This article is about private equity deals, particularly in the hotel/commercial real estate industry. The author, Jan-Martin Feddersen, in Germany, has an excellent blog with great visuals — Immobilienblasen .
Another Private Equity Deal That Went Bust Within 24 Months
Courtesy of Jan-Martin Feddersen
Commercial Real Estate (CRE) & Private Equity…… When ever you hear this combination during the next few years it will be almost to 100 percent in connection with disastrous deals…… No surprise that Blackstone & Fortress are involved once again……. 🙂 The enitire CRE complex will be the next very very big headache for the balance sheets from banks…… It´s a safe bet that we will hear similar stories also from the LBO front on a regularly basis ( see Tribune Co. Could Be Flirting With Bankruptcy NYT) ……
Extended Stay Hotels Inc. is in early talks that could result in turning the hotel chain over to its lenders, a sign of the deep trouble awaiting the commercial real-estate business.
Extended Stay’s difficulties signal a new phase of distress in commercial real estate, because they arise directly from the weakening economy. Until now, problems have mostly involved developers unable to obtain refinancing for otherwise healthy operations.
Lightstone Group LLC, Lakewood, N.J., bought Extended Stay from Blackstone Group LP for $8 billion in April 2007. The deal was highly leveraged, hastening Extended Stay’s troubles. The chain has no major debt expirations due soon
As conditions deteriorate, Extended Stay has been forced into discussions with its lenders, and people involved in the talks say a transfer of ownership could come within a month or two. Extended Stay has recently hired Lazard Ltd. as financial adviser and New York law firm Weil Gotshal & Manges as bankruptcy counsel……
During the real-estate lending boom, Wall Street originated $600 billion of commercial mortgage-backed securities. The default rate on commercial mortgage debt has remained near historic lows, even while residential-related debt suffered a severe downturn.
But that is now beginning to change, sending new shock waves into much-battered banks, private-equity funds and other financial institutions that participate in the $1 trillion commercial real-estate debt market. Hotel landlords typically are the first to feel the pain in a downturn because hotels have the shortest leases in real estate — one night at a time.
bigger/größer (click for bigger chart). Thanks to Calculated Risk
> I just cannot wait for this deal Hilton’s $20 Billion Sale to Blackstone Is Completed to blow up……..
( OKTOBER 2007 ) The sale, for $26 billion including debt, is a record for the hotel industry. New York-based Blackstone, which already owns the La Quinta lodging chain, joins Apollo Management LP and TPG Inc. in targeting hotel companies for their cash flow and real estate.
An Extended Stay failure reveals how a commercial real-estate downturn could ripple through the financial system.
When Lightstone Group and preferred equity partner Arbor Realty Trust bought Extended Stay from private-equity firm Blackstone Group in 2007, it borrowed more than $7.4 billion. Wachovia Corp., Bank of America Corp., Merrill Lynch & Co. and Fortress Investment Group put in $3.1 billion in so-called mezzanine financing, which isn’t as highly secured as other types of debt. People involved in the transaction say an analysis of the company’s value shows that much or all of the mezzanine debt could be wiped out in any renegotiated deal.
Bondholders have hired Houlihan Lokey Howard & Zukin for restructuring talks.
Extended Stay is still meeting its debt service, but people familiar with the matter say it could default within the next 60 days if the economic downturn continues as expected. Revenue per available room, or RevPar, a common hotel-industry measure, will be down more than 10% this year at Extended Stay, according to someone familiar with the matter. Much of that decline has come in the last two months.
But it was the Extended Stay deal that was Mr. Lichtenstein’s biggest. Extended Stay has operations in 44 states and Canada. It was also among his riskiest deals, as
Lightstone, with help from Arbor Realty, arranged to put down just $600 million of equity, or 8% of the total price. (Blackstone, which made about $3 billion on the sale, kept an equity interest.)
Mr. Lichtenstein saw increasing demand from business travelers who needed hotel accommodations for weeks or even months at a time. He also believed he could unlock value at Extended Stay by taking advantage of the chain’s size and paying more attention to management.
A couple of months after the deal closed, Mr. Lichtenstein acknowledged the easy money that helped him complete the deal had disappeared. "We were one of the last deals in," he said.
Troubles also have surfaced at Lightstone’s Prime Retail division, which owns roughly 30 malls and shopping centers in the U.S. and Puerto Rico. Lightstone has sought to turn over at least six of its malls to lenders after falling behind on debt payments.
UPDATE via NYT (In Private Equity, the Limits of Apollo’s Power):
Similar screenplays/attributes can be attached to almost every other deal from "pirate" equity since 2005….
Ähnlichen Drehbüchern dürften fast alle Übernahmen von "Pirate" Equity seit 2005 früher oder soäter folgen……
