Monday, December 8, 2008

Seeing the Light - Lightstone and ESA

Not to pick on Lightstone, but you just can't avoid the bad press for too long when you make such poor business decisions. The Extended Stay transaction was bad when it started - they paid more than two times what Blackstone had paid for the chain just two years before for a limited service hotel chain.

However, the article seems off on a few points. The problems did not "arise directly from the weakening economy", although they were exacerbated by the economic problems.

One wrinkle in negotiations is that Extended Stay isn't likely to file for bankruptcy protection, because of provisions common in commercial mortgage-backed securities deals that would expose more properties of its founder, David Lichtenstein.

I'm not sure what misinterpretation McCracken is putting forth here, but the whole point of putting creating an SPE to hold your property is to avoid this situation. This is going to sound unintentionally snarky, but I really would like someone to explain what "provision" he's alluding to.

I do think the chain is going to get hit harder as revenues decline, but a foreclosure on the senior mortgage seems unlikely in the next 60 days. Instead, I'd look for the foreclosure to hit after the senior mortgage matures in June 2008 - although extensions are freely available, the chain is unlikely to hit performance targets resulting in a transtion to amortizing payments... at that point, it will not cover debt service on the mezz debt and if the economy continues on its path, the senior mortgage will not be far behind.

EVERYTHING is okay though, Fitch took a close look at it just 3 months ago and found nothing wrong with the transaction. Nothing to see here, please move along.

*I had no insight into what the WSJ was going to publish when I commented on the ESH transaction and Lightstone's recent default on the Burlington and Macon malls this past weekend - I just got lucky.
**Please excuse the overt sarcasm, it's hard to take some things too seriously when everyone gets it wrong, including the journalist "uncovering" the epic fail itself.

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