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RETURN TO NEWS INDEX Investment Funds Mining Bankruptcy Courts for Distressed Opportunities
By Mark Heschmeyer
CoStar Group
Published: Mar 24, 2010
Rather than waiting for commercial real estate property values to find a bottom, a number of investment funds this past week showed they're ready to jump in now by taking direct control of companies already in distress, thereby gaining early control of their property portfolios as well. The funds are finding their opportunities in bankruptcy reorganization proceedings.
Most notably in this category is the ongoing and highly publicized contest of Simon Property Group, Vornado and Brookfield Asset Management, vying through a U.S. Bankruptcy Court for control of the massive General Growth Properties' mall portfolio. While that case has garnered all the attention recently, several other prominent examples are also worth noting.
Starwood Capital Group, TPG Capital and Five Mile Capital Partners agreed to invest up to $905 million in Extended Stay Hotels Inc. as part of a recapitalization plan that would allow the hotel chain to emerge from bankruptcy.
The proposal, which would value Extended Stay at $3.9 billion post-transaction, would allow the hotel chain to emerge from bankruptcy with a significantly stronger balance sheet, reduced debt load and significant cash reserves to invest in its properties and operations.
The Extended Stay board of directors determined Starwood Capital's offer to be superior to a previous agreement with Centerbridge Partners and Paulson & Co., which was subsequently terminated. The consortium's plan is not conditioned on any financing or due diligence provisions, but is subject to approval of the Bankruptcy Court.
"We are excited about the prospects of acquiring Extended Stay," said Barry Sternlicht, chairman and CEO of Starwood Capital Group and who under the agreement would become chairman of Extended Stay. "We believe we have made a very compelling offer with the specific intent of balancing and considering the interests of all stakeholders involved here. Starwood Capital has unparalleled experience in the hospitality sector and we believe we are uniquely positioned to work with the team to help the company flourish and maximize the company's potential for all stakeholders."
As part of the agreement, the consortium would invest $450 million of equity directly into Extended Stay and has also agreed to backstop a $200 million equity rights offering, thereby infusing $650 million of new capital into the company. In addition, the consortium will commit $255 million to provide a cash alternative for creditors who prefer cash to the equity they would receive as part of the plan of reorganization.
Under the terms of the agreement, affiliates of Starwood Capital Group will provide half of the new equity, with affiliates of TPG and Five Mile Capital equally providing the remaining amount.
Extended Stays' portfolio includes:
- Extended StayAmerica - 363 hotels - 41,000 rooms
- Homestead Studio Suites - 132 hotels - 17,000 rooms
- Extended Stay Deluxe - 109 hotels - 11,200 rooms
- StudioPLUS - 46 hotels - 3,600 rooms
- Crossland - 34 hotels - 4,400 rooms
In a more recent example, Trecap Partners LLC completed its acquisition of the real estate equity investment advisory business of Capmark Investments LP, including investment management contracts and general partnership interests in its real estate equity funds. Trecap paid $19.2 million.
The $4.3 billion portfolio includes 129 multifamily and commercial properties in the United States and 41 commercial and multifamily assets in Europe. These investments are held in four U.S. funds, one United Kingdom fund and several single asset/client accounts.
Capmark Financial Group Inc. and its subsidiary Capmark Investments filed for bankruptcy reorganization through Chapter 11 proceedings last October.
"Trecap embraces the opportunity to work closely and effectively with all the clients invested in these acquired funds, who consented to this transaction," said Douglas A. Tibbetts, the CEO of Trecap, an affiliate of Hunt Companies Inc. "In especially challenging commercial real estate markets, the combined experience and knowledge in the Trecap organization and our affiliates should provide a major advantage to our investors in core and value added real estate investments."
The entire former Capmark Investments' real estate equity leadership team--Robert Fabiszewski, William Martin, Wayne Harris, Paul Dolinoy and Gene Conway, as well as 25 other employees including five in the UK, are joining Trecap to continue to manage the acquired funds and client accounts.
Trecap Partners' portfolio includes:
- Multifamily: 21,621 units
- Office: 5.4 million square feet
- Retail: 3.6 million square feet
- Mixed-Use: 1.9 million square feet
- Industrial: 1.2 million square feet
In yet a third example, Tiptree Financial Partners LP entered into a definitive agreement to acquire Care Investment Trust Inc., a real estate investment and finance company investing in health care-related real estate and commercial mortgage debt. Care is externally managed and advised by CIT Healthcare LLC, a wholly-owned subsidiary of CIT Group Inc., which also is undergoing Chapter 11 bankruptcy reorganization.
Tiptree will gain control of the company through a combination of an equity investment in newly issued common stock at $9 per share and a cash tender offer by Care for up to 100% of its currently issued and outstanding shares of common stock at the same price,
Care would terminate its existing management agreement with CIT Healthcare.
As of Dec. 31, 2009, Care Investment Trust owned 14 assisted living, independent living and Alzheimer-care facilities with 643 units in Illinois, Indiana, Iowa and Nebraska. It owned an 85% equity interest in nine Class A medical office buildings developed and managed by Cambridge Holdings Inc. totaling 767,000 square feet in Texas (8) and Louisiana (1) and controlled $25.3 million in three investments in mortgage loans
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