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 Cover Story Reveling in Risk BY SHANKAR P. David Lichtenstein’s buy-it-now strategy makes the Lightstone Group the country’s second largest owner of outlet malls. David Lichtenstein does megadeals on the spur of the moment. “Everything we bought this year was decision that was made in 24 hours,” says Lichtenstein, chairman of The Lightstone Group in Lakewood. “If I have to make a decision, I scratch my head and say, ‘Okay, the board just met and this is what we decided. In the past 10 months Lightstone has acquired $1.3 billion worth of shopping malls, office complexes and apartments across the country. That’s not counting the majority stake in Park Avenue Bank that he bought last year. The New York City real estate lender has $240 million in assets. Lichtenstein, 44, has a sharp eye for a bargain. He buys litigation-plagued companies that big real estate investment trusts shun; shopping malls with bankrupt anchor stores; and office buildings in markets that other investors turn away from. Yet he claims his portfolio has generated returns of more than 30% a year since he founded Lightstone in 1988. Not that he hasn’t missed some opportunities. In the immediate aftermath of 9/11 First Boston offered Lightstone five hotels in Manhattan for $80 million. Hotels were considered bad buys at the time and Lichtenstein declined. Today, he reckons their value at $250 million. “I walked away from almost $200 million in upside because I wasn’t able to see around the curve,” he says. “I’m in Manhattan every week and almost every time I pass one of those hotels, and it’s like getting a nice kick in my ankle.” Lichtenstein’s first deal was an 89,000 duplex financed by $12,000 in savings and credit card debt. Today this Brooklyn-born son of a school teacher is the country’s second largest owner of outlet malls – after Simon Property Trust of Indianapolis – and commands a portfolio of properties in 30 states that includes 20,000 apartment units and has a total value of more than $3 billion. The companies he has acquired have a combined workforce of more than 1,000 employees. Lichtenstein has well-heeled financial partners and willingness to buy whatever strikes his fancy from malls to office complexes he offers one price and sticks to it until a deal has been completed. Three months ago Lichtenstein completed his largest and perhaps riskiest deal - the $889.4 million purchase of Prime Group Realty Trust in Chicago. That brought him 11 office buildings with 4.6 million sq. ft.; 120,000 sq. ft. of industrial property; 9.3 acres of developable land and a stake in 2.8 million sq. ft. of office space. Virtually all of it is in the metropolitan Chicago area, which is nursing uncomfortably high vacancy rates that range from 16% to 20%. “I agree the Chicago office market is in bad shape,” says Lichtenstein. “But we think occupancy will go up.” The portfolio was also entangled in litigation brought by executives of the trust who wanted to acquire it. “No normal company would have looked at [the deal],” Lichtenstein says. “We went out and examined the litigation and felt we had handle on it.” In the end, the plaintiffs “settled at pretty much the dollar amount that we thought they would.” Lichtenstein draws comfort from what he considers to have been an attractive price. “we bought at a 9-cap.” He says, meaning a capitalization rate of 9%. This refers to the capitalized value of the portfolio’s annual stream of rent. For example, an office building that generates $50,000 in rental income and sells for $500,000 has a capitalization of 10%. Cap rates fall as market values rise, so if the same building sold for $750,000, the capitalization rate would dip to 6.7%. “We think [the Prime Group] portfolio will move to a 7-cap,” says Lichtenstein, meaning that its market value will increase. Lightstone’s backers include Chad Johnson, managing director of the Large Loan Principal Group of Wachovia Securities in New York City, who first met Lichtenstein 10 years ago. “It was a very complicated transaction with very tight timing and incredibly stressful,” Johnson says of Wachovia’s First deal with Lichtenstein. “ He’s a master at seeking out value can find it in the tightest markets.” Over the years, Johnson has invested more than $2 billion in Lightstone’s deals. Other major backers include Citigroup, Morgan Stanley and Arbor Commercial Mortgage, a lender in Uniondale, New York. “The real estate firms that partner us have endless appetites,” says Lichtenstein. “So if a deal makes sense, it’s just a question of calling up and saying, ‘ Hi, we need another few hundred million.” According to Lichtenstein, one such transaction earned Arbor Commercial a 500% return on its investment in 14 months. “I love messy deals,” he says, “ especially those that are orphans” – a reference to assets that have suffered from management neglect. Two years ago he paid $625.5 million - a 20% discount to market value - for Prime Retail of Baltimore, a troubled owner of outlet malls. “We had management that was only worried about their jobs and board members who were worried about their reputations and about getting sued,” Lichtenstein recalls. “there were shareholder litigation, environmental issues and foreclosure issues. We brought the entire thing digested it with a few burps.” Lichtenstein cleaned house of everyone save Prime Retail president Bob Brvenik, who last year led the $120 million purchase of five properties from Pennsylvania Real Estate Investment Trust. That was on top of the acquisition of five other malls in three transactions worth a total of more than $40 million. Lichtenstein upgrades such properties to bring in marquee retailers such as Neiman Marcus, Hugo Boss and Salvatore Ferragamo. Brvenik says Prime Retail has pumped some $150 million into capital improvements since acquiring the malls. “When somebody gets out of their car in one of our outlets malls, their temperature goes up a bit.” Says Lichtenstein. Prime Retail’s most ambitious upgrade is underway in San Marcos, Texas, where an outlet mall is about to be reborn as a knock-off of Piazza San Marco in Venice. Lichtenstein got the idea after being struck b the beauty of the Italian city while visiting there. The renovated mall will feature fountains, canals, gondola rides and a replica of the famed campanile. That $50 million overhaul has brought in Neiman Marcus, Benetton and casual clothier Tommy Bahama. Top brands already at the mall that are expanding and relocating to new quarters include Williams-Sonoma, Ann Taylor, J. Crew and Salvatore Ferragamo. Retail properties account for about 40% of Lightstone’s investments followed by offices (30%), residential units (20%) and industrial space (10%). He plans to pare back the retail component to 33% by increasing the share of residential and other properties. With interest rates climbing, Lichtenstein says he is “hoarding cash” for the next round of bargains. He figures “there will be blood in the streets” if rates climb another 100 to 200 basis points, leading to distress sales and foreclosures. “that’s one curve,” he says, “ that we want to be ahead of.” A Bank Of His Own |
