Morgan Stanley purchased Makena Resort for $565 million & $6.6 billion including Grand Wailea. At that time (2007), Michael Franco, managing director of Morgan Stanley Real Estate, told Bloomberg: "This acquisition is a unique opportunity to acquire eight top-quality resort properties diversified across key U.S. travel destinations. We believe that these types of luxury hotels are extremely hard to replicate." Morgan Stanley Real Estate acquired part of CNL Hotels & Resorts Inc. Morgan Stanley, the biggest real estate buyer of the day among Wall Street investment banks, in 2007 paid $6.6 billion (including debt assumed) for eight premier properties, including the Grand Wailea.
reprinted courtesy Maui News 1/11/11
Just like homeowners who fall behind on their mortgage payments sometimes "hand in the keys" and walk away, the investors who bought the Grand Wailea resort in 2007 are giving up their ownership.
The big Maui resort and seven others that were pledged for a huge loan have been taken over by the lenders, according to a report by Bloomberg News in New York.
The loan, originally for $1 billion, was coming due next month.
On Monday, Grand Wailea General Manager Matt Bailey said the change in ownership wouldn't have any immediate effect on operations, which are under a long-term contract with Hilton.
The irony of the situation with the Grand Wailea is that it is reportedly doing pretty well considering the depressed state of the visitor industry. So well, in fact, that its old owner, Morgan Stanley Real Estate, was planning a $250 million, 310-room expansion.
That expansion is being contested, and a hearing is scheduled this morning at the Maui Planning Commission. Attorney Isaac Hall, who is representing hotel expansion opponents and an appeal by Shep Gordon over a beach parking arrangement being financed by the Grand Wailea, said the takeover adds an additional complication to an already complicated situation.
"The authority to pursue the whole thing is in Morgan Stanley," he said. "We have a question right now about who does have the authority to process this application."
In an e-mail, Wade Fischer, a vice president of Pyramid Project Management, which is handling the special management area application, said: "The application remains intact and will continue through the process. Our involvement remains the same."
The Grand Wailea last changed hands in 2007, at the peak of the real estate boom, when Morgan Stanley Real Estate acquired part of CNL Hotels & Resorts Inc.
Morgan Stanley, the biggest real estate buyer of the day among Wall Street investment banks, paid $6.6 billion (including debt assumed) for eight premier properties, including the Grand Wailea.
At that time, Michael Franco, managing director of Morgan Stanley Real Estate, told Bloomberg: "This acquisition is a unique opportunity to acquire eight top-quality resort properties diversified across key U.S. travel destinations. We believe that these types of luxury hotels are extremely hard to replicate."
At about the same time, Morgan Stanley was a lead investor in the purchase of the Makena Resort for $565 million.
Within a year or so, the recession beat down real estate values and operating income. The Makena deal resulted in foreclosure and a sale back to the lenders for $95 million last year.
The CNL acquisition was financed in several portions, and the Grand Wailea and the other seven top resorts were pledged for $600 million in corporate obligations, according to Bloomberg.
The lenders were Paulson & Co., Winthrop Realty Trust, Capital Trust Inc. and Morgan Stanley special property group (a separate part of Morgan Stanley).
At one time, the bonded debt was reported to have been $1 billion, and the collateral was valued by real estate tracker RealPoint at $1.4 billion in late 2009.
Morgan Stanley had already converted $200 million of these corporate bonds to equity, Bloomberg reported.
Although the parties involved are not speaking to reporters for attribution, apparently Morgan Stanley Real Estate was unable to refinance even its reduced debt. Maui Land & Pineapple Co., by contrast, recently refinanced and extended its debt falling due this spring at a lower rate of interest, according to a company filing with the U.S. Securities and Exchange Commission.
According to Bloomberg, as of last Thursday, the remaining bond debt for Morgan Stanley was restructured. The lenders wrote off $200 million and converted $400 million to equity. They thus took control of the eight resorts.
The seven others, not including the Grand Wailea, are La Quinta Resort & Club and PGA West in La Quinta, Calif.; the Arizona Biltmore Resort & Spa in Phoenix; Doral Golf Resort & Spa in Miami; the Ritz-Carlton Orlando and JW Marriott Orlando, both at the Grande Lake Resorts; the JW Marriott Desert Ridge Resort & Spa in Phoenix; and the Claremont Resort & Spa in Berkeley, Calif.
That does not mean, however, that the Paulson-led group picked up eight luxury resorts for an average of $50 million.
There was other debt, at least $1.5 billion, that was senior to the unsecured corporate bonds.
Barry Sullivan, a Honolulu lawyer who has negotiated restructurings of a billion dollars worth of Hawaii hotel debt, said he could not speak directly of the Grand Wailea debts, since he was not involved, but that in general lenders to distressed hotels are in a bind.
Because the debt arrangements are complex and multilayered, it is not usually a simple matter of foreclosing on the real estate.
And sometimes the parties among the lenders do not agree among themselves, he said. Some may want to write off a loss and move on, he said. Others, more optimistic, may want to hang on until operations improve and hope that cash returns improve.
Bloomberg reported that Morgan Stanley Real Estate lost about $4.4 billion in 2008 and 2009. It has previously turned the keys back to its lenders on some other commercial properties, in one case escaping a $2 billion obligation by giving up.
Most Hawaii resorts were sold or their owners took on debt around 2006, when tourism was expanding and interest rates were low. Few if any can now support those debts.
In 2007, when Morgan Stanley absorbed most of CNL (the less prestigious properties were sold to a Texas firm), Arthur de Haast, global chief executive officer of Jones Lang LaSalle Hotels, one of the biggest commercial real estate brokerages, told Bloomberg, "I'm sure Morgan Stanley has worked out a strategy to enhance the assets, restructure debt and eventually sell the assets in two to three years."
Indeed, Morgan Stanley "flipped" its stake within a few years, but not the way investors had counted on.
Bailey estimated that as many as 80 percent of hotel owners worldwide borrowed against their properties in the 2006-07 peak period. They were counting on both appreciating prices and steady growth in tourism.
The financial crisis of October 2008 put a stop to that, and on Maui the bad news began five months earlier when Aloha Airlines and ATA Airlines folded.
Recently, many Hawaii resorts have been enjoying double-digit growth, but the bottom reached in 2009 was so low that even improved 2010 totals are not back to what they were before the downturn.
Bailey said the Grand Wailea is doing well with visitors known as free and independent travelers, but group business continues to languish.
Nevertheless, planning for an eventual rebound, the owners had applied for a big expansion of the resort, which has nearly 800 rooms.
On appeal, the 2nd Circuit Court nullified permits granted by the Maui Planning Commission because the court ruled applications to intervene should have been granted. Meanwhile, the Wailea Community Association had plans to pave and realign parking at the Wailea end of South Kihei Road. Grand Wailea contributed $100,000 to support that.
Hall opposed that, maintaining that the parking would be in part fulfillment of Grand Wailea's conditions for the since-nullified special management area permit. Pyramid said since there was no permit, the money was a free gift, with no guarantees that the developer ever would, or could, ask for credits.
Second Circuit Judge Joel August held up the paving work. Hall's client, Shep Gordon, a homeowner at Keawakapu, is appealing the special management area exemption that was given to the paving work. That is the issue on today's Maui Planning Commission agenda.
* Harry Eagar can be reached at heagar@mauinews.com.
reprinted courtesy Maui News 1/11/11, original link www mauinews.com/page/content.detail/id/544901/Grand-Wailea-investors-give-up-ownership.html?nav=10
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