By JAY LOOMIS
THE JOURNAL NEWS
(Original Publication: January 8, 2006)
MAHWAH, N.J. — David Lichtenstein calls them the "orphans" of the real estate world. These unloved properties, hurt by problems real or imagined, are risks that many developers avoid. Yet for Lichtenstein, adopting orphans and leading turnarounds are his specialties.
Take Prime Retail Inc., a major owner of retail outlet centers.
In late 2003, Prime Retail's stock had plunged 99 percent as investors worried that a dangerous overload of debt was putting the company at risk. The problems, however, didn't scare away Lichtenstein, a Rockland County real estate investor who smelled an opportunity to snap up retail properties in good locations. He bought Prime Retail for a mere 18 cents a share — far below the stock's $16 peak in 1997 — through The Lightstone Group, his privately held real estate company.
Two years after the $625.5 million buyout, a turnaround is well under way, according to Lichtenstein. The deal gave him control of 36 retail outlet centers in 23 states.
"We changed the management," he said. "We brought in the best people in the industry to run the company. And we have taken occupancy from the low 80s to the high 90s."
A key strategy has been changing the tenant mix at the outlet centers to one that is "much more hip, energetic and young," Lichtenstein said. A leading showcase for the transformation is an outlet center in San Marcos, Texas, that mimics Venice — complete with a gondola ride.
Such aggressive deals are the norm for Lichtenstein, who has quietly become one of the largest private real estate investors in the United States.
The portfolio for his company, spanning 28 states, includes nearly 20,000 apartments and 27 million square feet of commercial and retail space. Lightstone Group is growing rapidly, reporting $2 billion in acquisitions during the past year.
"What I like about real estate is that on a personal level you see real results," Lichtenstein said. "When we open an apartment complex, and a few hundred families live there, when you provide housing, it is something that you can measure. ... When you have a shopping center and provide beautiful shopping and entertainment, or an office facility, it is something you can touch. On a personal level, it is a feeling of productivity."
Lichtenstein, 43, once seemed an unlikely real-estate player. Growing up as the son of Brooklyn teachers, he wasn't sure what he wanted to do when he grew up.
"I didn't go to college," he recalled. "I was uneducated."
Soon after high school, he bought a single two-family home in New Jersey, fixed it up and sold it for a profit.
"This seemed like something I could understand," he said. "You buy a house, you fix it up. I started buying more properties. It snowballed over time. You never think that it could get as big as it did."
Lichtenstein maintains a small office inside the Sheraton hotel in Mahwah, N.J., that is a convenient drive from his home in Rockland. In his spare time he pursues hobbies such as tennis, reading and growing tomatoes in a garden. Free time, however, can be hard to find when you are running a company that has 1,500 employees, most of whom work at Lightstone's various properties around the country. The company's headquarters are officially in Lakewood, N.J.
"The biggest challenge in my life is balancing life and work," said Lichtenstein, who travels about two days a week, including a recent 16-hour roundtrip marathon to San Francisco.
The company has enjoyed returns of more than 32 percent a year in its 17-year history, according to Lichtenstein. He has racked up stellar returns with a contrarian investing philosophy that often defies conventions. While some of his peers chase the hottest properties in fast-growing markets, Lichtenstein said it is hard to make a decent return with that strategy. The reason, he said, is the deals get overpriced from so many bidders.
"If you go after the big trophy property, everyone is lining up to buy that property," he said. "How are you going to get anything that way? Once a market is hot, we are out of there."
Lichtenstein's value-centric approach often leads him off the beaten track to smaller markets overlooked by others — malls in Minot, N.D., and Dothan, Ala., are two examples. In some cases, he scoops up properties hobbled by everything from soaring vacancies to litigation to high debt.
"We go into situations where other people say 'We don't want to have a part of it, or it is too problematic for us,' " Lichtenstein said. "But we have a lot of expertise in fixing things. We try to make a living by looking around turns. ... That is what keeps us up at night. What bends can we see around?"
About a year ago, Lichtenstein's company bought The Brazos Mall in Lake Jackson, Texas. The mall did marketing studies to find out what type of retailers shoppers wanted. New retailers then came in, including a food court and a cinema.
"It was only 70 percent full when we bought it," Lichtenstein said. "It was real orphan. ... We took it to 96 percent occupancy."
In one year, he said, the profit of the mall has doubled. In Westchester County, Lightstone owns one commercial property, an office building at 150 Grand St. in White Plains that is targeted for a renovation into medical offices.
"I am having fun," Lichtenstein said. "I am glad to be able to wake up in the morning and think I am doing something productive."
Associates said that Lichtenstein has a knack for finding bargains.
"From what I have seen, he is able to buy properties that are undervalued, turn them around and get more out of them," said Charles J. Antonucci Sr., president and chief executive officer of Park Avenue Bank in Manhattan. Lichtenstein is a majority shareholder in the bank. "And he moves very quickly, which in the real estate business, is very good."
In July, banking giant Wachovia Corp. provided the financing for Lightstone's $170 million purchase of malls in Macon, Ga., and Burlington, N.C.
"They have established themselves among the most professional and knowledgeable owners in the real estate industry," Chad Johnson, managing director of Wachovia, said of Lichtenstein and other Lightstone executive in July when the the sale closed.
Lichtenstein recently started Lightstone Value Plus, a real estate investment trust open to average investors through brokers, even though shares do not trade on a public exchange. Lichtenstein said he made a $30 million contribution as the first investor.
"I probably get 10 to 15 calls a day from people saying that they have seen me do this or do that, and asking 'Can we invest with you?' This allows them to do that."
Lichtenstein has mixed views on the outlook for real estate following the five-year boom that has led to a sharp increase in property values. He said the office market overall is in good shape, particularly in major cities such as New York where occupancy is strong. Unlike previous booms, office developers didn't overbuild in most cities. That has allowed office rents to rise or remain stable.
"It is the best office market we have seen in our lifetime," Lichtenstein said. "Vacancy rates are at an all-time low."
He sees some headwinds, however, for retail real estate.
"I think that retail, which has been on a fabulous run the last five years, could flatten out over the next 24 months because Internet retailing has taken off and the economy is pretty flat," he said.
But it is residential housing where Lichtenstein is the most pessimistic about a potential bubble deflating as interest rates rise. Two months ago, Lichtenstein said that residential housing prices in some of the most overheated markets could fall 25 percent during the next year. Standing by that forecast, Lichtenstein said some cities along the East and West coasts are already seeing home prices weaken. The biggest hit, he said, will likely come in the condominium markets.
"There has been such a huge run-up, it is sort of giving back a lot of profit," Lichtenstein said. "It will depress somewhat the elation and euphoria that has been in the housing market."
Some consumers with adjustable rate mortgages could be hurt from rising rates, and foreclosures may increase, he said.
"If short term interest rates (don't come down), it reduces affordability for new purchasers," Lichtenstein said. "It narrows the number of people who can buy. It will be a double whammy."
He said that residential and condo markets in Westchester and Rockland counties may hold up better than some areas because of less new construction and their proximity to New York City.
Another risk — terrorism — is harder for real estate owners to defend against, he said.
"I think the terrorism risk is one that is very hard to quantify and very hard to hedge," he said.
