Aug. 5–A Michigan Avenue hotel that could not find a buyer last year is suddenly in play, in a deal that should be a test of how real estate investors view the local hotel market.
Starwood Hotels & Resorts Worldwide Inc. said Monday that it was considering bidding for a controlling interest in the Westin Michigan Avenue, the 751-room hotel long considered a bellwether of the downtown Chicago hotel market.
The White Plains, N.Y.-based hotel chain already manages the Westin under an agreement that does not expire until 2026. It was not interested in buying the property until an unsolicited offer was received from a venture associated with a Minnesota hedge fund, EBF & Associates LP, with assets totaling more than $1.8 billion.
The bid values the Westin at about $91.5 million, including assumed debt, according to a Tribune estimate, well below Starwood’s estimated market value of $97.6 million.
In a sign of how the hotel market has shifted, four bidders were willing to pay $102 million to $111 million for the property at 909 N. Michigan Ave. nearly 25 months ago.
Starwood did not say how much it would offer for the recently renovated property, but disclosed the estimated market value earlier this month when it proposed refinancing the existing debt rather than a sale. The hotel is owned by a limited partnership whose general partner is a Starwood subsidiary.
The response to the offers may be a key signal about the local hotel market, experts say.
Limited partners would spurn a low offer if they believe the market is set to improve soon, lifting the hotel’s value. But if those same partners believe the recovery of the local hotel market is still several years off, they are likely to accept a lower price.
“By taking the money out now and investing it in another, completely different avenue, like the stock market, they may believe the turnaround will be quicker than what they now have in the hotel market,” said John Karver, senior vice president in the hotel group of real estate firm CB Richard Ellis Inc.
The latest bids come as the Westin shows signs of rebounding from the deep downturn in travel. Revenue per available room, a key measure of hotel profitability, rose more than 5 percent, to nearly $131 per night, in the second quarter, according to a filing with the Securities and Exchange Commission.
Back in May, Starwood proposed refinancing and increasing the hotel’s existing $24.9 million debt. Under the proposal, crafted by the hotel unit of Chicago-based real estate firm Jones Lang LaSalle Inc., the hotel would have borrowed between $70 million and $75 million from Atlanta-based Column Financial Inc. and then put the property up for sale in 2005, when the investment market improved.
But the Westin’s limited partners may find a sale preferable to a refinancing, because it would distribute cash not only to investors but also to Starwood, which would receive nearly 47 percent of the $38.5 million in proceeds, due to a second mortgage and accrued management fees.
On July 7, Madison Capital Group LLC, a small New York investment firm, offered $525 per unit for 15 percent of the partnership units
But that bid was trumped on July 24 by the venture linked to EBF.
The venture, which already owns about 8.9 percent of the partnership, offered to pay $550 per unit for another 59 percent of the partnership units.
The offer pegs the total value of the limited partnership interests at about $74.6 million. Debt and other obligations, offset by working capital, would raise the value by about $17 million, according to a Tribune estimate.
Michael J. Frey, chairman and chief executive of the Minnetonka, Minn.-based company that controls both EBF and the venture making the Westin bid, declined to comment.
Meanwhile, Starwood said last week that the terms of the Column Financial deal may no longer be available.
And rising interest rates could make any deal difficult.
Said hotel expert Karver: “We would see no investment in hotels today if it wasn’t for the fact that interest rates are so low.”
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HOT, JLL,
