As if the executives from Ashford Hospitality Trust haven’t had enough bad news, they got more this week as Extended Stay Hotels filed for Chapter 11 bankruptcy. As it turns out, Dallas-based Ashford is most likely going to lose a US$164-million investment it made in ESH when Lightstone Group LLC overpaid (nearly US$8 billion) for the 680-property extended-stay chain it bought from the Blackstone Group in April 2007.
2007 was a time when lenders were wheeling and dealing—in some ways they were selling their souls to the devil by giving borrowers financing for as much as 95 percent of a deal. Of course, it wasn’t all done in one loan—mezzanine financing played a major role in the wild buying spree that was going on. That’s where Ashford came into the picture with ESH.
Ashford, like a number of other entities in the lodging industry, was vigorously promoting its mezzanine lending program. It was willing to bridge the gap between a primary bank note and the cost of acquisition.
Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full, according to Investopedia.com. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies.
The Carlton Group, a privately held international real estate investment bank that specializes in equity and debt placement, merchant banking, principal investment activities and commercial and residential loan sales, was also a player in the mezz debt market back in the sunny days of ’07. Carlton Strategic Ventures, the principal investment and merchant banking group of the Carlton Group, had a US$214-million participation in the M7 mezzanine loan tranche on the Extended Stay Hotels portfolio. The M7 mezzanine loan was part of a US$7.4-billion financing provided by Wachovia Bank, Bank of America, Merrill Lynch and Bear Stearns to fund the acquisition of Extended Stay Hotels by the Lightstone Group in June 2007.
What Ashford and other lenders didn’t know was that the economy would tank as badly as it has and that investors, such as Lightstone’s David Lichentstein, would be running for cover—and using bankruptcy as the umbrella to protect themselves from the falling bricks.
According to the Wall Street Journal, the 48-year-old Lichtenstein will avoid personal guarantees that were in the original loan agreement and continue to manage the 680-property hotel chain. The WSJ reports that the secured lenders, including Ashford, who have been negotiating the restructuring plan for lenders to indemnify Lichtenstein for as much as US$100 million in exchange for him supporting the plan that would put the lenders in control of the hotel chain. There are other much larger stakes from other financial institutions involved in the ESH deal—many of which received TARP funds.
Does anybody remember Bear Stearns? It sounds as if they are going to be on the hook for Lichtenstein’s failed foray in to the hotel industry, taxpayers aren’t as fortunate as Lichtenstein.
When I interviewed Lichtenstein for a story when the deal was struck, he was full of energy and vigor, and he was ready to conquer the hotel industry. But like other bright lights during those heady days of basically free money, he flared out in a hurry.
Gary DeLapp, the president and CEO of HVM, the company that manages all 680 of the ESH properties, said in a press release that the company has no plans to close or sell any of the assets.
DeLapp, one of the lesser-known executive gems in the hotel industry, is also someone who feels the pain. He has been with the Extended Stay brand for what seems like forever. His heart is in making sure the brand survives, and like most distressed hotel assets these days, some lucky suitor is going to get a great deal when it acquires the brand. I would expect companies like Accor and Choice Hotels International to actively pursue the acquisition of the ESH brand.
However, the spotlight on Ashford is bright because of the fallout from the ESH news. Its stock shares plummeted 22 percent on Tuesday and were down another 16 percent at press time today. How this affects the company long-term remains to be seen. Leader Monty Bennett, an executive who isn’t afraid to speak his mind, has some sleepless nights ahead.
Robert W. Baird analyst David Loeb almost immediately downgraded Ashford to underperform status from neutral. As a real-estate investment trust, Ashford certainly has seen how bad the recession has been as REITs have been the hardest hit hotel companies during the past 12 months.
Assuming Ashford will be able to write off the mezz debt left in ESH’s bankruptcy wake, perhaps Ashford executives can start getting some good news. They certainly need it.