Strategic Hotels Brings in Blackstone to Help Recap San Diego’s Famed Hotel del Coronado

The arrangement, which gives Blackstone a 60 percent ownership stake in the celebrated luxury waterfront hotel, was a timely one, as a loan secured by the property had been scheduled to mature this month.

February 9, 2011
By Barbra Murray, Contributing Editor

Strategic Hotels & Resorts Inc., a joint venture owner of the San Diego area’s Hotel del Coronado, has completed a transaction with Blackstone Real Estate Partners that recapitalizes the iconic 679-room property and shrinks indebtedness from $650 million to $425 million. The arrangement, which gives Blackstone a 60 percent ownership stake in the celebrated luxury waterfront hotel, was a timely one, as a loan secured by the property had been scheduled to mature this month.

Hotel del Coronado, sited on the beaches of the prestigious San Diego suburb of Coronado, also features 78 new cottages and villas at its Beach Village, upscale retail shops and a premier spa. Until recently, the joint venture owning the famed 123-year-old property consisted of Strategic Hotels, Kohlberg Kravis Roberts & Co. and KSL Resorts. Strategic Hotels had acquired a 45 percent stake in the asset from KKR and KSL in 2006 for $745 million, leaving its partners with an ownership interest of 41 percent and 14 percent, respectively. In conjunction with that transaction, the joint venture had secured $610 million of non-recourse mortgage and mezzanine loans.

Fast forward to January 7, 2011, the scheduled maturity date for the loans. That day, Strategic Hotels announced that the partners had received an extension pushing the maturity date back one month to February 9, 2011, and expressed their continued hopes for orchestrating the restructuring of the debt. Their hopes were dashed on the restructuring effort, but all was not lost, as the recapitalization arrangement with Blackstone materialized. “I have had a personal and corporate relationship with Blackstone for 15 years,” Laurence Geller, CEO of Strategic Hotels, told CPE. “We realized that Blackstone was the logical partner to work with because of their real estate expertise and their knowledge of the hotel industry.” The new joint venture consists of Strategic Hotels, KSL and Blackstone, minus KKR.

On the surface, the recapitalization deal with Blackstone may appear as a simple switching out of partners, but such is not the case. “KKR decided to exit so we restructured the partnership and bought out KKR,” Geller explained. Strategic Hotels acquired KKR’s interest in connection with the Blackstone agreement, which leaves Strategic Hotels and KSL with respective joint venture ownership stakes of approximately 34.3 percent and 5.7 percent, and makes Blackstone general partner with 60 percent. As part of the recapitalization, which places a $590 million value on Hotel del Coronado, Deutsche Bank originated $425 million in debt financing.

“Blackstone believes in the long-term value of the asset to the same extent that we and KSL believe in its long-term value,” Geller said. “There is much upside to it with the incremental projects, and it’s better having an expert equity partner than a passive financial partner.”

There is also an upside to the San Diego hotel market, he adds. “The backdrop to our reinvestment in this is clearly the revival of the high-end luxury hotel industry in this cycle. Besides, at how many hotels did Marilyn Monroe make a movie like ‘Some Like it Hot’? The only ‘hot’ we like now is for the market to be sizzling and have a hot summer, so we have a lot of business at Hotel del Coronado’s beach.”