Today’s big story (in my mind at least) is a Wall Street Journal article today that brought to light Starwood Capital’s new found interest in the Extended Stay bankruptcy battle. (I’m writing this directly from my blackberry so I can’t get a direct link).

In a nutshell – it states that Starwood Cap is joining a group of investors (mainly those involved with the first mortgage of the deal) in putting down funding to take the deal out of bankruptcy court.

This deal does have some pretty hefty requirements – 10% down, within 10 days of closing – in cash, but nothing too unmanageable.

This sounds like it could be one of the first major deals that Starwood’s new REIT is getting involved in, as it fits directly in line with their intentions when they launched the IPO.

The question I have is what is Starwoods intentions – is this simply a deal which they are getting involved in due to the potential upside, or is this a deal they want to get involved in to expand their hotel portfolio? About a year or two ago I expected Starwood to purchase Extended Stay Hotels, since at the time, it would have fit in with their hotel expansion strategy.. Although now, with the different outlook on the lodging industry that’s a different story.

I’m glad to see that Starwood is getting involved, as it does add some legitimacy to the process, plus they also seem to have the backing of all the other mortgage holders and even the federal government who holds a portion of the mortgage through their takeover of Bear Sterns last year.

Andrew@alconic-inc.com

Fortunately the hotels will be staying open and it will be business as usual for any employees and guests, the real losers of this are the banks who helped fund the transaction – and is a perfect example of how foolish banks were to lend money during the height of the market. The winner in this debacle – if you can believe it – is the person who spearheaded the transaction and runs Lightstone Group – David Lichtenstein.

Extended Stay Hotels was purchased by The Lightstone Group – a company I know pretty well since their headquarters is  located 30 minutes from where I live in Lakewood, NJ, in a highly leveraged purchase of $8 billion dollars in 2007. Lightstone ended up putting in a whole $200 million of their own cash into the deal – everything else was financed. While The Lightstone Group has plenty of real estate experience, they have absolutely no hotel operating experience, and it’s not as though they purchased one or two hotels – they purchased a national chain with over 600 individual properties.

Lichtenstein thought at the time by overhauling operations the transaction could work, and in theory its possible – but what they never considered is the economic downturn we’ve experienced, and since they were so over leveraged to start with – the majority of any income from the properties went right back into debt service.

It’s funny, the winner in all this is Lichtenstein himself – even when the deal was closed he only contributed $200 million dollars of his own funds – the majority of that was even borrowed, so he stands to lose very little money from his own pocket. The WSJ article linked to above states that the banks will not be going after his other assets, and some how – after all this is done, Lichtenstein & The Lightstone Group will continue to be managers of Extended Stay Hotels.

Talk about being a winner! I wish I was able to do transactions like this – purchase things for billions of dollars using very little of my own money, having to default on the purchase, and coming away unscathed. Occurrences like this are what initiates calls for action by congress so that the fleecing of banks – and ultimately the American public don’t occur again.

It’s unclear what repercussions this will have on Lightstones ownership of the firm though – will they continue to own any of it? Will the banks attempt to sell off portions of Extended Stay Hotels in order to get some return on their investment before having to write it off completely?

We’ll see what happens next, but its unfortunate that a fairly successful hotel chain and brand could be ruined because of the greedy banks and investors during the prime of the market.

andrew@alconic-inc.com

According to the story Lightstone:

is 60 days delinquent and in danger of “imminent default” on a $73.6 million mortgage on four malls, according to debt-rating service Fitch Inc. Lightstone told the servicer managing the mortgage — which was sliced up and sold to investors as bonds — that it intends to surrender the properties, according to Fitch….

…The malls to be forfeited — Martinsburg Mall in Martinsburg, W.Va.; Mount Berry Square Mall in Rome, Ga.; Shenango Valley Mall in Hermitage, Pa.; and Bradley Square Mall in Cleveland, Tenn. — will be managed by a receiver in the interim.

And they’ve apparently been down this route before, earlier in 2008 it defaulted on loans for malls in Burlington, NC and Macon, GA.

Now before you think, Lightstone is going under and they are having difficulties paying loans on all their properties, read into this a little more.

Lightstone – like probably every other property owner in the world – has a separate LLC or holding company set up for all of their properties, some properties may be combined, but for the most part just because one property is having difficulty paying the mortgage doesn’t mean that the entire company is having issues. Secondly, these malls are not major holdings, and they are all located in pretty much suburban/rural areas. In these areas the opening of a Wal-Mart can easily close down half the town so having vacant space in these malls is probably a real possibility due to the economic climate. Also, I havent heard a peep about issues with Lightstone’s Prime Outlets, which probably a bright spot for Lightstone because Outlet stores always do well in a down economy.

No news has come about lately in regards to the Extended Stay issues, but it hasn’t even been 30 days since the properties were “supposed” to be transferred to the banks.

Overall, I think Lightstone is still a viable company – they just have a few properties which they probably paid too much for, or have too many vacancy’s due to the economy. Hopefully if they play their cards right they will come out of this stronger than before – but probably with less properties under their belt.

andrew@alconic-inc.com

I came across a blog post from Hotel News Now’s Assistant News Editor Patrick Mayock who saw a press release from Lightstone which said:

“Extended Stay Hotels had no discussions or interaction with the Wall Street Journal on today’s story. The company remains in compliance with all of its debt terms. It is profitable on an operating basis, is current with its vendors and intends to remain so. The business model remains a viable one, and we expect to continue to improve and grow the business.”

That statement doesn’t directly dispute the fact that it may experience problems within 60-90 days, and the WSJ article never even said that it isn’t in compliance with its debt terms – it merely was referring to what would happen in a few months time if economic conditions continued to deteriorate. Coming out with this statement is risky because if 60-90 days down the road Extended Stay does miss debt payments and/or banks seek to gain control of the company I find it hard to believe that Extended Stay & Lightstone didn’t see it coming and suddenly woke up and realized they had a problem. Major corporations and banks especially in this economy are not that ill informed about their own financials and the financials of a large loan.

Secondly – whether Lightstone or Extended Stay Hotels had any interaction or discussion with the WSJ prior to the article being published has no bearing on anything.

Thirdly, the Extended Stay segment is a great segment to be in – and the potential of the segment in the future is great, but banks don’t care about the future if you’re not going to be able to pay your debt payments.

The Wall Street Journal isn’t some fly-by-night operation which writes a story based on a rumor a reporter may hear while walking down a street in Manhattan. I hate to say it, but I feel there is some strong validity behind the WSJ’s article and especially since the statement that Patrick Mayock quoted doesn’t directly dispute anything in the article – I think Extended Stay is running into problems.

I’ve heard reports of hotels in some areas having less than 25% occupancy, and special events and banquets being cancelled left and right due to cost concerns. While hotels of all types are still good invesmtnets for the long term – the short term prospects for them, especially if it was an overleveraged transaction to begin with is a completely different story.

I’ll keep you all posted with any more updates that come out of this event.

andrew@alconic-inc.com

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.

andrew@alconic-inc.com