Blackstone is tapping the commercial bond market to help fund its purchase of a 452-key hotel and resort on the Hawaiian island of Oahu.

In December, an affiliate of the private equity firm obtained a $189 million mortgage from Citigroup. Proceeds, along with $52.9 million of mezzanine debt and $101.3 million of sponsor equity, were used to acquire the Turtle Bay Resort for $332.5 million and pay closing costs. The seller was a bank syndicate that took control of the property in 2010, according to Kroll Bond Rating Agency.

The first mortgage, which pays interest, and no principal, for its entire extended term of seven years, is being used as collateral for Turtle Bay Resort Trust CGCMT 2018-TBR.

The Turtle Bay Resort is the only full-service hotel and resort located on the northern shore of the Hawaiian island of Oahu, an area well known for its natural setting. “While the undeveloped, natural setting appeals to some tourists, the north shore does not offer the extensive amenities, dining options and retail opportunities available in Waikiki,” the presale report notes.

The property is also older. It was built in 1972 and underwent a $55 million renovation in 2013. Blackstone appears to have big plans: The site has been approved for the development of 725 hotel, condominium hotel, and single-family units. But these units will be located on non-collateral land on both the east and west sides of the subject hotel, so mortgage bondholders may not benefit.

“On the one hand, new development might support additional amenities and activities on the site and raise the profile of the location,” Kroll notes in the presale report. “On the other hand, a new hotel may impact demand for the subject’s hotel rooms and impact its competitive position given its age.”

Even though Blackstone is financed a large portion of the purchase with equity, Kroll considers the Turtle Bay transaction to be highly leveraged. Using its own estimates of net cash flow and value, it puts the loan-to-value ratio (KLTV) at 98.6%, based on the first mortgage alone. This is higher than the average KLTV of the lodging properties securitized in the seven single-borrower deals it has rated over the past 12 months.

Taking into account the debt held outside the securitization trust, the KLTV is even higher, at 126.2%. “Should a default occur, the presence of additional debt could introduce additional creditors that could attempt to exercise remedies that are adverse to the trust, or support a bankruptcy plan that is adverse to the trust’s interests,” the presale report states.

Notably, Blackstone owns the collateral site in fee; Kroll says this is unusual for Hawaii commercial properties, which are typically owned subject to a ground lease.

The rating agency expects to assign an AAA to the senior tranches of notes to be issued in the transaction.

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