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Fontainebleau, James Bond’s Miami Beach Hotel, Is Shaken, Not Stirred, by Debt

Luxury destination is among properties seeking to renegotiate terms with lenders, highlighting toll of coronavirus pandemic

By Julia-Ambra Verlaine and Cezary Podkul
The Wall Street Journal

The Fontainebleau is a jewel of Miami Beach, a modernist resort that was the venue for Frank Sinatra’s TV special with Elvis and a backdrop for the James Bond movie “Goldfinger.” To investors, the property is feeling less glamorous.

Wall Street scooped up billions of dollars of securities backed by mortgages on properties such as the Fontainebleau. But the luxury hotel is among those now seeking to renegotiate terms with lenders, highlighting how deeply the coronavirus pandemic has cut into a popular segment of deals that concentrate investors’ risk into a single asset.

Low interest rates, rising markets and easing credit-rating standards fueled the growth of these deals, known as single-asset, single-borrower bonds. Sold as gold-plated debt backed by trophy properties, they grew to almost 40% of the commercial mortgage market’s $120 billion of non-government-backed bond issuance in 2019, according to mortgage tracker Trepp LLC. That was up from 21% in 2012.

That borrowing spree has now ended. As hotels, restaurants, stores and other businesses adjust to the pandemic’s prolonged closures, issuance has ground to a near halt.

“Nobody bakes in these types of scenarios into their investment analysis,” said Jason Callan, senior portfolio manager at Columbia Threadneedle Investments, which owns about $4 billion of single-asset deals, including many hotels. “Now that it’s occurred, everybody has to deal with the ramifications.”

The Federal Reserve left single-asset, single-borrower deals out of the $100 billion securities-lending fund it created to stabilize various segments of the bond markets during the coronavirus pandemic. Stranded on their own, dozens of bonds linked to properties including the Fontainebleau are facing a reckoning.

No single-asset deals were classified as delinquent before April, and loans in special arrangement were de minimis, according to Morgan Stanley. That has changed dramatically. Morgan Stanley analysts estimated that as of April 30 the total balance of deals backed by single assets in debt renegotiations stood at $7.8 billion, up from $681.6 million in February.

The Fontainebleau recently joined that group. When the hotel opened in 1954, it was one of the largest and most luxurious resorts in Miami Beach—with 6 acres of gardens designed in the fashion of Versailles.

It has held on to its landmark cachet. “The Sopranos” paid a visit. Midge Maisel swooned over the grand Stairway to Nowhere overlooking the 17,000- square-foot lobby in the “The Marvelous Mrs. Maisel.” Sports Illustrated hosted its Super Bowl party at the resort in February.

Now the owner is asking for forbearance on millions of dollars in interest payments owed on $975 million of bonds because of “potential cash flow concerns,” according to a May 15 notice to bondholders. The outcome could mean losses for investors who scooped up the debt in a November bond sale packaged by Goldman Sachs Group Inc.

That sale marked the Fontainebleau’s second refinancing in a year. Jeffrey Soffer, owner of the resort, tapped into the property’s surging market value by cashing out $79 million of equity in a November 2018 deal and another $112 million a year later, ratings reports show.

Brett Mufson, president of Mr. Soffer’s property holding company, Fontainebleau Development, said in an interview that the hotel hasn’t missed any of its debt payments and that the company remains committed to the property.

“It’s the crown jewel of our portfolio, and it’s the cornerstone of our company,” Mr. Mufson said. “We have every intention of continuing to work with our lenders and our partners and continue to protect the asset.”

The bonds were sold based on revenue projections that depended on occupancy rates of about 75% and a steady stream of customers dining in one of the dozen high-end restaurants and bars on the property, including Hakkasan, where the “only at Fontainebleau” main courses go for as much as $198.

Mr. Soffer’s promise to pay a monthly $4.3 million total tab on those bonds and other debt depends on filling 200,000 square feet of meeting space, 1,594 hotel rooms and reservations at top-shelf restaurants when air travel has declined nearly 90% since late March, according to the Transportation Security Administration. JPMorgan equity research analysts predict that the airline industry alone will need many years to recover to 2019 levels.

One report by CRED iQ, a commercial real estate analytics and valuation firm, estimates that the Fontainebleau is now worth just under $1 billion if occupancy doesn’t recover to 80% until 2025. That value is down about 40% from the appraised valuation of $1.66 billion that Goldman used to underwrite the hotel’s November bond sale and indicates the property is now worth less than its total outstanding debt of $1.175 billion.

Other analysts are more optimistic. CBRE Group Inc. said in its most recent forecast that it expects hotel room revenue to recover to 2019 levels by 2023.

Mr. Mufson of Fontainebleau Development said the property’s recovery could be even quicker. The hotel will reopen its doors June 1 and has already begun taking reservations. Based on bookings thus far, he said he expects a “hockey stick”-shaped recovery in 2021.

Investors estimate that rooms account for less than half of the property’s revenue while food, beverage and entertainment offerings add up to around 43%. Liza Crawford, a securitized-credit analyst at TCW Group Inc., said it could take two years before hotels operate at previous levels.

“We are seeing significant requests for help in the hotel sector, but it is difficult to underwrite debt for hotels when occupancy is below 20%,” she said. “Forbearance is a temporary solution—it doesn’t solve cash-flow problems that extend 12 to 24 months.”

The Kalahari Waterpark and Resort in Pennsylvania, which backs a $363 million single-asset mortgage deal called SLIDE 2018-FUN, is in a similar position. Todd Nelson, chief executive of park owner Kalahari Resorts & Conventions, said in a statement that the park’s closure in March triggered a “technical default” on the loan. The company hopes to reopen the resort this summer, Mr. Nelson said.

Credit-ratings firms have placed dozens of similar properties on watch for potential downgrades. Some have already been downgraded, including a formerly triple-A rated bond tied to the Destiny USA mall in Syracuse, N.Y. Some analysts are wondering why Fontainebleau’s ratings haven’t budged.

“I think it’s really strange that this deal has not been downgraded,” said Marc Joffe, a former senior director at Moody’s Analytics who is now a senior policy analyst at the Reason Foundation in California. “Clearly, the world has changed.”

Analysts from ratings firm DBRS Morningstar said during an April webinar that single-asset bonds have significant cushions against market value declines.

Mr. Soffer, who owns a range of properties through Fontainebleau Development, bought the hotel in 2005 and renovated it extensively. The renovations cost more than $800 million and extended into the depths of the financial crisis.

New carpeting and wall treatments cost more than $150 million alone. The hotel’s 2008 reopening included a Victoria’s Secret fashion show and performances by Usher and Robin Thicke.

In 2014, Mr. Soffer tapped JPMorgan Chase & Co. to sell $535 million of floating-rate debt secured by the property. Mr. Soffer refinanced the property in 2018 and again in 2019, when the Fontainebleau’s valuation jumped to $1.54 billion and $1.66 billion, respectively, taking on more debt each time.

Industry professionals said they don’t view troubles in single-asset deals as a death knell for the industry. They said investors afraid of putting all of their eggs in one basket can still build diversified portfolios of real estate debt by buying various single-asset deals.

“Just because you’re taking concentrated risk in something doesn’t make it bad,” said Toby Cobb, managing partner and co-founder of real estate lender 3650 REIT.

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