Private equity firm KSL Capital Partners has closed a $480 million refinancing package for two luxury resorts in Hawaii, extracting nearly $148 million in equity while maintaining control of prime beachfront properties.
The transaction, structured through a commercial mortgage-backed securities offering called Wells Fargo Commercial Mortgage Trust 2025-HI, consists of a $325 million senior mortgage loan and $155 million in mezzanine financing for the Outrigger Reef Waikiki Beach Resort and Sheraton Kauai Coconut Beach Resort.
Outrigger Reef is a 658-key, full-service hotel and resort on Waikiki Beach in Honolulu. Sheraton Kauai is a 314-key, full-service hotel and resort in Kapa'a, on the island of Kauai.
The CMBS offering reflects continued investor appetite for trophy hotels in supply-constrained markets, according to bond rating firm DBRS Morningstar, which is rating the offering.
KSL plans to use most of the proceeds to retire $325 million in existing debt, according to a presale report from Morningstar.
The refinancing allows KSL to monetize its investment while retaining ownership of the 972-room portfolio, which the firm acquired between 2016 and 2017. Since taking control, KSL has invested $112.4 million in capital improvements across both properties, including extensive room renovations and new amenities.
One of the notable new amenities at Outrigger Reef this year was a wedding chapel. With an elegant design and classic white finishes, the chapel was added to attract Japanese tourists. KSL noted that Hawaii is a popular destination for Japanese visitors, and the chapel has multiple weddings booked in the coming months.
In 2024, Japanese tourism to the United States was still lagging from the pre-COVID pandemic, with numbers at only 49% of 2019 levels. That made it one of the slowest-recovering major markets, according to the International Trade Administration.
Another notable improvement was the addition of Monkeypod Kitchen, a popular restaurant chain in Hawaii. The new location marked its first in Waikiki.
KSL owns a 20% interest in Monkeypod Kitchen and pledged that stake as collateral for the mortgage loan, according to Morningstar. While this is not typical for CMBS transactions, instances have occurred in comparable transactions, Morningstar said.
An additional strength of the CMBS offering is that only 210 new hotel rooms are under construction in the Kauai market, and none in Waikiki.
In addition, Hawaii Senate Bill 2919 restricts short-term rentals, benefiting traditional hotels, Morningstar noted.
The senior loan originated by Wells Fargo carries floating interest of the Secured Overnight Financing Rate plus 2.3%, with a two-year initial term and three 1-year extension options. Three mezzanine loans, totaling $155 million, have spreads ranging from 4.25% to 8% over the Secured Overnight Financing Rate.
KSL did not immediately respond to CoStar News' request for additional information.