Refinancing lessons from the Diplomat Hotel deal

Trinity Real Estate Investments and Credit Suisse Asset Management’s joint effort to buy the Diplomat Beach Resort from Brookfield Asset Management marked one of the more nuanced hospitality bets while the sector still grapples with pandemic and macro volatility.

The $835 million transaction – funded by a joint venture between real estate funds managed by CSAM and Trinity Fund Advisors – subsequently assumed the outstanding commercial mortgage-backed securities debt on the asset as part of its terms.

Originally considered by some industry analysts as an indicator of hospitality pricing, the Diplomat Beach Resort is instead serving as an example of circumventing the elevated costs of new debt capital and financing measures in today’s market.

Manus Clancy, senior managing director at Trepp, says the rating agency sees such CMBS-assuming structures from time to time, though this instance is particularly noteworthy for its size.

Assuming an existing loan in place of taking a refinancing angle – as with the Diplomat – will result in a lower cost of capital for the buyers compared with financing the purchase with new debt.

“Doing a new securitization is not cheap. And if you’re not going to end up with a bigger loan than you had before and take cash out, what’s the point?” Clancy says. He notes that in the broader market, it is likely there will be more loan assumptions in the future even though there have not been an overwhelming amount over the years. 

CSAM’s calculus

Rob Rackind, global head of real estate at Credit Suisse Asset Management, tells Real Estate Capital USA the fundamentals of the deal, including its income-producing status, pricing at a level below costs, unique location and a variety of value-add initiatives made sense for his firm and served as the draw toward pursuing the opportunity with Trinity.

What ultimately led to the close were elements beyond the asset, specifically Trinity and Hilton’s persistence on finding a financing solution beyond the traditional means. CSAM notably used capital from two of its non-US offered discretionary funds and funds from the private bank for its undisclosed portion of the $835 million deal.

Rackind notes the firm, during the due diligence phase, assessed the US financing market to get comfortable there would be sufficient market liquidity on acceptable terms for when the in-place debt matured. “America has the deepest, largest pool of capital for real estate, all the way through the capital stack,” he says. “Even when the financing markets are closed, they’re never truly closed. In the worst points of the cycle, you will always be able to find financing. It might cost you more, but you can always find it.”

Trinity and CSAM found their optimal avenue in by picking up the outstanding CMBS debt linked to the Diplomat, which is represented in BFLD 2019-DPLO, according to data from KBRA Credit Profile, a division of KBRA Analytics.

The $460 million, non-recourse first-lien mortgage loan was co-originated 60 percent by Morgan Stanley, 20 percent by JPMorgan Chase and 20 percent by Wells Fargo in September 2019.

Maverick Force, a director with KCP, says the CMBS package was initially set to mature in October 2021, but two of three one-year extension options were used by the Brookfield-helmed sponsor group to push maturity to October of this year. He noted in February that it would not be surprising to see the loan fully paid off within the succeeding three-month period following the deal’s close.