Background of Astor Case Atudy

Background:

The Astor Park Hotel was initially constructed as a dormitory for the University of the Northwest (UNW) in 1969 and was converted into a retirement home in the mid 1970’s.  The property quickly fell into default after the conversion and Wells Fargo bought the asset and brought in Hyatt to restructure and operate the property as a hotel.  In 1979, Wells Fargo sold the property to Andrew Pimentel-a Pacifico based real estate developer for $ 9million (financed with $6million of 10% interest only debt for 10 years) and at that time the property was renamed as the Astor Park Hotel.

The hotel turned to be quite successful in the early 1980’s, which enabled Pimentel to take a 25-year, $40 million non-recourse loan with interest accruing at 10.69% from Equitable in 1987. $6 million of the loan was used to repay Pimentel’s initial acquisition financing; 10 million of the debt was used to improve the property and the remaining was distributed to Pimental and his partners. More debt was added in 1990 in the form of a $5million, 20 year second trust deed with a constant of 11.75% provided by Equitable.  At the time of this loan, the property was valued at $75 million.

The Astor Park Hotel suffered a poor performance in the 1990’s due to the increased competition and a drastic decline of the Pacifico economic environment. In terms of this, the property’s loan was restructured to allow a future debt service deferral of $6million. Though from 1993 to 1996, Pimentel put a large amount of fund - $12 million into the renovations of the property, the Astor Park hotel continued to perform poorly.  By 1998, the hotel’s poor performance had resulted in a substantial increase of the deferred interest from $6million to $18 million. The heavy debt burden- a total of $63 million forced the Astor Park hotel to be filed for Chapter 11 bankruptcy proceedings.

Valuation and Reposition:

According to my analysis, the poor performance of the Astor Park Hotel was a result of management inefficiencies and incorrect market positioning strategy. Besides, the Astor Park Hotel was undervalued and this undervaluation was based on that after acquisition, high management efficiency and a sound market positioning strategy would be achieved. There were many areas where the management of our company could assist in improving the performance of the property. Obvious cost overruns included food and beverage operations which lost over $320000 in 1998 due to generous staffing and extravagant, money –losing weekend brunch would be eliminated or at least reduced. And increase in ADR would be achieved by offering less complimentary or discounted room to ownership-related guests. In terms of this, free cash flow would increase and in order to conduct a valuation of the property, I have made several assumptions as below:

1: Rate of return of equity is 11%; cost of debt is 9% and the tax rate is 30%

2：If the property is repositioned, 100% debt finance at 9% percent would be used to acquire the hotel and if the property continues to operate as is, the acquisition and capital expenditure for repositioning will use 50% leverage financing over 20 years at 9% interest. Therefore, WACC used to discount to discount the future cash flow is calculated as below:

3: The borrowers only pay interest to the lenders during the loan period and the principle will be repaid at the maturity.