Extended Stay Hotels - It's baaack!

Some of the largest belly flops following the Great Recession were in the Hotel sector, and interestingly, we're seeing two of those spectacular failures come back into the market this month. Red Roof Inn is out in a new issue deal (which we will publish an update on as soon as it prices), and Extended Stay was in the WSJ this morning as it filed for an IPO.

You'll recall Extended Stay, a 680 property hotel chain, was purchased by Lightstone for $8 billion, went through Chapter 11, and was picked up by Centerbridge/Paulson & Co/Blackstone for $3.9 billion in 2010. The current owners have approximately $3.6 billion in debt part of which is in a 2010 deal.

In the original CMBS loan default, everyone sued everyone - even the special servicers involved ended up suing each other. We posted numerous updates about it as it played out. The potential buyers sued, the creditors sued, the Fed owned a big chunk via Bear Stearns... it was ugly. Of course, the day it first showed up in a deal many CMBS players were scratching their heads wondering how the deal got done in the first place.

When Special Servicer's Attack

At the bottom of the WSJ's article, Street Aims to Reboot CMBS, there was an interesting piece of news: CWCapital is denying Trimont any of the $19mm in fees related to the Extended Stay workout. Trimont was serving as the Special for about a year until investors voted to replace them with CWCapital. The WSJ article implies that CWCapital thinks that Special Servicing Fees are performance based with the following excerpt pulled from the court filings: "during the nearly one year that Trimont was the special servicer, it had no success working out the loan or resolving the bankruptcy case."

The article also talked about the Innskeeper loan dispute between LNR and Midland. I excerpted below so you can skip over the beginning of the article, which is wholly uninteresting, but CrabsOfSteel has reminded us all that it's sometimes worth reading threw the entire article for the good bits. h/t CrabsOfSteel.

That type of gamesmanship is highlighted in two recent lawsuits related to the bankruptcies of Innkeepers and Extended Stay. In the Innkeepers case, LNR Partners Inc. alleges in a lawsuit filed Oct. 27 in New York state Supreme Court that another investor reneged on an agreement to name LNR the special servicer overseeing Innkeepers' $825 million CMBS loan.

LNR alleges that it had a pact with CRES Investment, a division of Presidio Holdings II LLC, stipulating that CRES would hire LNR as special servicer if CRES's slice of the mortgage was deemed the controlling stake. As a side bet, LNR bought slices of the mortgage on its own to better its chances of getting the designation.

However, LNR claims in its lawsuit that CRES, once it was named controlling stakeholder, didn't hire LNR, instead keeping Midland Loan Services as special servicer. "CRES' failure to comply with its contractual obligations is depriving LNR of its bargained-for right to control workout and resolution of the Innkeepers loan," the lawsuit reads.

CRES representatives didn't return calls seeking comment. LNR declined to comment.

A similar dispute emerged in the Extended Stay bankruptcy. Trimont Real Estate Advisors Inc. alleges in a lawsuit filed Sept. 21 in U.S. District Court in Washington, D.C., that rival special servicer CWCapital Asset Management LLC owes it a portion of a $19 million restructuring fee. CWCapital received the fee as special servicer of Extended Stay's $4.1 billion securitized mortgage.

However, Trimont said it is entitled to some of the fee because it was the special servicer in the case for roughly a year.

Prior to a bankruptcy auction that resulted in a sale of Extended Stay and its 680 hotels, Trimont was abruptly replaced as special servicer with CWCapital by investors Bank of America Corp., UBS Securities and Cerberus Capital Management LP.

CWCapital has asked a judge to dismiss the case, noting in its court filing that "during the nearly one year that Trimont was the special servicer, it had no success working out the loan or resolving the bankruptcy case."

Delinquencies Improve in CMBS

Trepp notes that delinquencies improved 47 bps last month mostly due to the resolution of the ESH loan, which had been delinquent since '09.

Lodging improved 441 bps (ESH-reltaed), but all other sectors worsened:

• MF worsened 20bps
  

• Industrial - 21 bps

• Office - 6bps
• Retail - 4bps

Trepp also notes the rally ran out of steam late in October, which is very true. Lofty levels were being hit as late as the third week, but Monday of the last week found a back up in bids. Today started off mixed with the NAIC loss forecasts being adjusted downward.

August 2010 Delinquencies up 1/2 billion to $61.4 billion

Realpoint came out with their August numbers. This is substantially faster than the June to July change of $387.9billion.

Balance of 90+ day delinquent loans declined (first decline since we started down this rabbit hole), every other bucket increased.

Total Realpoint Delinquency Level - 8.14%
sans Agency -- 8.48%
Conduit/Fusion - 8.61%


They reference the pipeline of problem loans too. All brand name loans typical of '06 and '07: EOP, ESH, PCV/ST, Beacon & Seattle, Farallon MHC, and CNL Hotels & Resorts. (That's 3 pari passu loans now)

Average Loss Severity in August - 62%. They have a nice breakout at the end regarding losses if you want some references.

Their report is free - realpoint.com.

S&P Makes a Funny - ESH Defaults

S&P finally applied appropriate D ratings to 14 classes in the ESH deal, up to the A4.

Interestingly, there is nothing new in the S&P review that we didn't write about as far back as December 2008, and it's not because we are overly bright or have exposure to the deal. It is because it has been obvious it would fail to most folks for some time.

Extended Stay creditors attempt to freeze cash from Prime Outlets

Ruh roh.

Line Trust Corp. and Deuce Properties Ltd., junior lenders to Extended Stay, will ask a New York state judge to prohibit Lightstone Group LLC and founder David Lichtenstein from transferring cash it receives from the sale, a lawyer for the companies said. Simon Property, the largest U.S. shopping mall owner, said in December it would buy Prime Outlets Acquisition Co. from Lightstone for $2.33 billion including debt.

And the winner is...

The Starwood investor group—including TPG and Five Mile Capital Partners LLC—is proposing to put in more than $600 million in new equity, the people said. The rival plan had proposed as much as a $450 million investment from Centerbridge and Paulson.

But what will happen to the gargantuan $4.1b CMBS loan?

The Starwood proposal also calls for some of the existing holders of Extended Stay's $4.1 billion first mortgage debt to continue holding their debt, known in financial circles as "rolling" their positions.

extend, and ...

The Starwood-led plan puts a higher value—nearly $4 billion—on Extended Stay than other estimates that have emerged during the process, according to people familiar with the situation. Upon its bankruptcy filing, the company estimated its value at $3.3 billion. The company's financial advisers have pegged its value to be about $2.8 billion to $3.6 billion.

pretend.

It's not over yet, though

To be sure, the Starwood-led plan is still far from a done deal as Centerbridge and Paulson could increase their bid and other bidders also could emerge, the people said. And the plan still needs to be approved by the bankruptcy court.

Extended Stay's Stay of Execution

Judge Peck extended the bankrupcty filing deadline to April 2nd.

According to Richard Parkus at DB, Centerbridge and Paulson are injecting $400mm in cash (200 equity/200 rights), and they want to bring on Doug Geoga to represent them on the board. Further, they're ready to pull the trigger immediately.

This may turn into a real issue with Starwood who bought the mezzanine debt, and subordinate bonds off the CMBS (G and H), and has been in much longer negotiations to take over the chain. They've publicly accused ESH of misleading them. Their reorg plan calls for making payments to the CMBS holders (who all are not receiving any interest right now, btw), amongst other things. They may well get a big slap in the face for their efforts to buy the debt, get a controlling position, receive no income on the debt purchase, pay a consultant, and then not get anything for it.

I'm on the road traveling, so don't quote me on the information below that ise based on memory alone!!!

For those without the full history, this is one of those loans (similar to PCV/ST) that everyone scratched their head on when it was first issued. It didn't make sense then, and it's fitting that it is one of the first to fail. Blackstone bought the chain in 2004 for something like $4 billion, and financed it through a loan that ultimately ended up in a Bear Stearns deal. Then, just 2 or 3 short years later, Blackstone flipped it to Lightstone, for TWICE as much ($8 billion). Lightstone is quite possibly the worst real estate investment vehicle ever created - the guy that runs it bought at the top, used the most leverage, and overpaid on top of that, and he did it over, and over, and over again.

So, Lightstone called up their buddy at Wachovia (whose name rhymes with varoom, kind of) and put together a great debt package including a CMBS component and mezzanine debt. Lichenstein (the dolt who runs Lightstone) even got on the hook for a $100mm personal recourse carveout when the loan went into bankruptcy. Of course he figured out a way to get out of this by getting an indemnification from some of the bondholders, which smelled a little funny and he must have used some sort of voodoo to get this in place.

Starwood stepped in and has effectively offered to buy them for $3.5billion. But that brings us back to the start of this article.

Comings and Goings

Bridger has started making Conduit loans again. First?

Fitch was out this morning with an update on CRE CDOs - delinquencies are just at 12%! I would've guessed much higher. Maybe should revisit some of those bid lists that keep getting dismissed.

Extended Stay examiner, "earned" $4mm, or 10% of the original senior note. What a great job. The new structure looks like it will be a $1.8bln senior, 775mm second, 471mm preferred stock going to the senior mortgage holders... Mezz and preferred stock holders are getting 10% of the new common.

ZeroHedge puts some more CMBS loan updates up. Full disclosure, the loss severities are extremely low (lower than historical averages even in good times) and the information is from the servicer comments and is a little dated (some of the information is almost 2 years old). Still interesting to some people based on the comments on ZH.

Zell has been on the horn all week now that his new fund is getting fat. CRE will recover before employment does is the message.

ESH Ruling Problematic?

Moody's pondered that the Judge's ruling in the ESH bankruptcy case that the actual investor list be released so he could hear their concerns directly (versus through the Trustee/Servicer)

Moody’s noted it cautioned in June this scenario might lead to “free-for-all financing” as certificate-holders plead their own cases, bypassing the natural filtering process of the trustee and servicers. Because of the implications, Moody’s said at the time any judge would be unlikely to pursue that option.

“Judge [James] Peck may return to his initial skepticism and rule on later substantive motions the way all market participants, even the certificateholders now attempting opportunistically to bypass the trust structure, thought the rules would work when the ESH transaction went out the door,” Rubock said. “Or me may not, and we may need to rethink how robust many structures are — from trusts to participants — under the extreme tests to come.”

Probably not a big deal at this stage, but maybe it sets a new precedent for other workouts down the road.

CMBS Delinquency update - Realpoint

Realpoint just sent out updated delinquencies of 3.471% in CMBS, and are forecasting at least a 6% delinquency by December citing Peter Cooper/Stuy Town (PCV/ST) and the Extended Stay Portfolio. I think it'll be higher than that - PCV/ST isn't the only loan running out of debt service reserves in the 4th quarter; its not even the only loan in NYC running out in the 4th quarter!

We'll see a high number of well-known properties go delinquent and make headlines. Get ready for the pain!

The Late Show

Nothing new to report. The rating agencies started dinging Peter Cooper Village/Stuyvesant Town and the Extended Stay deals, again, today...

PCV/ST downgrades. And some thoughts on their mezz debt that was being shopped around.

Extended Stay - Fitch Affirms (a few days back) S&P puts on Rating Watch Negative

JP Morgan unloading properties - WSJ

The WSJ reported this morning that JP Morgan is selling 23 properties as it consolidates operations, including the move into BS's former headquarters. Noted that they would likely have to lease back some of the space to get eyes on the deal, and also noted that they were not offering financing to the buyer.

The other bit of news on the front page this morning was more Lightstone/Extended Stay commentary - more of the same old thing, though. Although nothing new, it is ironic that both have the Bear Stearns tie in (Maiden Lane is one of the creditors due to their exposure to BS's old balance sheet).

Extended Stay Files

Extended Stay was destined for failure as we noted on numerous occasions, but in detail back in December. They defaulted earlier this month on the big CMBS loan, and the mezz lenders (BOA and Wells Fargo) and holders started a court battle last week.

Today's big news is that they finally filed for bankruptcy - they should of done this the day after they originally closed the deal.

Extended Stay defaults... Biggest Loser - Taxpayer

WSJ reports

U.S. taxpayers also have had an interest in the talks because another lender in the buyout was Bear Stearns Cos., whose stake was taken over by the Federal Reserve after Bear collapsed in March 2008. BlackRock Inc. has been representing the Fed in the restructuring talks, according to people with knowledge of the negotiations.

...

Most of the holders of junior mezzanine debt bought at a discount, some around 60 cents on the dollar, but others as low as 10-15 cents, say debt holders. Both the senior and mezzanine loans mature June 12, with extension options.

can't pay their phone bills...

... May after Extended Stay failed to pay a $3.5 million late phone bill, according to the people familiar with the matter.

fraudulent??

The suit, filed in New York state court, alleges the banks colluded with the borrower and "hatched a Machiavellian scheme to wipe out " the investors who bought the junior slices of the $3.3 billion in mezzanine debt. Lightstone isn't named as a defendant in the suit. Mr. Lichtenstein declined to comment.

Extended Stay

Extended Stay started creeping back into the news...

It has never been clear how this loan was expected to survive, even at origination. I previously went into it at length, here and here.


Image from Hans Van DeVorst (.com)

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.