Strategic Hotels ‘Breaks Record’ with Montage Laguna Beach Purchase

By Barbra Murray, Contributing Editor

Strategic Hotels & Resorts Inc. has just turned the heads of everyone in the hotel real estate business with its recent acquisition of the 250-key Montage Laguna Beach in Laguna Beach, Calif. The hotel REIT purchased the uber upscale property for $360 million, or approximately $1.4 million per key, in what the Los Angeles Times was first to describe as a deal that “shatters state records.”

“We are very focused on acquiring high-end and luxury resorts and hotels that complement our best-in-class portfolio, and the Montage Laguna Beach is a perfect example of a great fit for Strategic Hotels,” Raymond Gellein, CEO of Strategic Hotels, told CPE. “This is an irreplaceable hotel in one of the top locations in the country.”

The seller was Ohana Real Estate Investors L.L.C. Indeed, the price tag was huge, but for good reason, according to Gellein.

“The Montage Laguna Beach has the highest ADR and total RevPAR of any resort in its competitive set by a wide margin; the revenue and profitability metrics of a hotel, along with its irreplaceable location and quality, are all factors that drive the price per key,” he said. “This resort has spectacular ocean views from every single guest room.  There have been other hotels and resorts that have traded at per key prices above $1 million, and each transaction has specific metrics and criteria that drive the acquisition price.”

To finance the purchase of Montage Laguna Beach, Strategic Hotels relied on the issuance of 7,347,539 shares of common stock at $13.61 per share to an affiliated designee of Ohana, along with the assumption of an existing $150 million mortgage loan scheduled to mature in 2021.

Montage Laguna Beach, which first opened its doors 12 years ago this month, occupies 30 lush Southern California acres and also features such amenities as a 20,000-square-foot spa and 16,000 square feet of indoor meeting space.

The five-star Orange County destination resort is an asset of great prominence, to say the least.

But it’s more than prominence that Strategic Hotels is getting with Montage Laguna Beach; it’s getting as close as a hotel owner can get to a guarantee of continued success.

“Given the picturesque locations, easy accessibility, and moderate climate, the California coast as a whole offers a competitive advantage relative to other resort markets in the United States,” according to a 2014 report by hospitality consulting firm HVS. Since 2001, occupied room nights among Southern California resort properties have more than doubled, marking a net increase of 121 percent.

“The strength of the [Southern California] resort market and the extraordinary high barriers to entry for new supply–resulting from the difficult entitlement and development process, limited number of oceanfront sites, and high costs of construction–make the area attractive to hotel investors and lenders,” per the report.

Commercial real estate services firm JLL advised Ohana on the sale of the property, which will continue to operate under the management of Montage Hotels & Resorts.     

The acquisition of Montage Laguna Beach marks yet another step in the REIT’s strategy of growing its collection of irreplaceable, world-class luxury hotels in the U.S.

In December of last year, the company purchased the 210-key Four Seasons Resort Scottsdale at Troon North in Arizona for $140 million. And in June, Strategic Hotels completed the acquisition of the remaining 63.6 percent ownership interest in the renowned Hotel del Coronado in San Diego in a $210 million transaction that valued the property at $787 million.

“We remain very selective, but our last two acquisitions of the Four Seasons Troon in Scottsdale and the Montage Laguna Beach are excellent examples of the types of transaction we focus on,” Gellein said. But Strategic Hotels’ interests are hardly limited to the West, as the REIT finds that there are highly desirable markets from coast to coast. Gellein noted that there is less than one-half of one percent of total supply under development for new resorts across the U.S.

“The various barriers to entry, including high replacement cost, zoning restrictions, natural physical barriers, limited development financing and other factors, provide confidence that new supply will continue to be very limited,” Gellein added. “As a result, the ongoing strong demand for the luxury sector of the market, coupled with very limited supply, provides ongoing opportunity for us to acquire high-quality hotels and resorts in key geographic locations.”