Dubai World Unit Loses Control of W Union Square (Update4)
Share Business ExchangeTwitterFacebook| Email | Print | A A A
By Nadja Brandt and Jonathan Keehner
Dec. 8 (Bloomberg) -- Dubai World’s Istithmar unit lost control of the W New York Union Square hotel in a foreclosure auction after investing in the property near the top of the real estate market.
LEM, an affiliate of Lubert-Adler Real Estate Funds, won an auction for the mezzanine debt on the luxury Manhattan hotel, which was purchased by Istithmar in 2006 for $285 million. LEM bid $2 million for the debt.
“We are pleased to have completed this step to assume ownership of the W New York Union Square,” the acquirers said in a statement today. “Despite the recent downturn of the hotel industry, and the defaults that led to today’s foreclosure auction, we are optimistic about the future. Our intention is to ensure a seamless transition of ownership.”
State-owned Dubai World is seeking a “standstill” agreement with lenders as it attempts to restructure $26 billion of debt. Istithmar shelled out $665 million for two New York hotels, the W Union Square and the Mandarin Oriental, whose sale prices each broke a local record of $1 million per guest room, according to Real Capital Analytics Inc. Dubai World amassed more than $4 billion in debt buying trophy hotels and office buildings in the U.S., Real Capital data show.
The mezzanine debt of $117 million on the W New York, named by Conde Nast Traveler as one of the world’s top 500 hotels in 2005, was divided into three parts, with LEM holding one portion, according to Ben Thypin, senior market analyst at Real Capital, a New York-based research firm.
Switching Places
LEM assumed the debt on the two mezzanine notes as well as the mortgage payments on hotel and will “essentially switch places with Istithmar,” Thypin said.
Mezzanine loans are intended to make up the gap between a first mortgage and the borrower’s equity. Unlike a mortgage, where the bank has a lien on the actual property, a mezzanine loan is secured by a pledge of equity ownership in the borrowing entity that bought the property.
LEM Mezzanine, based in Philadelphia, is a series of private equity funds with $450 million of equity, according to its Web site.
“LEM has very little equity in the deal, so essentially the property is just moving into different hands,” Thypin said after the auction. “They may be more willing to recapitalize it or somehow improve operations, but it’s not moving out of trouble. The hotel still has to improve its performance.”
LEM spokesman Rick Matthews said the company can’t comment on its plans for the property.
Travel Cuts
“Until they had a chance to take a closer look, it’s too soon to indicate what their plans are going forward,” he said after the auction.
Luxury hotels have been hurt by a decline in business and leisure travel during the recession. A drop in room rates at the W Union Square has cut its net cash flow, according to data compiled by credit-rating company Realpoint LLC.
The average daily rate among hotel chains with the costliest rooms fell 17 percent in January to October from a year earlier, to $241.72. Occupancy is down to 63 percent from 70 percent, according to Hendersonville, Tennessee-based Smith Travel Research. In New York, rates for all hotel types slid 24 percent to $207.11, a record drop among the top 25 U.S. markets.
Lenders have poured more than $100 billion into Dubai, at least $34 billion of which went to Dubai World, according to Moody’s Investors Service. Dubai World said on Nov. 30 that it is considering selling off assets as part of a restructuring.
Starwood
“As Istithmar World has demonstrated repeatedly throughout the financial crisis, we have stood by the investments in our portfolio,” Istithmar spokesman Abdelaziz Al Mazam said Nov. 18 in response to questions about debt on the W Union Square. “As signs have begun that the global economy is recovering, we expect to continue to do so with increased confidence.”
The W New York Union Square, which features Rande Gerber’s Underbar, is operated by White Plains, New York-based Starwood Hotels & Resorts Worldwide Inc., the third-largest U.S. lodging company.
Starwood spokeswoman K.C. Kavanagh didn’t immediately return e-mails and phone calls seeking comment.
The results were announced at the auction in Manhattan.
To contact the reporters on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net.
Last Updated: December 8, 2009 15:03 EST
