Inter-Continental Hotel Suffers Loss Despite High Occupancy
Beset by high debt costs, the Hotel Inter-Continental San Diego lost $1.2 million over the first four months of 1987, despite a healthy 82% occupancy rate that was significantly above the local market average. For all of 1986, the hotel lost $7.6 million while operating at a 69% occupancy rate.
The bay-front hotel’s losses were disclosed in an internal memo prepared by Beverly Hills Savings & Loan to evaluate hotel owner Doug Manchester’s demand that Beverly Hills and Home Savings of America restructure the hotel’s $217 million in debt. Manchester has made the restructuring a condition of Marriott Corp.’s taking over management of the 681-room hotel.
The Beverly Hills memo describes the Inter-Continental as a hotel that has made significant improvements in operations but is drowning in debt, $207 million of which is owed to first mortgage holder Home Savings, with $10 million owed to junior mortgage holder Beverly Hills Savings.
The memo said the Inter-Continental lost money in the first four months of this year because gross operating profits were not adequate to meet non-operating expenses, including debt service, taxes and ground-lease payments to the San Diego port district.
Because the hotel’s total debt exceeds what is described as its probable market value of $200 million, the Beverly Hills memo concludes by recommending that the S&L;’s board agree to restructure its loan at a loss since “the evidence supports a conclusion that our loan is uncollectible.”
“The occupancy level exceeds the market average for San Diego, and one must question whether this performance can be maintained,” the memo reads. “There is nothing in the operation results to suggest that the hotel will be in a position to service its debt at market rates anytime soon.”
Last month, Beverly Hills Savings board members Tom Carter and Tom Stickel, both San Diegans, said the S&L; was not inclined to make concessions to Manchester. Beverly Hills had already taken a $20-million loss, they said, when its $30-million equity investment in the hotel was converted in 1985 to a $10-million loan as a condition of Home Savings refinancing the hotel for $207 million.
But the memo and other sources involved in the debt restructuring talks indicate that Beverly has little choice but to restructure given its loan’s weak security. According to a proposal put forth by Manchester late last month, Marriott would pay $1 million in cash to Beverly Hills now, in exchange for the S&L; extending the due date of its loan until 1997.
As part of the restructuring, Marriott would also invest $20 million in the hotel and become a 5% owner of the complex, the memo said. Marriott would also receive 90% of the hotel’s tax benefits, the memo said, as well as 30% of the hotel’s cash flow after payment of operating costs.
A second hotel tower containing 683 rooms, now being built and scheduled to open in December, would also be managed and partially owned by Marriott. The towers are adjacent to the San Diego Convention Center, which is scheduled to open in 1989.
Manchester said last month that the debt restructuring and Marriott’s capital infusion are needed to keep the hotel from going under. He threatened to take the property into bankruptcy proceedings if lenders do not meet his demands, sources involved in the renegotiations said.
Carter and Stickel were unavailable for comment Wednesday, as were Manchester and Home Savings officials. Marriott Vice President Jim Reed in Costa Mesa said only that a definitive agreement for Marriott to take control of the property should be completed in the next week or two.
Hotel Inter-Continental spokeswoman Susan Thomas maintains that her company views as “invalid” the preliminary agreement announced last month in which Inter-Continental agreed to relinquish the hotel’s management to Marriott. According to the Beverly Hills memo, Marriott has offered to pay Inter-Continental $4.5 million to take over management of the property.
Saying that the New York-based, 110-hotel Inter-Continental chain plans to fulfill its contract to manage the hotel, Thomas defended the chain’s record since the hotel opened in April, 1984. She said the hotel had become one of San Diego’s two highest performing, in terms of revenue generated by room sales, along with the Hotel Del Coronado.
Thomas’ assertion was supported by the Beverly Hills memo, which said the hotel’s average room rate was $118 for the four months ended April 30, up from $113 last year. The hotel’s gross operating profit as a percentage of revenues was 37% through April, up from the 1986 average of 30.7%, which is also high for the industry, the memo said.
According to a survey by hotel industry consultants Laventhol & Horwath, the average room rate at 127 San Diego hotels was $73.77 for the same four-month period. Occupancy at the hotels surveyed was 77.3%.
