The Chicago-based investor that was reportedly exploring a sale of its lone Orange County property just 18 months ago has instead added to its local resort holdings.
Strategic Hotels & Resorts Inc., a real estate investment trust that owns 18 high-end hotels in the U.S., late last month announced the $360 million acquisition of the Montage Laguna Beach, one of OC’s toniest resorts.
The 250-room, oceanfront resort sold for a little more than $1.4 million a room, one of the highest ever per-room prices in the U.S. for a hotel sale.
The deal is the latest sign of strength for the high end of the OC hospitality industry, not to mention another example of the frothy sales market for upper-end hotel properties across the country, driven by cash-flush public companies and a growing base of foreign investors.
Irvine-based Montage Hotels & Resorts will continue to manage the Montage. The hotel was sold by Ohana Real Estate Investors LLC, an investment group funded by eBay founder Pierre Omidyar.
An investment group that included Ohana Real Estate—which also owns Travelodge Laguna Beach—paid a reported $190 million for the Montage in 2002, just prior to the 30-acre resort’s 2003 opening.
Strategic said it funded the purchase with about $100 million in common stock, $110 million in cash, and the assumption of $150 million in debt.
The deal adds another notable OC holding to the portfolio of Strategic, whose market value is about $3.3 billion. Strategic also owns the Ritz-Carlton in Dana Point about three miles south of the Montage on Coast Highway.
It bought the 396-room property in 2006 from a privately held predecessor company for $327.7 million, plus the assumption of $8.6 million in debt in a deal that valued it at nearly $850,000 per room.
Changing Course
Strategic’s stay in OC appeared to be short term as recently as mid-2013. National reports said the company, prompted by one of its largest investors, was exploring a sale of some or all of its properties, including the Ritz-Carlton, Laguna Niguel. The company at the time was considered undervalued compared to other hotel stocks.
A sale never took place, as improving stock returns and quarterly earnings helped placate the investor, New York-based Orange Capital LLC.
The company had begun to streamline its investment strategy by 2014, shedding all but one property it owned outside of the U.S.
and homing in on what company officials call the “upper-upscale and luxury lodging market.”
Other Southern California properties in its portfolio include the Loews Santa Monica Beach Hotel, the Hyatt Regency La Jolla, and the Hotel del Coronado on the San Diego waterfront.
Strategic bought a minority stake in the Coronado in 2006 and added the remaining 63.6% stake last year in a deal that valued the hotel at $787 million, or a little more than $1 million per room.
“These are beautiful luxury and upper-upscale assets, which at this part in the cycle have room to grow, because it doesn’t make sense to build properties like these today,” Chief Executive Raymond Gellein said in an interview last month.
Barriers include scarce land availability and high development costs.
The addition of the Montage fits the bill for that strategy, Gellein said in a statement following the acquisition.
“The Southern California market generally, and the coastal Orange County market specifically, have been among the highest-rated markets in the country and are poised to continue their strong growth given the diverse set of demand drivers and no competitive supply in the current pipeline as the result of extremely high barriers to entry,” Gellein said.
The company said it expects the Montage to bring in an average daily rate this year of $600 per room.
The Ritz-Carlton posted an average daily rate in 2013 of nearly $400 per room, and the company said the hotel’s rates were up about 6% year-over-year in mid-2014.
Top Dollar
A few resort properties in the state have been valued at higher per-room prices following recent refinancing transactions, but in terms of a sale, the $1.4-million-per-room price paid for the Montage is believed to be the priciest California hotel sale, according to Alan Reay, president of Irvine-based consultancy Atlas Hospitality Group.
“It’s a huge number,” Reay said.
The price is near those paid in recent sales of the Waldorf Astoria New York and the Four Seasons Resort Hualalai in Hawaii, he said.
By comparison, the St. Regis Monarch Beach Resort in Dana Point—another of OC’s top resorts—sold last May for about $320 million, or roughly $800,000 per room for the 400-room property, which was bought by Denver-based private equity firm KSL Capital Partners LLC.
The St. Regis was valued at less than $400,000 a room as recently as 2009 in the aftermath of the last recession.
Officials with Strategic said they think there’s room for hotel valuations to go up further, despite the steep price paid for the Montage.
“Cycles have lasted as long as 10 years and we’re in the middle of the current cycle,” Gellein said in an interview with Leaders Magazine last month.
Strategic’s acquisition of the Montage isn’t without its share of irony, Reay said.
The resort was initially a development of Marriott International Inc. but was sold to Omidyar’s Ohana Real Estate, in part to eliminate any conflict of interest between the Montage and the nearby Ritz-Carlton, which is a Marriott brand.
