mortgage that was provided by Deutsche Bank just a year earlier, also underscores the free flow of capital for lodging industry purchases and development, which all but dried up in the wake of the Sept. 11 terrorist attacks.
The recapitalization of the 679-room Hotel del Coronado involved the sale by Orlando, Fla.-based CNL Hotels & Resorts of its 70 percent stake in the property for $166 million last year. CNL’s partners in the property were La Quinta-based KSL Recreation, which continues to manage it, and New York-based Kohlberg Kravis Roberts & Co. last year. They acquired CNL’s stake and sold a 45 percent interest in the hotel to Strategic Hotel Capital Inc. for $70 million.
According to James Struthers, the chief financial officer for KSL, the proceeds from the new mortgage loan were used in part to finance Strategic’s acquisition. Proceeds will also be used to finance improvements at the Del, including a new spa with 22 treatment rooms, an “infinity” pool that gives the illusion of having no edges, and a new fitness facility, which are expected to be completed in the latter half of this year.
Throughout the last six years, the Del has maintained an average annual occupancy rate of more than 77 percent. By comparison, annual occupancy for San Diego hotels is projected to be 72.4 percent for 2005. The rate was 70.9 percent in 2004.
The revenue that the Del hotel generated from the total rooms that were rented nightly has averaged $191 per room during the six-year timeframe, said Orest Mandzy, editor of Commercial Real Estate Direct, a Newtown, Pa., online newsletter.
The hotel’s appreciation in value is due largely to its net operating income climbing to $36.7 million in 2004 from $30.3 million the year before. For the first half of 2005, it totaled nearly $20 million, Mandzy said.
“You could project that operating income would be roughly $40 million for all of 2005, so that would be a 33 percent increase from last year,” he said. “Net operating income has skyrocketed.”
The Del’s new loan, which will be resold on the commercial mortgage-backed securities market, has a three-year term, but could be extended for two additional years.
Mandzy said that short-term debt is more in favor with owners of well-performing properties like the Del, who may want to borrow against their added value, since they’d be restricted from doing so with a traditional commercial mortgage. Additionally, traditional mortgages, such as those with a 10-year maturity date, can’t be paid off ahead of time without incurring severe penalties.
Hotel’s Worth Based On Income
“A (hotel) property’s value is based solely on its ability to earn revenue,” Mandzy said. “The Del is a unique asset. There’s only one in the entire country, and while there may be other Victorian resorts, none can be replicated and not in that location.
“So the expectation is that, because it can’t be replicated, it can always get a premium price for rooms. It’s almost a philosophical argument. The experience of going to a Sheraton can be duplicated, but not the experience of going to the Del.”
Meanwhile, according to the online newsletter’s historical data on the commercial mortgage securities market, $20.9 billion in hotel loans were securitized in 2005 , more than double the $8.6 billion tally for 2004.
In 2003 , a year that marked the reversal of the downturn in hotel financing , the total for securitized loans stood at $5.7 billion.
“The third and fourth quarter of 2003 was when things picked back up,” Mandzy said. “There were a few small deals in the beginning of the year, but activity really picked up in the latter part of the year and has continued to grow since then.
“I’m not in the prognostication business, but from what people have told us, and from what we’ve been able to gather, nobody is shutting the lending spigot. It should climb this year over last.”
The strength of the commercial lending market, as far as hotels are concerned, depends on “the faith that inflation is being kept at bay,” he said.
“But real estate is very cyclical industry,” Mandzy added. “Any hiccup in the economy will impact hotels first, since they rely on transient leases, and conversely hotels come back quicker when the economy improves.”