Tech Mogul Digs Hotels Out of Debt & Disaster

MSD Capital recently paid past-due amounts on the Four Seasons Maui resort’s $425 million mortgage, which suggested to some that the loan will be restructured.

After several years battling disasters—both natural and man-made—at Michael Dell‘s resorts in Hawaii and California, the investment fund that manages the billionaire’s personal fortune is trying to reboot his hotel empire.

MSD Capital LP, which oversees some $12 billion in assets for Mr. Dell, has brought its payments up to date on its $425 million mortgage on the Four Seasons Maui resort, likely signaling a restructuring of the loan. MSD had been delinquent for roughly 16 months on the debt after the investment manager quit covering the property’s debt-payment shortfalls early last year.

Meantime, MSD has been dealing with the aftermath of the March tsunami that damaged its Four Seasons Resort Hualalai hotel and its adjacent Kona Village Resort on the Big Island. And MSD is launching an overhaul of its 84-year-old Fairmont Miramar Hotel & Bungalows in Santa Monica, Calif., partly to ward off competition.

Mr. Dell’s labors in the hotel industry underscore how, at a time when U.S. hotel values are rapidly recovering from a historic downturn, the industry still faces onerous debt maturities and other obstacles best tackled with deep pockets and perseverance.

Mr. Dell and his family established MSD in 1998 to invest the billionaire’s wealth outside his eponymous Dell Inc., the seller of computer goods and services. MSD branched into real estate in 2004 by hiring Barry Sholem, a veteran of property investing at DLJ Real Estate Capital Partners and Goldman Sachs Group. Mr. Sholem led MSD’s acquisitions of its four resorts.

In hindsight, those deals didn’t have great timing, coming as the market approached its peak. MSD acquired the Fairmont Miramar and the Four Seasons Hualalai in 2006 and the Kona Village Resort in 2007.

Mr. Dell’s investment manager’s first real-estate purchase, the Four Seasons Maui resort in 2004 for $280 million, came before the market went into overdrive. But three years later, MSD made a fateful decision, refinancing the resort for $425 million and taking out its initial equity and some additional profit.

After the global economic downturn hit, the Maui resort couldn’t cover its hefty debt payments with its own income, forcing MSD to cover $12 million of shortfalls, according to loan records cited by Morningstar Inc. Then, in February 2010, MSD stopped covering those shortfalls, letting the securitized loan go delinquent in a bid to get the servicer overseeing it to rework its terms.

As the two sides spent several months negotiating, special servicer CWCapital Asset Management LLC started the lengthy foreclosure process in case no compromise could be reached. Loan records now show that MSD paid the past-due amount, estimated by Barclays Capital to be $18 million, this month.

MSD representatives declined to comment on the Maui loan’s status, as did CWCapital.

Julia Tcherkassova, an analyst who tracks commercial-mortgage-backed securities for Barclays, says that such a move is a prelude to restructuring the loan. “If you see a loan brought current,” she said, “it typically means that a modification agreement has been reached.”

Even with the deal, the performance of the 380-room resort remains far below peak levels. In this year’s first quarter, the resort generated revenue per room of $490, according to Fitch Ratings. That compares to its 2007 figure of $808.18, according to loan documents cited by Morningstar.

The performance of MSD’s other Four Seasons resort, Hualalai, also has been less than stellar. MSD teamed with Rockpoint Capital LLC in 2006 to buy the 243-room resort and 8,800 adjacent acres slated for residential development for $502 million. But, during the downturn, the resort suffered greatly, with occupancy declining by 15 percentage points and revenue per room falling by 27% from 2008 to 2009, loan records show.

Since then, Hualalai has climbed back most of the way to its peak, notching occupancy of 65% and revenue per room of $792.20 for the 12 months ended last September, the most recent data available in loan records. Residential development at the resort has slowed to a crawl, however, as it has across much of the U.S. And the resort’s estimated value—anywhere from $124 million to $289 million, according to Morningtar—remains less than its overall debt load of $335 million. That debt matures next June.

The tsunami in March damaged the Four Seasons Hualalai’s ground-floor guest rooms and restaurants, with debris sweeping into its courtyards and pools. MSD closed the resort for several weeks of repairs, reopening it April 29.

Faring much worse was Kona Village, which MSD and Rockpoint purchased in 2007 from “Beanie Baby” mogul Ty Warner for an undisclosed price. Many of its iconic thatched-roof beach bungalows were pushed off their foundations and its gas and water pipes pulled from the ground. The resort will reopen, but only after 12 to 18 months of repairs, according to a person familiar with the matter.

Additional work lies ahead for MSD in Santa Monica, where the company disclosed April 28 that it intends to conduct a sweeping renovation of its 300-room Fairmont Miramar to keep pace with newer rivals. MSD bought the Fairmont Miramar for $200 million, or $662,000 per room, in 2006.

Since then, median per-room prices for hotels in Los Angeles County have declined by nearly 15%, according to Alan Reay, founder of California hotel brokerage Atlas Hospitality Group. Even so, he said, recent sales of comparable luxury resorts in the area indicate the Fairmont Miramar still holds its 2006 value. (credit,k,hudson,wsj)


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