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Colony NorthStar Forecloses on $1.3 Billion Hotel Portfolio

REIT Takes Control of 148 Limited-Services Hotels Previously Held by Goldman Sachs Funds
August 14, 2017
Colony NorthStar Inc. (NYSE:CLNS) foreclosed on a $1.3 billion, 148-property limited-service hotel portfolio.

The hotels were owned by Whitehall Street Global Real Estate LP 2005 and Whitehall Street Global Employee Fund 2005, of which Goldman Sachs was the major investor. Whitehall began acquiring thr portfolio in 2006.

[Editor's Note: An earlier version of this story referred to the portfolio as the "Tharaldson Portfolio." Tharaldson Hospitality Management of Fargo, ND, had sold a bulk of the properties to Whitehall funds in 2006. However, Tharaldson has not managed or been involved with the properties since 2008.]

Whitehall obtained a $1.335 billion refinancing of the properties in 2013, a $734 million portion of which was securitized in a CMBS offering. In addition, the predecessor firm to Colony NorthStar originated a $289 million junior mezzanine loan as part of that refinancing.

Based on that mezz financing, Colony NorthStar took control of the 31-state portfolio through a consensual foreclosure following a maturity default on the junior mezzanine loan. In its second quarter earnings conference call this past week, Colony NorthStar now says it owns approximately 55% of this portfolio with the balance owned by third-party capital under Colony NorthStar’s management.

“At a basis of $92,000 per key and a 9% debt yield as the June 30, 2017, on depressed financial results, we are optimistic about the ultimate prospects for this investment,” Darren Tangen, CFO of Colony NorthStar told analysts.

Tangen said the company considers it a non-core investment and expects to eventually sell the portfolio.

In May 2015, Moody National REIT I Inc., a non traded public REIT, struck a deal to buy the portfolio for $1.725 billion but terminated the deal two months later.

Fitch Ratings was one of two bond rating agencies that rated the 2013 CMBS offering involving the hotel portfolio. According to the ratings firm, the largest share of the hotel portfolio is in California with 22 hotels. The collateral consists mainly of limited service or extended stay properties, with the largest flags consisting of Fairfield Inn, Residence Inn, Hampton Inn and Courtyard.

A significant portion of the hotels are located in secondary and tertiary markets, including some with exposure to volatility in energy prices or weak economic growth, according to Fitch. Tharaldson is based in Fargo, ND.

As of May 2017, Fitch reported that overall performance at hotels has been at peak levels, but projected that performance of the portfolio is likely to decline or remain stable through the remaining loan term, which doesn't mature until 2030.

Of the 148 hotels, 75 had experienced an increase in average daily room rates (ADR) and revenue per available room (RevPAR) for the trailing 12-month period ending March 2017, while the other 73 experienced a decrease.

On an overall portfolio basis, issuer net cash flow (NCF) for the 148 hotels had increased 7.8% since issuance. As of first-quarter 2017, the hotel portfolio's TTM occupancy and RevPAR were 70.1% and $77.97, respectively. The issuer's underwritten occupancy and RevPAR were 69.6% and $71.98.

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