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Friday, January 9, 2004



Outrigger revamps plan
for Waikiki development

The company will sell two hotels
and add time-share units to help
finance the project


Hawaii-based lodging company Outrigger Hotels & Resorts said yesterday it will sell two of its Maui and Big Island resorts to raise capital, and that it is reconfiguring its planned $350 million Waikiki redevelopment project to replace hotel units with resort condominiums and time-share units.

Outrigger Hotels & Resorts The properties going on the market are the Wailea Marriott on Maui and the Waikoloa Beach Marriott on the Big Island.

Meanwhile, time-share company Fairfield Resorts Inc. has agreed to acquire the hotel portion of the Ohana Reef Towers Hotel, which is in the middle of the Waikiki project. Outrigger has not yet financed the redevelopment, but plans to start construction in 2005.

"The equity markets are particularly tough on the hotel industry for new construction," said David Carey, president and chief executive of Outrigger Enterprises Inc. A benefit of resort units is that they sell before construction takes place.

Outrigger did not say how much it could raise from the sale of the two neighbor island hotels, which is expected to happen by the middle of the year. The company said configuring the Waikiki project away from hotel development will ease the financing process.

Outrigger is moving ahead with the project despite failing to win an extension of the state hotel construction and remodeling tax credit, which expired in July. Outrigger will support a tax credit this year at the Legislature, but the revamped redevelopment was put together under the assumption that the company would not get a tax credit, Carey said.

Outrigger has hired Eastdil Realty of Los Angeles, a subsidiary of Wells Fargo & Co., to help with the transactions. At the same time, Eastdil will seek financing for the Beach Walk project.

Outrigger unit RWH Inc. bought the 545-room former Outrigger Waikoloa Beach for $48.5 million in 1998, property records show. Another unit, OWBR LLC, bought the 521-room former Outrigger Wailea for $40.8 million in 1999.

In December 2002, Outrigger announced that the properties would be marketed under the Marriott brand, though Outrigger continued to own and manage them. The company said low interest rates and strong market conditions prompted it to sell the two hotels.

Fairmont Hotels & Resorts Inc. said in 2002 it was buying the leasehold Orchid at Mauna Lani for $140 million, Carey noted. With the national economy picking up, people are looking at Hawaii for investment, he said. Also, Outrigger's Marriott properties had a record fourth quarter.

One observer was critical of the timing of the sale. "I think they're pulling the trigger too early," said Michael Sullivan, managing director of HVS Capital Corp. in Denver. "The problem is that they weren't doing well, so they had to bring Marriott in to help juice the sales, which is unusual for Outrigger."

Sullivan, who has worked with Outrigger before, said the hotels are almost irreplaceable beachfront properties in good markets, but Outrigger will probably have to wait for a couple years to get the prices it wants. Investors want to see past earnings, and the 9/11 downturn in travel hurt the hotels, he said

Mel Kaneshige, Outrigger senior vice president, agreed the hotels can't show a long string of success, but said Hawaii has strong fundamentals and the capital markets will recognize that. The visitor industry here has weathered the turmoil better than other places, he said.

The sale last month of the Damon Estate commercial and industrial lands for $480 million to a Massachusetts real estate investment trust shows there's interest in Hawaii, Kaneshige said, noting those properties are not hotels.

Outrigger believes other hotels will be put on the market shortly, Kaneshige added. "That's our intelligence right now," he said. If Outrigger can't get the right price, the company won't sell, he said.

Outrigger originally announced the Waikiki Beach Walk project in July 2001, not long before the Sept. 11 attacks that caused visitor counts to plummet in Waikiki. Even today, Waikiki's Japanese market has just begun to recover from the war in Iraq and outbreak of SARS last year, not to mention a longer-term drop in Japanese arrivals.

Outrigger's plan calls for the demolition of six old Outrigger-owned hotels in the area, and initially envisioned construction of a single new high-rise 890-room hotel. Instead, Outrigger is looking at building the main 350-foot high-rise as a mix of resort condominium units and possibly some residential units. The final configuration has not been set.

Two hotels, the Ohana Waikiki Tower and the Ohana Waikiki Village, will be converted to resort condominiums. The units will be individually owned, but the properties would be managed by Outrigger and could even keep their names, Kaneshige said.

An Outrigger unit, Outrigger's Condominium Collection, already has 11 resort condominium properties statewide.

Meanwhile, Fairfield, a unit of Cendant Corp., plans to renovate and convert the 480-room Ohana Reef Towers into a 193-unit time-share property. The price of that transaction was not released. The new resort will be called the Fairfield Hawaii at Waikiki Beach Walk.

Outrigger will continue to manage the time-share, and Fairfield will handles sales and marketing. Outrigger will also keep the entertainment/retail portion of the property to build a 110,000-square-foot complex, bordering both sides of Lewers Street between Kalakaua Avenue and Kalia Road.

Sullivan said the time-share deal makes sense for the redevelopment project and that resort condominiums will be easy to finance and sell. He questioned whether the retail component would work with the downturn in Japanese arrivals to Waikiki. Kaneshige said that Outrigger has never relied on the Japanese market for its hotels, and the retail concept won't either.

Carey said Outrigger may do other time-share conversion projects around the state with Fairfield, which started a partnership with Outrigger in 2002.

Time-share units made up 2.9 percent of the total 31,717 visitor units in Waikiki in 2002, according to the state Department of Business, Economic Development and Tourism. Statewide, the percentage of time-share was higher than in Waikiki, at 7 percent, or nearly 5,000 units out of a total 70,783.

No layoffs are expected from the sale of the neighbor island hotels, the company said.



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