By Alex Barreira – Staff Reporter, San Francisco Business Times Nov 18, 2024

San Francisco’s largest hotel complex is inching closer to a buyer.

Eastdil Secured, acting as broker, submitted its first and final calls for bids on the Hilton San Francisco Union Square and Parc 55 hotels and “several offers are presently under review,” according to a bondholder report this month on the properties’ associated debt.

The connected and jointly managed hotels, with nearly 3,000 rooms combined, have been under court-appointed receivership for just over a year since former owner Park Hotels & Resorts handed in the keys rather than pay off its related $725 million loan. The receiver, Michelle Russo of Hotel Asset Value Enhancement, has a deadline to contract a buyer by March 31, 2025.

Since Eastdil’s offering memorandum went out in July, the broker has collected at least 70 confidentiality agreements related to buyer discussions with “many large national and international names,” per the bondholder report. In September Eastdil began conducting tours and was participating in daily buyer phone calls.

Per the report, the hotels are being offered to buyers with or without the existing debt in order to maximize the potential return for bondholders.

The assets’ appraisal value since the 2016 loan has dropped by more than $1 billion. The latest appraisal is about $550 million, but a buyer will likely offer well below this given the hotels’ distressed condition, which only worsened in 2024, per the bondholder reports.

The hotels’ net income was more than $100 million in 2018 and 2019, and has only been positive once since then, when it was $8.3 million in 2023. Now they’re on track for a combined $30 million operating loss this year, accentuated by a nosedive in group business over the last six months and the biggest hotel workers strike in six years as contract negotiations drag out.

“They continue to picket outside the Hilton Union Square 24/7,” reads the bondholder report commentary. “This disruption has resulted in many cancellations.”

Elsewhere the report notes, regarding union asks, “Any significant increases in payroll will likely offset any gains in Occupancy or ADR (average daily rate) the properties might achieve in 2025.”

Group business in the third quarter produced only 9,700 room nights, compared with 36,000 in the first quarter and 24,000 in the second quarter. Hilton sales staff “tried to infill with smaller groups, but demand was not strong,” per the report commentary.

Overall, occupancy for the trailing 12 months as of Sept. 30 was just 45.5%. ADR for the period was $244.52 and revenue per available room was $111.27. The bondholders’ comp was: 68.1% occupancy, $261.54 ADR and $178.18 RevPAR.

“You look at this and think, maybe Park did make the right decision,” said Alan Reay, president of lodging consultancy Atlas Hospitality. “They probably walked away when they should have and not had to feed more money into the deal.”

Though the sale deadline looms, it’s not out of the question that the hotels could still see some truly disruptive buyer scenarios, such as when the San Jose Signia by Hilton sold of one of its two towers to become college dormitories last year.

Reay drew a comparison between the declining demand for massive office buildings to that of the largest hotels, which in some ways are “functionally obsolete” unless they’re serving major conventions. And yet the Bay Area market is also way undersupplied on housing.

“I think some of the higher probability buyers are looking to convert hotels to apartments, like is going on with offices to apartments,” Reay said.

Given the size of the assets and the deadline for a sale, circumstances favor an institutional buyer with significant liquidity and the operational expertise to stop the bleeding. A direct sale of the hotels without the debt would be one of the fastest ways to execute a deal, but could mean steeper losses for bondholders depending on how it’s combined with a financing package.

A loan-to-own sale, in which the buyer acquires the loan at a discount and then steps in for the lender, taking over the property via foreclosure, is another doable path to ownership ahead of the deadline. One recent example: last year’s Gregg Flynn-Highgate Hotels joint venture to take over the Huntington Hotel at a significant discount, which Flynn said gave him room to channel far more money into renovation costs.

The 1,919-room Hilton Union Square is in a similar boat, overdue for a major room-level renovation
that could exceed hundreds of thousands of dollars per key.

The receiver Russo did not respond to a request for comment on Friday. Eastdil Secured representatives also did not respond to comment requests.

As receiver Hotel AVE stands to earn a 0.05% commission on gross proceeds of the property sale or
alternative debt outcomes (such as loan payoff, restructuring, or similar disposition), per court filings.

If a buyer is not under contract before the March 31 deadline, the receiver will lose the authority to sell the property. At that point the loan lender, JPMorgan Chase, will have until July 15 to foreclose on the property.