Lightstone To Lose Extended Stay, So What Happens Next?
In one of the last greatest real estate deals before the economic downturn – The Lightstone Group, purchased Extended Stay Hotels from the Blackstone Group for $7 billion – putting down only $1 billion- the rest all being debt. At the time it was announced there were two questions – #1 Who is The Lightstone Group and #2 What were they thinking?
I’m pretty familiar with The Lightstone Group – its headquarters is less than 20 minutes from where I live in Lakewood, NJ across the street from the airport that I’ve flown out of hundreds of times with a friend who has his Private Pilots license. I’ve been following the company since I first read an article about its CEO David Lichtenstein, who started the company by purchasing a small two family home in Lakewood – then trading up built a real estate empire that at one time was estimated to be worth over 10 billion dollars.
Unlike most real estate developers The Lightstone Group is more than happy staying below the radar, even though some of their properties are definitely above the radar – their most notable ownership interests besides Extended Stay Hotels is the Prime Outlets, a nationwide owner of high end outlet malls along the lines of Chelsea Property Group’s Premium Outlets. Lightstone also owns a large commercial portfolio primarily consisting of strip malls, as well as many many garden style apartment complexes. This is all after only 20 short years. Only the most astute real estate industry followers (or locals – like me) have ever heard of Lightstone – in fact they don’t even put their name on any of their properties like most other developers do.
In the past they have made some very good choices about purchasing real estate holdings which may not be glamorous or have the cachet of the GM Building in New York City, but they are all cash-flow positive and good investments. That’s one reason why there was so much concern as to why they purchased Extended Stay. Not only was the deal highly leveraged, affording them very little wiggle room in the case of a downturn, but did they have experience in operating a hospitality company when their past experience is all commercial & apartment holdings?
I personally was shocked when the deal was announced, it was a deal which instantly raised their profile and was very out of the ordinary for a regular purchase, but it seemed as though they wanted to get into hospitality (Everyone was doing it at the time) and this was a good opportunity for them. Their CEO was excited to instantly be the largest Extended Stay hotel operator in the country with a great brand, as well as owning over 600 properties (all are owned by the company – it does not franchise).
Or so they thought.
Today’s Wall Street Journal had a story on how Lightstone might be forced to turn over Extended Stay to its banks. Extended Stay wouldn’t be going bankrupt, nor would it be broken up (at least not at this point) but Lightstone would no longer have any ownership in the properties. According to the story, Lightstone isn’t late on any debt payments, but expects to be late within 60 days if the downturn doesn’t suddenly turn around.
Extended Stay is in an awkward position because all of their hotels are, well, Extended Stay Hotels – designed for business travellers who will be staying over a number of days, weeks or months – a market which has lost a lot of customers over the past few months as the economy slows down. Most of these travellers would be construction workers, or temporary workers working at a location for a few weeks or a few months. Traditional overnight business travellers would be more likely to stay at a Sheraton or Marriott – especially in major urban areas where these hotels don’t have much of a presence.
Extended Stay has a great brand and alot of locations throughout the country – but its all based upon one hotel-room type, extended stay, which is a niche market in of itself. Unlike other hotel companies which have a little bit of extended stay, a little bit of luxury, a little bit of select-service, etc.
I wonder what will happen to the brand – the banks will not hold onto it for too long, that’s not what they want. Will Blackstone buy it back at a discounted rate? (It still owns a small equity stake in it) or will another major hotel company scoop it up on the cheap? Since Lightstone owns the properties as well as the brand, I don’t see Starwood Hotels or Hilton or any of the other major hotel companies purchasing Extended Stay from the banks – they’ve spent the last few years trying to divest of all corporate-owned properties and just collect franchise and management fees.
I wouldn’t be too surprised to see Starwood Capital purchase Extended Stay. It’s no secret that Starwood Capital is waiting on the sidelines for the economy and real estate market to settle so they can make purchases on the cheap – its what they excel at. Extended Stay would be a great platform for Starwood Capital to create an extended stay brand – the part of the equation which I thought they go after when they launched their Hotel Fund in 2006. One of Lightstone’s reasons for purchasing the company at the price they did was the intention to re-do management, not by cutting employees – but just running the company better. While it’s brand may not be as well known as a Homewood Suites, or Marriott, having a brand named after the same term used for the entire niche market “extended stay hotels” is powerful. So is the fact that the brand contains the largest number of extended stay hotels in the country. The marketing spin that can be put behind it as well as opening the brand up to franchising can lead to great growth in the future – and I’m sure that was always Lightstone’s intention, but unfortunately the economy put a damper on that and they might just lose it altogether.
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Category: barry sternlicht, branding, david lichtenstein, extended stay, extended stay hotels, Hotel Development, Hotels, Starwood Capital Group
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“…for Starwood to create an extended stay brand – the part of the equation which I thought they go after when they launched their Hotel Fund in 2006.”
Starwood already has an extended stay brand: element hotels. Been around since 2006, and growing.
Erik – I should have been more specific. I was referring to Starwood Capital which is completely unrelated to Starwood Hotels
Element is in a very different category, trying to appeal to the “luxury” extended stay segment. How about one of the company’s direct competitors working with a hedge fund or other private equity group?
I could see Choice or Intercontinental Hotels go after the name and then gut the properties for geographic areas of interest. Both companies are growing their extended stay segments at a fast pace in recent years, and Choice has already partnered with hedge funds to finance some of its franchised hotels.
Patrick – Choice, Wyndham and IHG were my first thoughts – but they are mostly franchised firms, they would rather not hold onto any real estate. Starwood Capital on the other hand has done just that – purchased the real estate and then sold the rights for development and the hotel name to another company. For example take the LeMeridien brand – when it was sold a few years ago, Starwood Cap bought (with Lehman Brothers) almost all of the LeMeridien properties around the world, and Starwood Hotels managing them and owning the LeMeridien name.
There is a first time for everything – but I dont see Choice/Wyndham/IHG changing or adding to their business model at this point, especially with the economy the way it is.
Andrew,
Like you I have been following Lighstone group because its close to home , and I grew up in the same complex as David Lichteinstein when he was a nobody.(for lack of a better word) I think most people who know the company was shocked that they took such a big risk for reasons that are unclear. I do know for a fact that they teamed up with some other under the radar mega deveopers to make this purchase. If they lose Extended Stay they likely stand to lose there cash investment of about 600 – 700 million. It will be interesting how this plays out!
I’m willing to bet that Prime Outlets aren’t doing all that hot at the moment either…