LOS ANGELES—Innisfree Hotels & Resorts founder and CEO Julian MacQueen is happy to be part of a growing group of owners who have been able to refinance their hotels as the lending environment continues to loosen. Innisfree worked with Aries Capital to refinance two multimillion dollar debts during 2012: a $57-million transaction in March and an $82-million deal in December.
The first deal, a 10-year non-recourse commercial-mortgage-backed-security loan with a 64% loan-to-value ratio, covered the refinancing of a 137-room Hilton Garden Inn and a 119-room Holiday Inn Express, both in Orange Beach, Alabama, and a 181-room Hampton Inn in Pensacola Beach, Florida. The second deal took care of a 206-room Holiday Inn Resort and a 275-room Hilton—both in Pensacola Beach.
The LTV for that deal was 70%; the lenders providing the financings were not disclosed. “We were able to cash out, which was important to us,” MacQueen said. “It was a two-tiered challenge. We had three hotels in Orange Beach (Alabama) that had more equity in them than the other two. We knew we needed to combine multiple properties in two states, and three of them were land leases.” A big deal for MacQueen was him getting out from under $38 million of personal recourse. “Not only was I able to get out of most of the personal recourse, we were able to replace the debt service from unamortized to amortized,” MacQueen said. “To go off of recourse, that’s huge. To get a 10-year deal, that’s huge. And we closed it in 30 days.” “It takes a lot of hard work and cooperation to close a deal like this in 30 days,” said Neil Freeman, chairman and CEO of Aries Capital.
MacQueen had simple advice for owners looking to refinance: “Start early. Don’t throw yourself in the eleventh-hour crunch.” The executives declined to reveal terms of the refinancing.
Like many deals in the hotel industry, this one was done thanks to a relationship that began at the Americas Lodging Investment Summit in 2011 during a financing forum. Freeman was impressed with the Innisfree portfolio and was eager to see how it handled the aftermath of the BP Gulf Oil spill. “They weathered the storm and had stable assets,” Freeman said. “We were in Atlanta on business and (Aries senior VP) Jeff (Bucaro) said ‘let’s fly to Pensacola to check them out.’ So that’s what we did.”
Aries Capital generated more than $250 million in capital volume in 2012 and is looking at new construction and major rehab loans in 2013. It can handle any place in the capital stack for such projects, Freeman said, adding that he expects CMBS funding will be at historical averages in 2013.
Innisfree, which was founded in 1990 and has 1,000 employees, has approximately 2,000 rooms in its portfolio that generate about $57 million in annual revenue, MacQueen said. “We are looking for future growth and more opportunities in high-demand seasonal locations—any place with a strong tourist component,” MacQueen said.
The company has two properties under construction in partnerships with the Creek Indian Enterprises Development Authority—a $24-million 127-room Hyatt Place hotel at the Pensacola International Airport that is scheduled to open this spring and a $25-million, 152-room Holiday Inn Resort Hotel in Fort Walton Beach, Florida, that will open in spring 2014.
The Fort Walton Beach development will occupy 17 gulf-front acres that is owned by the U.S. Air Force. The two companies are working as a single local entity called the Emerald Breeze Resort Group to build the property as part of the government’s Enhanced Use Lease program, a new concept from the armed services that helps create revenue streams from underutilized facilities. The property was made available for private development because of this program.
The EUL program, which is managed by the Air Force Civil Engineer Center, identifies underutilized military properties with ongoing mission requirements. In this case, the Air Force will maintain passive radio receiver dish, camera equipment and a passive radar facility on the hotel’s roof. “They freed up 17 acres of land and created an income stream for Eglin Air Force Base,” MacQueen said. “You can see a direct impact of our lease dollars going straight to the base.”
Revenue generated from the lease will be contributed to the Eglin Air Force Base budget. It took four years to develop the EUL, MacQueen said. It began with 100 bids, and then Innisfree won the right to conduct exclusive negotiations with the Air Force.
The company practices the triple bottom-line philosophy, which will work well for the Fort Walton Beach hotel, according to MacQueen. “We are focused on people, planet and profits, in that order,” he said. “We are very conscious of our impact on the beach. For example, the type of sand we use must be the same type of sand that’s there before building, and we’ve made sure we weren’t making any kind of impact on the wetlands.” On the people front, the company will offer 50% off the military per diem rate for members of the U.S. armed services. “This will allow servicemen and women to experience a first class beachfront hotel—it’s a wonderful way to give back to people serving every day.”
MacQueen knows there are advantages to winning the contract. Among the more lucrative perks is not having to pay property taxes because it is on government-owned land. He admits he’s gotten some push back from locals because of the property tax situation, but he’s comfortable with providing the discount to servicemen and women as a good alternative to giving government agencies the funds.
In addition, there’s room to build another hotel on the land when the first one reaches stability. That plays well with MacQueen’s bullish outlook for the next four years. “Through 2017 is nothing but blue skies,” he said. “We’re looking through 2017 as having compounded growth of 6% a year.”