The owner of two luxury beachfront hotels in Santa Monica, Calif., is refinancing them in the commercial mortgage bond market.
Edward Thomas Corp. obtained a $356.6 million first mortgage loan and $73.7 million in mezzanine loans from Morgan Stanley. Proceeds, along with $792,815 of fresh borrower equity, were used to repay existing debt of $415 million, pay a prepayment penalty and closings costs and fund a $345,266 upfront tax reserve, according to rating agency presale reports.
The first mortgage, which pays only interest, and no principal, has an initial term of two years and can be extended by one year up to five times, for a fully extended term of seven years. It is being used as collateral for a mortgage bond offering called Morgan Stanley Capital 2018-SUN.
The mortgage bonds are secured by the fee interests in the Shutters On The Beach and Casa Del Mar; two unflagged, full-service hotels that sit adjacent to one another prime beachfront locations in Santa Monica. Shutters contains 198 keys, while Casa Del Mar has 129 keys. Fitch Ratings consider both to be “A” quality properties. It noted that they are “proximate to major demand drivers including the Santa Monica pier, Santa Monica Place, class A office space, and the Third Street Promenade.”
The hotels are not only posh, they are also exclusive, according to Fitch. They are the only luxury hotels on the west side of Los Angeles that are located directly on the beach. And that is unlikely to change, since Santa Monica passed Proposition S in 1990, which placed a moratorium on all new Santa Monica coastline hotel development by prohibiting such development west of Ocean Avenue.
Another strength of the deal, according to Fitch is the fact that operating performance has been improving. As of the May 2018 trailing 12 month period, portfolio RevPAR had grown 18.2%, or an average of 5.3% annually, since 2014; net cash flow had improved 14.2% over that same period.
Fitch considers the transaction to be highly leveraged, however. It puts the “stressed” debt service coverage ratio of the first mortgage at 0.73x, and the “stressed” loan-to-value ratio at 140.9%. After taking into account the mezzanine debt held outside the securitization trust, the DSCR falls to 0.60x and the LTV rises to 169.9%.
The borrowers, Edward and Thomas Slatkin, are third-generation hoteliers who founded their company in 1982. They developed Shutters in 1993 and redeveloped a beach club into Casa Del Mar in 1999. Both hotels have been owned and operated by the Slatkin family ever since.
The Slatkin family’s luxury California hotel experience includes experience owning and operating the Beverly Hills Hotel for over 30 years and owning the Dana Point Resort. Other hotel platform operating experience includes owning a partnership interest in Westin Hotels & Resorts and owning Vagabond Motor Inns for almost 15 years, the presale report notes.