St. Regis Monarch Beach seized by Citigroup

The seizure of the St. Regis Monarch Beach, where American International Group Inc. sponsored a luxury retreat just days after accepting a federal bailout, is the most dramatic sign yet of the deep troubles in the market for high-end hotels.

Citigroup Inc. took over the Dana Point hotel and golf course Monday after months of negotiations over a $70-million loan that was in default. A foreclosure auction slated for today was canceled after the lender realized there would be no serious bids for the property, according to a knowledgeable person who was not authorized to discuss the situation publicly and spoke on condition of anonymity.

The takeover comes at a time of severe contraction in the hospitality industry.

Resorts such as the St. Regis, which cater to wealthy travelers and the high-end corporate retreat business, are experiencing some of the steepest declines in revenue as the recession hammers demand for business and leisure travel.

As twilight fell one night last week, a single person lounged by the resort’s main pool while only a few couples sat in the restaurants and a piano player performed for an empty lounge. A person knowledgeable about the resort and the negotiations with Citigroup said that only about 15% of the hotel’s rooms had been rented this summer.


Such low occupancy made it impossible for the resort to meet its all its debt obligations, which included payments on a $230-million first mortgage and the $70-million loan held by Citigroup, analysts said. With property values down in the recession, the resort complex was probably not worth much more than $100 million, said Alan Reay, a consultant with Atlas Hospitality Group.

The hotel’s place in an infamous recession-related scandal has made its problems worse, investment banker Donald Wise of Johnson Capital said.

The taint arrived by association with AIG, the giant New York insurer that, because of massive wrong-way bets on the mortgage markets, became the largest recipient of bailout money from the federal government.

Just weeks after receiving its first $85 billion in federal funds, AIG shelled out more than $440,000 at the St. Regis for rooms, wining and dining, spa treatments and rounds of golf to reward 100 top salespeople.

“The property has already been nearly catastrophically damaged, through no fault of its own or the previous ownership, by the unwanted media exposure going back to when AIG held their conference,” Wise said. “It’s a wonderful asset in nearly catastrophic straits.”

The hotel depends heavily on corporate get-togethers such as AIG’s, which were expected to bring in about 70% of St. Regis’ business, Wise said. After AIG’s junket received widespread censure from lawmakers and pundits, business at the St. Regis plummeted.

“They became the poster child of greed and avarice and got slimed in many ways,” Wise said. “It wasn’t the property. They just happened to book a meeting, and the rest is history.”

The hotel’s location on the inland side of Pacific Coast Highway -- away from direct beach access -- is also a competitive disadvantage, industry observers said.

Becoming the owner of the resort will be expensive for Citigroup, which now will not only have to pay interest on the $230-million first mortgage, but also cover St. Regis’ operating losses.

Citigroup will continue to seek buyers for the resort while operating it as a St. Regis under a contract with Starwood Hotels & Resorts Worldwide Inc., which owns the St. Regis brand. It will have to continue making payments on the $230-million loan, which is held by a hedge fund and Prudential Financial Inc. and will come due in a balloon payment in 2012.

The lender’s decision to take over the resort, analysts said, was most likely made reluctantly.

“I don’t think any of these lenders today wants the property on their books,” consultant Reay said. “They can’t get any money out of this deal.”

Citigroup might have to operate the resort for five or 10 years before it would be able to sell it and make some profit, Reay said.

The Makarechian development family of Newport Beach, which does business as Makar Properties, built the hotel and will continue to own adjacent land targeted for high-end residential development, a spokesman said.

“We are happy to say that Makar and Citi were able to reach an agreement that resulted in our continuing to own significant portions of the overall resort, while at the same time allowing for the public sale to be canceled,” the family said in a statement.

In refinancing the property in 2007 for a total of $300 million between the two loans, the family and its partner, Farallon Capital Management, had already cashed out their equity stakes.

As to what the new owners should do to try to boost revenue, investment banker Wise suggests the hotel work on amplifying its appeal to locals. The hotel, he said, might benefit if it were turned into a kind of country club for Orange County residents.

“They could create more places for weddings,” he said, “and create a bona fide kosher kitchen for bar mitzvahs.”