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SoCal resort's new owners plan $370M CMBS to finance acquisition

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The new owners of the Monarch Beach Resort, a once star-crossed Southern California luxury hotel, are tapping the commercial mortgage securitization market to finance the takeover.

According to presale reports, Ohana Real Estate Investors is sponsoring a $370 million bond sale backed by an interest-only, floating-rate loan of the same amount, secured by the five-star, 400-room oceanfront venue in Dana Point, Calif.

Ohana, a hospitality-focused investment, development, and management group, obtained the loan via Goldman Sachs and Wells Fargo to finance a portion of the estimated $496.7 million purchase price, according to DBRS Morningstar. Ohana acquired the hotel from Denver-based KSL Capital Partners in October for approximately $496.7 million, including $126.6 million in equity, according to the reports.

The large-loan securitization will involve 13 classes of notes, two of which are tranches that will pay only interest proceeds to investors. DBRS Morningstar and Moody’s Investors Service have each assigned preliminary ratings, including a triple-A grade to the $95 million Class A tranche.

The deal carries unique risks compared to other single-asset CMBS transactions, according to ratings agencies. The resort's two-year, first-lien mortgage (with three one-year extension options) has a variable rate tied to Libor, exposing the deal to collateral with potential rising-rate volatility.

In addition, Monarch Beach is an “unflagged” resort that has not carried a hospitality brand since dropping the St. Regis name two years after KSL acquired the 162-acre hotel property in 2014. As an independent operator, Monarch Beach lacks the benefits of a major brand’s reservation system and loyalty rewards program, according to Moody’s.

But the property — originally built in 2001 — has a desirable location in a popular resort town along the California Riviera Coastline, and has undergone more than $56 million in extensive renovations by KSL. Ohana plans another $32 million in additional capital investments, as well as adopting a global luxury brand by 2021, according to the agencies.

The resort features 400 guest rooms, eight food and beverage outlets, four retail locations, more than 120,000 square feet of indoor/outdoor group function space as well as an 18-hole championship golf course.

The property has averaged 64.8% occupancy at an average daily rate of $380.42, with revenue per available room at $246.56, as estimated by DBRS Morningstar.

The resort’s net cash flow was $24 million for the 12 months prior to September 2019, compared to $15.4 million in 2014, The property had formerly been foreclosed upon in 2009 as high-end corporate business dried up in the aftermath of the financial crisis.

Morningstar rated the deal on $22 million in annual net cash flow, however, haircutting the issuer’s estimates based on the “high risk” of term default of the floating-rate loan that carries step-up rates in the first two one-year extension rates.

The ratings agencies differ on estimated debt service coverage, with Moody’s projecting a 1.16x DSCR compared to DBRS Morningstar’s 0.96x.

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