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CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 43 interests in both towers. Further, the crossed mezzanine loan was credit-tranched into seven different classes that were further subparticipated by class. In total, while the CMBS debt’s loan-to-value (“LTV”) stopped at 46%, based upon the then appraised value of $6.9 billion, the mezzanine debt took the LTV up to 80%. Selling “at the Top” in 2007 As noted herein, while Blackstone successfully improved ESA’s income by approximately 9% between 2005 and 2007, the bullish CMBS market provided easy money that assisted Blackstone in selling ESA for $8 billion to The Lightstone Group (“Lightstone”) in June 2007. In total, between $4.1 billion of CMBS debt (implied LTV of 50%) and $3.3 billion of mezzanine debt, Lightstone was able to borrow 92.5% of their purchase price. Lightstone, led by the colorful David Lichtenstein, was a private company with comparatively little hospitality experience (Lightstone was best known for its successful retail and housing ventures) financed by a troika of banks that no longer exist today (Bear Stearns, Wachovia and Merrill Lynch). Not content to borrow 92.5% of ESA’s purchase price, Lightstone additionally utilized a $200 million preferred equity investment from Blackstone, as seller, to increase their implied financing level to 95%. Incredibly, and as a function of the times, Lightstone syndicated its equity and tapped corporate borrowings to acquire the $8 billion portfolio with only $100 million of its own cash representing just 1.25% of ESA’s total capitalization. The Bankruptcy and Purchasing “at the Bottom” Within less than a year following Lightstone’s acquisition of ESA, the financial crisis commenced with the collapse of Bear Stearns in March 2008. Following the bankruptcy of Lehman Brothers in September 2008 and the substantial curtailment of domestic business travel due to the financial crisis, cash flows at the Company began to deteriorate, as illustrated below, and in May 2009 the borrower defaulted on its overwhelming debt load. By June 2009, the Company filed for Chapter 11 bankruptcy. In bankruptcy, while the borrower attempted to restructure its debt, a formal auction process for the Company was initiated by the court in the spring of 2010 pitting the investment groups of Starwood Capital, TPG and Five Mile against Centerbridge, Paulson and Blackstone. Chart 3 ESA: Net Cash Flow (2004–2013) Source: Talmage research and various Offering Circulars Ultimately, the Centerbridge, Paulson and Blackstone consortium won the bidding process and acquired the Company out of bankruptcy in October 2010 for $4.2 billion (including closing costs), financing their purchase with a de novo $2 billion CMBS loan coupled with $700 million of mezzanine debt implying a LTV of 64%. The proceeds from the purchase were used to repay substantially all of the $4.1 billion of the 2007 CMBS debt. However all of the $3.3 billion of mezzanine debt was wiped out in the bankruptcy sale. Importantly, the AAA CMBS bondholders were paid on a current basis throughout the bankruptcy and all but the two most junior CMBS classes (totaling approximately 6% of the CMBS trust) ultimately were repaid at par plus accrued interest. Chart 4 ESA Capital Structure Comparison 2007 vs. 2010 Source: Various Offering Circulars Extended Stay America — Back to the Future “Between 2004-2008, there were $143 billion of REIT privatizations — 75% of which were financed with CMBS.”


CRE Finance World, Winter 2014
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