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Walton Capital refinancing Minnesota's largest hotel via CMBS

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JPMorgan is securitizing a $180 million commercial mortgage issued to the owners of the largest hotel in Minnesota.

J.P. Morgan Chase Commercial Mortgage Securities Trust 2018-MINN is backed by the leasehold interest in the 24-story Hilton Minneapolis located in the city’s central business district and owned by Chicago private equity real estate firm Walton Street Capital.

The securitization trust will issue seven classes of notes under a REMIC structure, including a $50 million Class A note with a preliminary Aaa rating from Moody’s Investors Service. A $9.1 million tranche will serve as risk-retention stakes for the deal.

The single-asset transaction will securitize the property’s two-year loan (with three one-year extensions) that was originated in November. The presale report for Moody’s did not include details on the use of proceeds, but noted that Walton Street has spent $16.4 million on renovations to conference and public space areas, well as a lobby transformation, since acquiring the hotel in 2016 for $143 million.

The loan includes a $5 million letter of credit for elective capital expenditures through November 2020, including 7,500 square feet of new meeting space and the relocation of an executive lounge to the main floor.

The previous owner, DiamondRock Hospitality Co. of Maryland, had previously spent $13 million in guest-room upgrades in 2014, according to Moody’s. The hotel was built in 1992.

The hotel is operating under a 10-year operational agreement with Hilton Management LLC.

Moody’s estimates the hotel’s value at $118.8 million, which results in a loan-to-value ratio of 151.5%.

Despite the high leverage, the hotel has a favorable cash flow outlook over the next two years. The hotel is projected to reap $3.4 million in tax assessment relief beginning next year after the expiration of a payment-in-lieu of taxes agreement with the city. The payment-in-lieu program is ending because of overstated future tax liability projections on the 100-year ground lease with the city.

The hotel is also expected to see a 20% growth in nightly room stay volume over the next two years based on upcoming events in the Minneapolis sports and entertainment corridor that Hilton lies within a mile of. The X Games, the 2019 NCAA Men’s Final Four collegiate college basketball championship and other major collegiate championships are on the slate – and follow up the city’s hosting of Super Bowl LII at US Bank Stadium last February.

The hotel is also just three blocks from the Minneapolis Convention Center, through which it is connected via the Skyway system – the city’s series of above-ground enclosed catwalks (covering 26 million square feet) attached to many downtown buildings sheltering pedestrians from Minnesota’s harsh winters.

Moody's has projected annual cash flow of $12.7 million, or a debt-to-service coverage ratio of 1.20x.

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CMBS JPMorgan Chase