Trinity Investments is keeping its sights on maintaining and adding to its high-tier hospitality portfolio despite continued debt market volatility broadly affecting all asset classes.
Sean Hehir, managing partner, president and chief executive at the Honolulu-based private real estate investment manager, told Real Estate Capital USA the firm’s conviction was on display with its $515 million commercial mortgage-backed securities financing of The Westin Maui Resort & Spa, Ka’anapali in Hawaii.
“It gives us the ability to refinance it, position it for the next few years of ownership and we can continue to own this marquis irreplaceable asset in one of the highest barrier-to-entry markets in the country,” he said.
Hospitable markets ahead
Hehir said a dichotomy has emerged within the hotel sector, resulting in a struggle for financing for generic branded, corporate-oriented hotels. There is, however, a still-viable pathway for financing for the best-in-class offerings. There is still more runway for the high-quality hotels, he added.
“2024, in my opinion, is going to be one of the strongest group travel and leisure travel years we have seen,” Hehir said. “The dollar is slightly weaker, so we are going to start attracting more international travelers as well.”
Hehir said the institutional investment world has started to take notice of the opportunities in the hotel sector too, especially with its steady performance in a high inflationary market and ability to reprice on a nightly basis.
With hotels having traded at slightly wider cap rates historically, Hehir said the sector can absorb the higher interest rates. For other asset classes stuck in the 3.5 to 4 percent cap rate range now encountering negative leverage when taking on 7 percent debt, it makes for a tougher sell. “I do not know how you get out of that box,” Hehir said.
Hybrid and remote working habits have also changed traveler behavior, bolstering once-weak Sunday and Thursday bookings to further boost cashflows in the hotel sector relative to other asset classes. “People will start traveling on a more normalized basis within the US again,” Hehir said. “The destination resort market has a lot of tailwinds going forward and I think the debt markets are reacting accordingly.”
Breaking down the debt
The July 18 CMBS package from Morgan Stanley and Deutsche Bank will help Trinity and its partner – Los Angeles-based Oaktree Capital Management – maintain ownership of the 771-key luxury hotel that started through a 2017 deal to purchase the property from Marriott.
The Maui resort was originally owned as part of the Marriott-Starwood merger and Trinity acquired the asset six years ago, marking its second acquisition after the 2016 relaunch of the Honolulu-based manager. From 2017 onward, Hehir said Trinity and Oaktree have allocated $120 million toward renovations to transform a resort originally constructed in 1971.
One third of the guest rooms have been renovated since Trinity took control of the asset and the remaining renovations are underway now. To date, Trinity has updated the retail offerings linked to the resort, overhauled the oceanfront restaurant and improved the asset’s health and fitness amenities as a shortlist of examples.
“We are not done continuing to asset manage it and improve it from where we are, but it is a testament to the team and the partnership with Oaktree,” Hehir said. “We have been able to get to this point where it was financed in this manner and the debt markets have received it very well.”
As part of the July 18 deal, the $515 million of financing will help refinance $360 million of maturing debt originated by Blackstone. Eastdil Secured arranged the July 18 loan, which was priced at 7.755 percent.
A pre-sale report from New York-based rating agency Standard & Poors said the deal, WSTN Trust 2023-Maui, has a 78.5 percent loan-to-value ratio based on an appraisal of 56 percent. “Our long-term sustainable value estimate is 28.6 percent lower than the appraiser’s valuation,” the report stated.
S&P viewed the debt-service-coverage ratio of 1.38x as moderately low. Other potential risks cited by the ratings agency include the loan being interest-only for its four-year term which could warrant higher refinancing risk.
The Maui resort deal marks the second major financing of a trophy resort on behalf of Trinity this year. In February, the firm linked up with the now-UBS-owned Credit Suisse Asset Management for an $835 million acquisition of the Diplomat Beach Resort in Hollywood, Florida.