Singapore takeover of 780-room Grand Wailea Resort Hotel & Spa in Wailea, Hawaii
Battle Brews Over Big-Name Luxury Hotels; Singapore Fund Is Forcing Auction of Four Properties and Wants to Take Ownership From Paulson and Winthrop Realty
by Kris Hudson and Eliot Brown
reprinted courtesy Wall Street Journal 8/14/12
Singapore's sovereign-wealth fund is forcing an auction of four massive luxury U.S. resorts, setting up the fund for a confrontation with the existing owners: a group led by hedge fund Paulson & Co. and Boston-based Winthrop Realty Trust.
At stake is control over some of the most-prestigious hotel properties in the U.S., including the 780-room Grand Wailea Resort Hotel & Spa in Wailea, Hawaii, and the 796-room La Quinta Resort & Club PGA West in La Quinta, Calif. The properties have been operating under bankruptcy-court protection for the past 18 months, after prior owners were unable to pay off $1.5 billion in mortgages.
Paulson, which took control of the properties in early 2011 with Winthrop, had been hoping to avoid an auction, according to real-estate executives briefed on the discussions. The firm had been trying to present a plan to pay off creditors by a Sept. 1 deadline and keep control of the properties.
But according to bankruptcy-court documents filed last week by the Government of Singapore Investment Corp., which is a major creditor to the properties, Paulson and Winthrop missed an interest payment on the debt, triggering an auction by year-end. The documents were filed in federal bankruptcy court in New York.
The fund, known as GIC, has signaled its interest in taking ownership of the properties. And as a lender holding nearly $400 million of the mezzanine debt on the four-hotel portfolio, GIC would be well-positioned to bid aggressively in any auction. A spokeswoman for GIC, which manages more than $100 billion in investments, declined to comment on the fund's latest move for the four resorts.
Should an auction occur, Paulson is looking to take part and hang onto the properties, which also include the 739-room Arizona Biltmore Resort & Spa in Phoenix and the 279-room Claremont Resort & Spa in Berkeley, Calif. Paulson has been working with private-equity firm Five Mile Capital Partners to find new partners to put in a total of roughly $400 million in new equity, along with debt, to pay off creditors, according to multiple real-estate executives briefed on discussions.
The four resorts range in age from 21 years to 97 years, but their recent history has been particularly volatile. The four were among eight big resorts that the former CNL Hotels & Resorts Inc. sold to a Morgan Stanley real-estate fund at the top of the market in 2007 for $3.1 billion.
Morgan Stanley financed the purchase by mortgaging five of the resorts, including those now sought by GIC, separately from the other three. The so-called five pack of resorts ended up with a $1 billion securitized mortgage and roughly $500 million of mezzanine debt held by GIC, Metropolitan Life Insurance Co. and others.
Amid the recession and its aftermath, the value and cash flow of the resorts declined to the extent that Morgan Stanley couldn't refinance the debt on the five resorts ahead of its due date in early 2011. That is when Paulson swept in to buy portions of the portfolio's junior-most debt on the cheap. Working with Winthrop and other partners, the group then used that debt to take over the resorts in a consensual handoff from Morgan Stanley.
The Paulson group put the five properties under bankruptcy protection in February 2011 with a plan to keep creditors at bay while the new owners attempted a strategy of selling assets, paying down debt and eventually exiting bankruptcy.
Early on, however, GIC and a partner, KSL Partners LLC, made a competing offer to take over the properties using the nearly $400 million of debt that GIC held. The Paulson group averted that takeover by placating GIC with a pledge to refinance the resorts' debt and thus pay off GIC and other lenders by Sept. 1 of this year.
That standstill agreement between Paulson and lenders led by GIC is the pact that GIC last week alleged Paulson had broken by missing an Aug. 1 interest payment to the lenders.
Meanwhile, the Paulson group succeeded in selling one of the resorts, the Doral Golf Resort & Spa in Miami, to real-estate investor and television personality Donald Trump for $150 million this year. Those proceeds were used to pay down the debt on the remaining four resorts.
After the Doral sale, the Paulson group hasn't managed to sell other assets or put together a refinancing for the four resorts. One stumbling block is that the resorts are generating far less income than they did in 2007 when their mortgages were incurred. The four resorts posted net operating income of $75 million last year, up slightly from 2010 but still far less than the $190 million they generated in 2007, according to Morningstar Credit Ratings LLC.
Write to Kris Hudson at kris.hudson@wsj.com and Eliot Brown at eliot.brown@wsj.com
reprinted courtesy Wall Street Journal 8/14/12, original link http //online wsj com/article/SB10000872396390444042704577589621236577222.html?mod=googlenews_wsj
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