Blackstone reacquires property it sold earlier

New York: Blackstone Group took ownership of 14 hotels it sold to Columbia Sussex Corp five years ago after buying junior debt on the properties and seizing control, a person with direct knowledge of the transaction said. Thirteen of the hotels will be managed by Interstate Hotels & Resorts Inc, according to a statement by Arlington, Virginia- based Interstate.

They include properties under the Westin, Sheraton and Hilton brands.

Blackstone is betting that hotel real estate will recover after the credit crisis depressed values. The New York-based firm was part of a group that this year won a bankruptcy auction for hotel chain Extended Stay Inc, which it sold in 2007 to investors led by David Lichtenstein's Lightstone Group LLC.

Buying junior debt

Blackstone had bought the junior debt on the Columbia Sussex hotels with the intention of seizing the properties, said the person with knowledge of the deal, who asked not to be named because the details haven't been made public. A $539 million mortgage on the real estate that came due in October was turned over to a firm specialising in troubled commercial property loans because of imminent default, Fitch Ratings said in June.

The company took over the hotels via a "deed in lieu" of foreclosure. In those transactions, a borrower agrees with his mortgage lender that he no longer has an economic interest in a property, and gives the deed to the creditor instead of going through a foreclosure, said Kevin O'Shea, head of the US real estate group at London-based law firm Allen & Overy LLP.

Peter Rose, a Blackstone spokesman, declined to comment.

Messages left for Ted Mitchel, Columbia Sussex's chief financial officer, weren't returned after normal business hours.

Taking control

Buying junior debt to acquire properties became more prevalent once the credit crisis set in and owners who purchased buildings close to the market peak found it impossible to refinance as property values fell.

"Many real estate investors have been taking advantage of the distressed market to acquire mortgage or mezzanine debt as a means to acquire ownership of the underlying real estate," O'Shea said.

Investors used junior loans to gain control of underlying real estate in multiple high-profile property takeovers last year.

In August 2009, Fortress Investment Group LLC won the bidding for a $640 million Manhattan condominium conversion project called Sheffield57, paying less than 40 cents on the dollar to wrest control from New York developer Kent Swig after he defaulted on the loans.

The auction followed similar sales of Boston's John Hancock Tower and 1330 Avenue of the Americas in New York. Blackstone, the world's largest private equity firm, bought the junior mezzanine portions of the Columbia Sussex debt from Northstar Realty Finance Corp., Fortress, Bank of America Corp. and hedge fund Fillmore Capital Partners LLC, people with knowledge of the purchase said in October.

The hotels were previously part of the former Wyndham International Inc. Blackstone, which paid $1.4 billion in equity for Wyndham International in 2005, sold half of that company's hotel portfolio to Crestview Hills, Kentucky-based Columbia Sussex that year for the same amount.

The 13 hotels that Interstate will be managing consist of six Westins, two Hiltons, two Sheratons, two Marriotts and a Wyndham, the company said. They have a total of 5,466 rooms.

The properties include the Westin San Diego, the Sheraton Philadelphia City Center Hotel, the Marriott Atlanta Downtown and the Wyndham Chicago Downtown, according to Interstate.

Funds: Restructuring debt

BRE/Hospitality Europe Holding BV, controlled by Blackstone Group LP, restructured its debt to carve out €150 million (Dh735 million) of financing to a fund controlled by Morgan Stanley.

Morgan Stanley Real Estate Fund VII Global provided the junior-ranking mezzanine facility, which was arranged by Citigroup Inc. and ING Groep NV's real estate finance unit, the companies said in a statement.

BRE/Hospitality, which owns nine hotels in European cities, reduced a senior debt facility to €330 million from €480 million, according to the statement. The senior debt is provided by Aareal Bank AG, Citigroup, Deutsche Postbank AG, ING and Swiss Re Capital Management and Advisory.

The debt reorganisation extends BRE/Hospitality's debt by five years "to help it get through the low point in the hotel cycle," according to the statement.

The company, controlled by Blackstone Real Estate Partners International Fund II and BREP Fund V, runs 3,423 hotel rooms in Amsterdam, Brussels, Frankfurt, Paris, Prague and Stockholm. It owns hotels with Starwood Hotels & Resorts Worldwide Inc., Hilton Worldwide Inc. and Hyatt Hotels Corp.