Trinity Real Estate Investments and Credit Suisse Asset Management, which linked up to buy the Diplomat Beach Resort for a reported $835 million in one of the more sizable bets on the hospitality sector during the pandemic, are planning to assume existing CMBS debt on the asset as part of the acquisition.
A joint venture between real estate funds managed by Trinity Fund Advisors and non-US offered real estate funds managed by Credit Suisse funded the February 3 transaction, which will subsequently assume the outstanding commercial mortgage-backed securities debt on the asset as part of its terms.
Sean Hehir, president and CEO at Honolulu-based Trinity, told Real Estate Capital USA the partners assumed the existing CMBS debt as part of the Diplomat purchase. He said Credit Suisse supplied equity for this transaction using two of its discretionary funds as well as funds from the private bank. Full terms of the transaction were not able to be disclosed.
The CMBS transaction linked to the Diplomat is 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 by Morgan Stanley (60 percent), JPMorgan Chase (20 percent) and Wells Fargo (20 percent) on September 19, 2019. Sponsors on the 2019 CMBS deal included Brookfield Strategic Real Estate Partners I, Thayer Hotel Investors VI, affiliates of Brookfield Property Partners and its parent company, Brookfield Asset Management.
Maverick Force, a director with KCP, told Real Estate Capital USA the CMBS package had a two-year initial term that was initially set to mature in October 2021, but two of the three one-year extension options have been executed thus far, now setting maturity for October 2023. He said the debt could be extended for an additional year, and according to the loan documents, there is no lockout period.
“It would not be surprising for us to see the loan fully paid off next month or in the next three months,” Force said, adding that there tends to be a 3-month window from when a sale goes through to when the proceeds finally come through the transaction.
Force said KCP had some concerns for BFLD 2019 DPLO throughout the pandemic, noting it looked to be slow to rebound. “Pre-pandemic, the property was under contract for about $800 million before that agreement was cancelled in May 2020,” he said. “In early 2022 – even though the property was still operating at a loss – news of an $850 million contract with Trinity started to circulate and then in mid-2022 that news fell off. Later that year, property financials did reflect improved performance.”
KCP data showed there was also $100 million of mezzanine debt originated upon the 2019 CMBS issuance that was used to acquire the Diplomat and potentially fund some renovation work, though its status or balance is not known at present.
The asset was sold by Brookfield, who owned it through a private real estate fund and had previously completed a $90 million renovation of the Diplomat resort to bolster the asset and its amenities further.
Hilton has been brought in to manage the newly acquired resort’s operations as it is reworked into the brand’s Curio collection. Hehir said the firms plan to upgrade the asset further within Hilton’s branding to be a part of the Signia collection when further renovations are completed.
Gibson, Dunn & Crutcher LLP, Eckert Seamans Cherin & Mellott LLC, Akerman LLP, and Greenberg Traurig, LLP worked as legal counsel in connection with the Diplomat transaction.
Hehir said as part of Trinity’s investment strategy, the firm has carved out a niche in larger brand-managed destination hotels. The firm targets assets with 300 rooms or more featuring management by Hilton, Mariott, Hyatt and related peers and has a preference for destination-oriented hotels which sometimes delves into the resort classification.
“We are typically anywhere from 20 to 40 percent of the equity in any given deal and then we partner with large institutional groups that rely on us for hospitality real estate and operational expertise and Credit Suisse Asset Management – who is our partner in the Diplomat – is a prime example of that,” Hehir said, noting Trinity has also worked with Elliott Management, OakTree and Partners Group on past deals.
Trinity maintains its belief in leisure- and group-oriented hotels as part of its investing thesis, partly because the assets are irreplaceable. “Nobody is building hotels like these anymore for the most part,” Hehir said, noting the difficulty of finding 10-20 acres of land near an ocean to construct such projects. “It is almost impossible.”
The firm has a couple more acquisitions in its pipeline comparable in profile to the Diplomat albeit with room amounts totaling closer to 300 or just above. Trinity targets the SMILE states for its value-add opportunities, including Florida, Texas, Arizona, California and its home state of operation Hawaii.
“As we go into the balance of this year, we see the debt markets easing up a bit,” Hehir said. “We have been able to be creative on our transactions where – in this instance – we assume the existing debt or by working with owners to provide seller financing or working with relationship lenders to provide loans because they understand us, our business plan, our team and how we go about doing business.”