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Buyout of Manchester Grand Hyatt largest hotel transaction on West Coast in 2011

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On March 17, 2011, when Bethesda, Md.-based Host Hotels & Resorts Inc. (NYSE: HST) closed its $572 million acquisition of the 1,625-room Manchester Grand Hyatt San Diego, it successfully concluded the largest West Coast hotel transaction of the year.

Developed by Douglas F. Manchester, founder and chairman of the Manchester Financial Group, the Grand Hyatt that bears his name is the West Coast’s largest waterfront hotel and the second largest hotel in California, according to sources involved in the transaction. The $140 million, 40-story tower was built in 1992. In 2003, a $240 million, 33-story tower and four-story adjoining building were added. The hotel has 125,000 square feet of meeting space, including a 34,000-square-foot exhibition hall and a 30,000-square-foot ballroom.

Host Hotels & Resorts, an S&P 500 and Fortune 500 company, has properties in 25 states and 13 countries, including five in San Diego. Reportedly the largest lodging real estate investment trust (REIT), Host is also one of the largest owners of luxury hotels.

According to documents Host filed with the Securities and Exchange Commission, the Hyatt deal included $19 million for the existing FF&E (fixtures, furniture and equipment) fund. The transaction was comprised of cash consideration of $566 million including repayment of $403 million of existing loans. In connection with the acquisition, Host issued 320,156 Class A Common Units valued at $6 million and 3,979,819.25 Class F Preferred Units valued at $499.5 million in a private placement. Host received a note from the seller equal to the value of the preferred units.

Michael Levinson, partner at Cooley LLP, headed the team representing Manchester Financial Group and its affiliates. David C. Meckler, partner at Latham & Watkins LLP in Orange County, represented Host. No brokers were involved in the transaction.

The waterfront Manchester Grand Hyatt San Diego was sold this year for a record $572 million. Courtesy photo

Levinson said Host’s deal was the third of three potential transactions explored beginning June of 2010, when Manchester announced a joint venture with Hyatt Hotels Corp. (NYSE: H) in which he would exchange his majority interest in the luxury hotel for an interest in two Hyatt hotels in Chicago and Atlanta.

“It was a way for Manchester to diversify his portfolio,” said Levinson. “It’s heavily concentrated in the Grand Hyatt, one of the most successful Grand Hyatts in the world, one of the largest hotels around, extremely successful and very valuable, and it made sense for him to diversify. So it seemed like a natural to do it with Hyatt.”

The San Diego Unified Port District holds the hotel’s ground lease, so any deal required the Port’s approval.

“The minute we were ready to proceed with a transaction with someone, we had to go to the Port, which meant it became public information,” Levinson said.

Once public, the joint venture with Hyatt attracted interest from Sunstone Hotel Investors Inc., an Orange County-based REIT that came to Manchester with a better valuation. However, that deal collapsed in August 2010. Then, according to Levinson, Host became interested.

“We found them to be a very good partner to deal with,” Levinson said. “We were contributing our hotel to the Host REIT, and they would issue to us various common and preferred units, and we would be diversifying by having a small piece of the larger Host company.”

Manchester Financial Group was involved in a similar transaction with Host in 2008 when it sold its remaining interest in the San Diego Marriott Hotel & Marina, valued at $93 million.

“Obviously having had that relationship with Host before and that transactional experience, it was easy to work with them,” Levinson said.

REITs must adhere to strict rules to maintain their tax status, and their ownership in hotels must be passive -- meaning they can’t be the operator. Typically the hotel manager is the employer, but according to Levinson, Manchester was the employer. Prior to placing the hotel into the REIT, the management agreement with Hyatt was renegotiated, and the hotel employees became Hyatt employees.

Citing non-disclosure agreements, Meckler wouldn’t comment on any specifics of the transaction that had not already been made public and said he was not at liberty to discuss why the Hyatt was a good acquisition for Host.

Alan Reay, president of Atlas Hospitality Group, which tracks hotel sales, said the huge amount of hotel transactions during the first six months was driven primarily by REITs and the low cost of financing as well as overseas investors, especially out of Asia, but has dampened somewhat due to the turmoil in the stock market and the decline in REIT share values.

“It seemed like an opportune time to make a move in terms of where Manchester was and the proper time to do that,” Levinson said. “The transaction provided him with substantial liquidity to do other transactions and deals.”

Given Manchester’s recent announcement that he had reached an agreement with Platinum Equity to buy the San Diego Union-Tribune, Levinson laughingly agreed one might draw the conclusion that Manchester intended to invest the Hyatt deal proceeds in a new San Diego project, but he wouldn’t comment on that transaction, which is expected to close mid-December.

Manchester retains control of the Grand Del Mar in Carmel Valley, and according to Levinson, has relocated its offices from the Hyatt to the Grand Del Mar. Although Manchester no longer controls his marquis waterfront property, he is still working out plans to develop the Pacific Gateway hotel-office complex at the Navy Broadway Complex.

-James is an Encinitas-based freelance writer.

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