Morgan Stanley Looks to Restructure CMBS

By KRIS HUDSON And ANTON TROIANOVSKI

A real-estate fund managed by Morgan Stanley is trying to restructure a $1 billion securitized mortgage on five resorts it bought in 2007 in the latest example of a bad commercial-property bet made by the firm.

Morgan Stanley's $1.75 billion MSREF V U.S. fund bought eight resorts at the top of the market from CNL Hotels & Resorts Inc. It put $1.52 billion of debt on five of the properties, including a $1 billion first mortgage and a $525 million mezzanine loan. The first mortgage was carved up and sold to investors as commercial mortgage-backed securities, a popular form of financing during the boom.

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The 780-room Grand Wailea Resort Hotel & Spa in Maui accounts for 40% of the $1 billion securitized mortgage that a Morgan Stanley fund is trying to get renegotiated.

But the five resorts have been hammered along with the rest of the luxury-hotel market by the economic downturn, making it difficult for them to pay debt service and possibly even operating costs. The resorts' combined cash flow declined to $84 million in this year's first half from $150 million during the last six months of 2007, according to debt-rating company Realpoint LLC. Their average occupancy fell to 62.5% from 72% in that same span.

Morgan Stanley was among the most aggressive buyers of real estate during the boom of earlier this decade. Its real-estate investing group bought at least $53 billion of property and sold only $14 billion between 2005 and 2007, according to Real Capital Analytics. Now, those deals made at the top of the market are dogging Morgan Stanley as property values plummet, rents decline and refinancing options remain scant. Most of that real estate was purchased by its Morgan Stanley Real Estate Funds unit, known in the industry as MSREF.

The MSREF V U.S. fund, which owns the resorts, has suffered a sharp decline in value. It also held the 310-room former Maui Prince Hotel in Hawaii, which the fund and a partner lost to foreclosure earlier this year. The California State Teachers' Retirement System last summer disclosed that its $137 million investment in MSREF V was worth just $300,000 by last March.

The five resorts inlcude the 780-room Grand Wailea Resort Hotel & Spa in Maui; the 796-room La Quinta Resort & Club and PGA West in La Quinta, Calif.; the 739-room Arizona Biltmore Resort & Spa in Phoenix; the 693-room Doral Golf Resort & Spa in Miami; and the 279-room Claremont Resort & Spa in Berkeley, Calif.

The servicer overseeing the mortgage last month transferred it to its special servicing team tasked with handling complex negotiations with borrowers, according to Realpoint. A recent monthly report issued by the servicer, PNC Financial Services Group Inc's Midland Loan Services, noted that the loan was transferred "due to servicer determination of imminent default." The report also said the borrower was "requesting extension options."

The mortgage comes due in February 2011. Meanwhile, rating firm Fitch Inc. said Midland told its analysts that the resorts' cash flow no longer covers the cost of their operations. Representatives of Midland and Morgan Stanley declined to comment.

Potential outcomes of the Morgan Stanley fund's bid to restructure the mortgage are many. The fund hopes to get revised terms on the mortgage so it can retain the resorts, according to a person familiar with the talks. If the fund defaults on the mortgage, the special servicer may try to foreclose.