And the Winner is...

Blackstone, in a bid to spread it's real-estate hegemony to multiple continents and asset classes has made Jonathan Gray a busy man.  Going long and strong real-estate, whether residential or commercial, has been a no-brainer since 2009 but much credit needs to be given to Jon Gray and his crew.  Actually,  the media has been covering his situation pretty thoroughly for a while now so The CRE Review is going to do a synopsis covering Blackstone's dominance in this area.

 Before we get started, here are some overviews of JG that are worth familiarizing yourself with.

1. Jonathan Gray, Blackstone’s Real Estate Wizard Behind the Curtain - New York Observer
2. Jon Gray Skips Party, Afraid Record Buyout Will Fail - Bloomberg
3. Blackstone's Gray Joins Board as Real Estate Rises to 71% of Firm's Profit - Businessweek 

Whether it has been getting involved in GGP's bankruptcy, loaning money to and then owning  Eagle Hospitality (Apollo and preferred shareholders got spanked on this one; more on this story another time), buying Centro, or any other (Emeritus' health-care portfolio) of it's lucrative joint-ventures (Glimcher); Blackstone has acquired an empire that spans beyond commercial buildings.

Jon Gray has also been busy acquiring a massive portfolio of residential houses; often times he is buying them in bulk.  Look no further than the mortgage team at Bloomberg and you will frequently see BX named in a story that excessively celebrates the genius of buying resi when it has never made more sense to do so.

1. Blackstone Sees Two-Year Window to Buy Houses: Mortgages - Bloomberg
2. Phoenix Picked Clean, Private Equity Descends on Atlanta - Bloomberg 
3. Blackstone Makes Foray Into Houses for Rent: Mortgages - Bloomberg
4. Blackstone Rushes $2.5 Billion Purchase as Homes Rise - Bloomberg

See what I'm saying here?   While not every purchase has been a winner (see: EOP restructurings, Hilton buyout), their aptitude to see trends just a few months before anyone (lol) else tells me that leaving the keys in the mail is just the price of doing business on such a massive scale. 

In case you haven't learned enough already.  A couple more to drive the point home.

1. The Hotel Hegemony Continues
1. Blackstone Said to Seek $450 Million for Hotel Financing - Bloomberg
2. Blackstone Said to Plan Sale of Miami Beach Resort - Bloomberg
3. Blackstone/Apple REIT Merger Signals New Wave of Private Equity Hotel Investment - CoStar

Maybe in the future we'll do a similar story on CRE investors who recently got it all wrong.  Any ideas?  Maguire, Lightstone, Macklowe might work.  Let us know.

~Jingle Male

And the Real Winner is...

We called it to soon back in March. The Centerbridge/Paulson/Blackstone investor group swooped in to take Extended Stay out of bankruptcy, quashing the creditor-approved group led by Starwood. More details to come.

There was one bit of unintended humor highlighted in the WSJ report on the matter:

Judge James Peck of the U.S. Bankruptcy Court in Manhattan initially approved Extended Stay's Chapter 11 restructuring plan in July, calling it "perhaps an unprecedented bankruptcy" involving entities "never expected" to file for bankruptcy protection.

I think it's fair to say that a lot of people expected this deal to fail - it epitomizes the rise and fall of the CRE space and Hotels in particular. Blackstone put $3-$4 billion into buying it in 2005, then flipped it to Lightstone in a highly levered $8 billion transaction in 2007, and now they're taking it back.

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.

Race to win "Worst RE Investor" is on...

Maguire, TishmanSpeyer, Lichtenstein/Lightstone are all in the running. I've already invested in a trophy that we're going to send to the finalists...

Lightstone's latest contribution from CRENews:

Lightstone Group said it has stopped making debt-service payments on a total of $563 million of mortgages. That's up $253 million of defaults from a year ago and doesn't count the $7.4 billion of debt on the Extended Stay Hotels chain, which became delinquent last November. The company bought many of its properties near the market's peak, using heavy doses of leverage. ...

Most recently, the company's Prime Group Realty Trust affiliate started talks to give up the Continental Towers, a 932,854-square-foot office building at 1701 Golf Rd. in Rolling Meadows, Ill., which serves as collateral for a $115 million securitized mortgage.

Meanwhile, Lightstone said it expected to lose, likely through foreclosure, four malls that secure $88.8 million of debt, including $73.2 million that was securitized through JPMorgan Chase Commercial Mortgage Securities Trust, 2006-CIBC15. The four properties, Martinsburg Mall with 552,212 sf in Martinsburg, West Va.; the 507,836-sf Shenango Valley Mall in Hermitage, Pa.; the 476,778-sf Mount Berry Square Mall in Rome, Ga., and Bradley Square Mall, with 406,845 sf in Cleveland, Tenn., have been in receivership since last year.

Foreclosure proceedings will also likely begin soon against the two shopping malls, the Macon Mall, with 1.4 million sf in Macon, Ga., and the Burlington Mall, with 419,000sf in Burlington, N.C., that serve as collateral for $164.6 million of debt, including $137.7 million that was securitized through Wachovia Bank Commercial Mortgage Trust, 2005-C20. Wachovia owns a $17.3 million mezzanine loan, while Presidential Realty Trust owns a $9.5 million loan.

Lightstone also said it will lose to two regional malls in Lake Jackson, Texas, and Shawnee, Okla., to foreclosure. The $47.2 million of debt, including $7.7 million of mezzanine debt, on the properties matures in January. The Texas property was scheduled for a foreclosure sale last week.

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.

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).

CMBS spreads unchanged to slightly tighter on bad news

How can spreads be unchanged today! A ton of bad news comes out and spreads go down or sit tight - sounds like the equity market.

• ESH bankruptcy front page news - WSJ misrepresents the CMBS debt and quotes an idiotic lawyer who doesn't know who owns the bonds and apparently never used the PHDC function in Bloomberg or called the Trustee (who delivers coupon payments to the bondholders every single month).
• Red Roof Inn defaults - again WSJ reporting. It's in several CMBS deals as previously noted.
• Tishman defaulted on an $86mm (86, the same age as Alan Tishman when he passed on) land loan on 42 acres it purchased just 3 years ago.
  
• Worldwide Plaza can't close a deal.
• Naysayers of the current government "plans" are claiming to be in the Appalachian forests but are found to actually be cutting through the Argentinian bush.
• Six Flags - bankrupt. (Looked at a CMBS loan once - hah).
• Eddie Bauer - bankrupt. Whiskey Tango Foxtrot (WTF)?
• Reuhl (aka Abercrombie & Fitch subsidiary) - bankrupt.
• Even the Pink Elephant went bankrupt last week.
• Apartment rents in Manhattan dropped 12.3% - to JUST $3k or so for a 2 bedroom apartment without a bedroom. In the real world (outside of the city) that would buy you a far more than average house worth more than half a million (assuming T&I of $3.6k per year, a 20% downpayment, 30-yr mtg, and 5% or 6% interest). Not to mention that the median income of the entire country, including Manhattan, is just about $10k more a year than an 'average' apartment in NYC would cost you!
  

I guess news like BB&B earning money last quarter (mainly because its competitors are just empty store fronts now), ReREMIC deals, and hopes that TALF 2.1 works are carrying the market through. Spreads didn't move today.

Nothing to see here, move along.

Update: Ed McMahon was also 86 when he passed, on the 23rd! Further, Eddie Bauer (the human) died in 1986, the same year Billy Ocean and The Cure and even The Eurythmics put on shows at Six Flags, the number for the Chinese manufacturer that makes the clothes sold at Reuhl stores begins with 86 (China's country code), Governor Sanford 86'd his family this very week to get his jollys on with his latina lover, I once stayed very near the #86 Red Roof Inn (in Richmond, VA) at a much nicer establishment in town, I have driven by the #86 Extended Stay south of Charlotte within the last month, Maxwell Smart was Agent 86, the Sopranos had 86 series (so did Secret Agent Man), not to mention that the ship my grandfather served on in the war is docked at pier 86 in Manhattan at this very moment! There is definitely a pattern here - it involves Tishman, although it is unclear at this time what the precise connection is - stay tuned for further updates.

Just give me time - I'll tie McMahon to all this somehow - the Donald did bail him out of foreclosure... Check back for further updates...

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.

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.

Hotel and Retail CMBS

Maris Zivarts and Courtney Alexander of UNITEHERE did an excellent write-up about the Columbia Sussex portfolio. Obviously there is a slight conflict given they work for the union of workers who are employed at some of the properties, but it is duly noted and the article is well written.

Hotel CMBS is historically one of the most volatile sectors with the highest losses. It was obviously on its way up at a frothy pace in 2004 & 2005, which can be tracked by the ~$3-4 billion in new cash put into Extended Stay Hotels by Blackstone, to be flipped two years later to Lightstone for more than 2x as much, $8 billion.

Lightstone Group turned in the keys on two malls that it defaulted on this year. Although I think it is undisputed that Retail will feel some pain, I'm beginning to believe that Regional Malls may feel more pain than strip centers given the concentration of highly levered retail tenants.