A massive convention center hotel in downtown Dallas, the largest in Texas, could secure a total of $300 million in two loans if the details behind a presale report come to fruition by month's end.
Owners of the Sheraton Dallas Hotel, a 38-story hotel at 400 N. Olive St., could close on a $270 million commercial mortgage loan and a $30 million mezzanine loan if the borrowers are able to close on the potential deals on or about April 30, according to a S&P Global Ratings presale report published this week. The loans would be secured by the fee simple and leasehold interest of the borrowers, Elliott Investment Management and the Chartres Lodging Group. The owners didn't return calls seeking a comment.
"The Sheraton Dallas is the largest hotel in Texas featuring 1,841 guestrooms across three towers and a three-story convention center with over 230,000 square feet of meeting and convention space," S&P Global Ratings analysts said in the report.
The ratings agency added that the firm has determined the loan-to-value ratio is 74.5% based on its appraised value of the property backing the proposed deal.
The Sheraton Dallas' ratio, based on securing the $270 million mortgage, is considered by S&P to be "low leverage," the report states. In contrast, the appraiser's as-is valuation of the hospitality property puts the loan-to-value ratio at 53.8%. The rating agency's team estimated the "long-term sustainable value" as being 27.9% lower than the appraisal.
The additional debt in the $30 million mezzanine loan would increase the LTV ratio to 82.9%, the ratings agency said.
Renovation Investment
"The mortgage loan is a refinance, and the loan proceeds [are earmarked] to pay off debt of approximately $275 million, paying closing costs and returning $19 million of equity to sponsors," the report stated. The borrowers purchased the property in late 2017 for $224.5 million and have spent about $84.2 million on renovations to the property since the acquisition, according to the report.
The two-year, floating-rate commercial mortgage loan is expected to mature on April 9, 2026, subject to three, one-year extension options, according to the report. The lenders selling the commercial mortgage-backed security, or CMBS, loan are Goldman Sachs and JP Morgan Securities, the report states. KeyBank is the servicer.
S&P Global Ratings said it considers lodging properties such as the Sheraton Dallas to be among the riskiest property types because of the daily nature of the pricing structure, as well as their significant operating costs and high expense ratios compared to other property types.
Generally speaking, the CMBS markets for hotel properties are open for business with a sense that interest rates could come down later this year as property owners see impending debt coming due, said Jan Freitag, a senior vice president of lodging insights for STR and the national director of hospitality analytics for CoStar Group.
"There's no pretending anymore, property owners are just wanting to extend their loans," Freitag added. "There's an appetite from the borrower to get the deal done. They anticipate refinancing their debt in two or three years at a lower rate."
Market Dynamics
The Dallas-Fort Worth area is one of the best-performing lodging markets in the United States, with employees being back in the office, Freitag said, and small- and medium-group business is rebounding in the region. He said hotels with good meeting spaces are expected to continue outperforming their peers.
A Sheraton Dallas property appraisal said Dallas ranks ninth on the list of U.S. meeting destinations, with convention activity providing an important component in the demand mix in the market, the report states. For instance, the Kay Bailey Hutchison Convention Center, a mile from the hotel, is expected to undergo a $3.7 billion redevelopment in the coming years.
The project is being designed to add 800,000 square feet of exhibit space and 400,000 square feet of breakout space, as well as a 100,000-square-foot ballroom. Construction is scheduled to wrap by the end of 2028. Upon completion, the expanded convention center is expected to nearly double annual attendance and revenue.
The Sheraton Dallas relies heavily on meeting and group demand, with about 60% of its occupied room nights coming from this type of business, according to S&P Global Ratings' presale report. The hotel has more than 230,000 square feet of meeting and convention space with five food and beverage outlets, a fitness center, rooftop swimming pool, a business center and other amenities. The largest ballroom has capacity for 5,000 guests.
The convention hotel has a management agreement with Marriott that expires Dec. 31, 2038. In the trailing 12 months ending in February, the hotel's revenue per available room, or RevPAR, was $89.20, the report stated. Prior to the COVID-19 pandemic in 2019, the hotel's RevPAR was $78.69.
Since the borrowers purchased the hotel in 2017, the partnership has invested more than $40 million in upgrades to hotel rooms, a revamped lobby, extensive meeting space upgrades and other updates.
The hotel draws demand from nearby companies, including Accenture, Deloitte, KPMG, PricewaterhouseCoopers and Santander Group, the report states.
The Sheraton Dallas also has contracts with Southwest Airlines, Qantas Airways and Alaska Airlines, accounting for 10.3% of its room revenue in 2023, totaling $6.3 million. Those three contracts were renewed for this year, with the contracts in the proposal stage for next year.