The rich, as F. Scott Fitzgerald might have said, are very different from you and me — they have better holiday destinations.
Among the best of them is Sea Island. The luxury Georgia resort and spa boasts a spectacular seaside golf course, a private beach club, elegant rooms (with rates starting at $395 a night), gourmet dining (buttermilk-fried Maine lobster tails in a Jack Daniel’s honey glaze for just $52) — and a bankruptcy.
On August 10 the resort’s owner, Sea Island Co., and its subsidiaries filed for Chapter 11 protection in U.S. bankruptcy court, weighed down by debt of more than $550 million. The good news for Sea Island and its vacationers is that a so-called stalking-horse agreement — an offer to buy the resort out of Chapter 11 — is already in place in the form of a deal proffered by distressed-debt experts Avenue Capital Group and Oaktree Capital Management. The $18 billion-in-assets New York–based Avenue and Los Angeles–based Oaktree, with $76 billion, have said they would pay $197 million to purchase the resort, which includes two luxury hotels, three golf courses, the Cloister Spa and Fitness Center and the Sea Island Beach Club, according to court documents.
The property is being shopped around by bankers from Goldman Sachs Group, who declined to comment. One hedge fund manager whose firm looked at the deal says he worries about the ability of Sea Island to make money, pointing out that, according to Goldman’s analysis, the hotel has not turned a profit in well over a decade.
Sea Island was a family-owned company founded by industrialist Howard Coffin in 1911, when Coffin, a frequent vacationer on the southern coast of Georgia and part of the upper class that Fitzgerald chronicled so well, purchased 20,000 acres on Sapelo Island. In 1928, Coffin, who made his money in the automobile industry, opened the Cloister hotel. With just 46 rooms, it was known as a “friendly little hotel,” David Bansmer, Sea Island’s president and COO, testified in bankruptcy court. By 2007, Sea Island had opened a redeveloped Cloister and the beach club and spa, and begun work on the Frederica Golf Club and residential development. The company planned to sell condos to a new class of well-heeled vacationers, many of whom frequented Sea Island. That’s where the real money was to be made — not on the resort itself.
To finance its continued development, Sea Island took out a $100 million term loan in 2007, on top of its existing $96 million term loan, and increased a $200 million revolving loan to $235 million. Interest rates on the loans were between 4.65 and 6.5 percent, according to court documents. Like many such developments at the time, Sea Island’s expansion was furnished through debt, which was easy to raise. But as Deborah Jackson, executive managing director of Weiser Realty Advisors, the real estate advisory arm of New York real estate accounting firm WeiserMazars, notes, many of the hotel-to-condominium conversions or hotel-condominium developments from that era have struggled since 2008. With the market not expected to recover until at least 2011, the pain has continued. “Unless you have deep pockets, you are going to be in a difficult situation,” Jackson says.
Both Oaktree president Bruce Karsh and Avenue chairman and CEO Marc Lasry have vacationed at Sea Island for years. In August, Lasry told Institutional Investor that he stands to get Sea Island at a great price, especially given the almost $600 million the resort cost to develop. “It is a unique asset with great potential,” he says. “The fact that we knew the property and people there better than anybody else afforded us unique insights.”
According to a source close to both firms, Avenue and Oaktree view Sea Island as more than a real estate play; it is about taking advantage of a turnaround that may hit the luxury complex and high-end vacation destination market. Oaktree and Avenue aren’t the only interested parties. Sea Island had to file a copy of its complete financials with the court by September 23, and a court auction is set for October 11 — leaving just enough time for interested buyers to take a quick reconnaissance jaunt to Georgia.
