Clearview Hotel Trust intends to sell stock in an initial public offering (IPO) to fund the acquisition of 14 hotels from Columbia Sussex, who would stay on as the hotels’ operator. Investors, it’s time to meet your business partner.

Columbia Sussex, a Fort Mitchell, KY based company headed by owner William Yung, III, grew during the boom years to become 4^th largest owner of full service hotels in the country with 67 hotels. Credit was easy, and Columbia Sussex borrowed lots. Now, the cost to rapid expansion is becoming clearer, as Columbia Sussex does something it has rarely done before – seek a partner.

Columbia Sussex needs Clearview to buy its 14 hotels so it can repay a $215 million loan that matures in July and is guaranteed by Columbia Sussex. While Clearview’s IPO and concurrent acquisition will solve one imminent debt maturity, it does not address the rest of Columbia Sussex’s pending debt problems, not all of which were disclosed by Clearview in its initial SEC filing.

But does Clearview need Columbia Sussex?

The core questions potential investors must examine before buying this IPO are:

1. Is Mr. Yung partner material, and will Columbia Sussex be good for Clearview investors?
2. What is Mr. Jon Kline’s track record on behalf of public investors, and does he have enough experience to manage Clearview’s strategic partnership with Columbia Sussex?
3. Has Clearview management assessed the long term impact of Columbia Sussex’s modus operandi – bare-bones operations and growing labor disputes?

Can Mr. Yung Work for Clearview?

Mr. Yung’s record in the gaming industry provides the best evidence to question Mr. Yung’s ability to work for Clearview and its investors.

Uncooperative in Atlantic City

In 2006, Mr. Yung acquired the Tropicana Casino and Resort in Atlantic City as part of a $2.8 billion purchase of Aztar Corp., and by the end of 2007, he lost the Atlantic City Tropicana as state regulators denied his license renewal and imposed a $750,000 fine. The New Jersey Casino Control Commission (NJCCC) gave a number of reasons for denying Tropicana’s license.

Soon after taking over control of the property, Yung laid-off nearly 1,000 employees – approximately one-quarter of the workforce. This was one of the factors in the Commission denying the Tropicana’s license.

The NJCCC’s Chairwoman Linda Kassekert said in her motion to deny the license:

…

Another key factor in the denial was Tropicana’s “total disregard” for the requirement to create an independent audit committee under New Jersey regulations.  Kassekert said, “It appears that the applicants either do not understand New Jersey’s law and regulations or do not want to understand them.”

In addition, Kassekert remarked on the inconsistencies of the testimonies of Mr. Yung and other Tropicana employees during the licensing hearing: “Most unfortunately, there is evidence of outright perjury in the record and evidence of a more subtle kind in its elusiveness. This can only lead me to the conclusion that this applicant has failed to meet the requirements of the [Casino Control] Act for honesty, integrity and good character.”

Tropicana Bankruptcy

“Following the license denial, two subsidiaries of Wimar Tahoe Corporation, Tropicana Entertainment, LLC and Tropicana Las Vegas Holdings, LLC, and certain of their respective subsidiaries, which we collectively refer to as the Tropicana Entities, defaulted on their $1.3 billion credit agreement. Thereafter, on May 5, 2008, the Tropicana Entities filed voluntary petitions for reorganization relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.”

Misfortune in Missouri

In 2005, Yung attempted to buy a St. Louis casino out of bankruptcy. After Missouri’s background check, he withdrew.

Unwanted in Indiana

“Yung said Columbia’s relationship with the city got off to a rocky start at the meeting because the mayor’s first question regarded the company’s record with the Equal Employment Opportunity Commission complaints.

“‘I didn’t come asking for anything; I came because he wanted me there,’ Yung said. ‘Obviously, I wasn’t welcomed.’

“Weinzapfel said he did not recall starting the conversation with a question of EEOC claims, but the mayor said he did ask about the issue because the city’s research into Columbia Sussex turned up an ‘inordinate’ amount of EEOC complaints.

“Yung said he came away from the meeting ‘disheartened,’ adding that several factors must be in place in order for communities to attract investment.

Disclosures in Tropicana Entertainment’s SEC filings describe a dispute over maintenance of Tahoe Horizon Hotel and Casino, which was subject to land leases with a third party called Park Cattle Company.

“In October 2005, Tropicana Casinos and Resorts, Tropicana Entertainment’s ultimate parent, received a default notice from Park Cattle, the landlord for the two ground leases for our Tahoe Horizon property, arising from Tropicana Casinos and Resorts’ alleged failure to maintain the Tahoe Horizon hotel and casino facilities as required by the leases. Tropicana Casino and Resorts has operated the Tahoe Horizon on the leased premises since 1990.”^[11] Tropicana Casinos and Resorts, which denied Park Cattle’s allegations, was wholly owned by Mr. Yung.

On April 2, 2008, the parties to the lawsuit reached settlement, described in Tropicana Entertainment’s SEC filing.

Columbia Sussex bought 14 hotels for a total $1.4 billion from Wyndham on October 6, 2005, borrowing $1.1 billion in CMBS and mezzanine debt. The prospectus for the CMBS – called Bear Stearns Commercial Mortgage Securities 2006-BBA7 – details the performance of the hotels at that time. According to the Offering Circular, the 14 Columbia Sussex hotels had an average RevPAR of $99.60, with occupancy of 76% and an average daily room rate (ADR) of $131, for the twelve months ending March 31, 2006.^[14] For the year end 2007, according to Fitch Ratings, the portfolio’s average RevPAR was $99.40, essentially flat when compared to the March 31, 2006 period.  2007 occupancy for the portfolio declined to 62.5% with an increased ADR of $158.90.^[15] Additionally, "Fitch stressed YE2007 net cash flow (NCF) also declined 6% compared to issuance NCF.”^[16] By September 2008, year-to-date occupancy was 65%, ADR $163, and RevPAR was $105.58, according to Fitch.

These 14 Columbia Sussex hotels missed the solid RevPAR growth during the boom years of the last upcycle. By contrast, average annual RevPAR for U.S. hotels overall increased 7.5% in 2006 and another 5.7% in 2007, according to Smith Travel Research.

                Performance of 14 Other Columbia Sussex Hotels During Last Up Cycle

Clearview stated in its original S11:  “Certain of the hotel properties in our initial portfolio have lower occupancy rates, which we believe provides opportunities for improvement through, among other measures, selectively enhancing group sales teams at certain of our properties.”^[17] Prospective investors should consider whether Clearview will succeed in changing Columbia Sussex’s management style given the record laid out on previous pages. Likewise, investors should ask Clearview management what their analysis is of maintenance and capital expenditures that may have been deferred under Columbia Sussex’s ownership.

Mr. Jon Kline’s Record

Mr. Kline resigned from his position as President of Sunstone effective June 30, 2007, following the appointment of Steve Goldman as Chief Executive Officer in March 2007.

Not only did Sunstone acquire $2 billion of hotels during Mr. Kline’s tenure, it also undertook one IPO, three follow-on stock offerings, three private placements, a forward equity sale, and two preferred share issuances. All between November 2004 and December 2006; all at prices significantly higher than Sunstone’s current stock price ($11.91 on 6/15/2010). At the same time, Sunstone’s debt rose from $712 million at December 2004 to $1.7 billion by year end 2007. Sunstone’s strategy of recycling capital left it owning expensive real estate bought during the up-years of the last hotel cycle. According to an investor presentation made by Sunstone in May 2007 Sunstone acquired 16 hotels after its IPO with 7,388 rooms at an average price of $258,000 per key.[19] In the same post-IPO time period, Sunstone sold 20 hotels with 3,896 rooms at $58,000 per key, totaling $226 million.

Kline’s Tenure of Stock Offerings at Sunstone

Sunstone has walked away from, put into receivership or intends to deed back to lenders 11 hotels, with 2,838 rooms. Sunstone still has $1.2 billion of debt, excluding the debt associated with those 11 hotels. Despite the number of equity offerings it undertook during the acquisition period, Sunstone shareholders have faced a 65% increase in the number of outstanding shares since mid-2007 (Mr. Kline’s departure), as the company completed two more follow-on share offerings in 2009 in the bottom of the cycle.

Sunstone’s current share price remains well below its 2004 IPO price.    

Labor disputes at Columbia Sussex’s properties have grown over the last few years, with the number of boycotts growing from one in 2007 to 8 as of today. Facing a variety of cuts, including layoffs, benefit reductions, pay freezes, higher costs for health insurance, and/or work speed-ups in the wake of their hotel’s acquisition by Columbia Sussex, unionized employees have called for boycotts of the Baltimore Sheraton City Center in Maryland, Hilton Crystal City in Northern Virginia, Anchorage Hilton in Alaska and Hilton Sacramento West in California.

Dave Thompson, who has worked at the Hilton Anchorage for 15 years says, “As I see more of our jobs being combined, less of us working, and the housekeepers having to clean two extra rooms a day, I have become more determined to win fair working conditions at our hotel.”

And in March 2010, hotel workers’ union UNITE HERE called on customers to boycott 4 more Columbia Sussex hotels in support of a fair process for organizing a union. They are: Westin Washington DC City Center, Westin Emerald Plaza San Diego, Wyndham Chicago and Westin Chicago Northwest.

Will Columbia Sussex bring labor disputes to Clearview’s hotels?

Columbia Sussex’s Debt Obligations

 The Bear Stearns 2006-BBA7

The Clearview SEC filing discloses that five of the hotels they plan to acquire are part of a 10-hotel loan that is guaranteed by Columbia Sussex and CSC Holdings, LLC and matures July 1, 2010. The filing also discloses that four hotels owned by Columbia Sussex subsidiaries have had receivers appointed by courts in 2009 and 2010. The filing, however, does not disclose $1.1 billion in debt that comes due later this year.

One of the largest pieces of Columbia Sussex’s outstanding debt is in a CMBS – the Bear Stearns 2006-BBA7 – which was used to finance the acquisition of 14 hotels from Wyndham in October 2005. The $1.1 billion in loans for these 14-hotels made up 79% of the purchase price and matures October 12, 2010. The 2006-BBA7 is also uncommon as a CMBS in that it has no sector diversification and the Columbia Sussex portfolio makes up 93.1% of the outstanding balance.

According to Fitch Ratings, on June 23, 2010, the 2006-BBA7 Columbia Sussex loans entered into special servicing, with Fitch identifying “imminent default” as the reason.

The $1.1 billion, from Bear Stearns Commercial Mortgage Inc. and Bank of America, is composed of $570 million in Senior Notes and $532 million in Mezzanine Loans. The Senior Notes are cross-collateralized and cross-defaulted, as described in the Offering Circular.

The Columbia Sussex Portfolio Loan backing 2006-BBA7 had an original maturity date of October 12, 2007. Three one-year extensions have been granted with the final maturity date of October 12, 2010 approaching.

For Brascan 2005-2, Fitch reported on November 13, 2009 a base case loss expectation of 45.7% and wrote:

“The largest component of Fitch's base case loss expectation is Columbia Sussex, a mezzanine loan (11%) secured by an interest in 14 full service hotels with a total of 5,821 rooms. The hotels are branded under the Sheraton, Westin, Hilton, and Marriot flags. The borrower recently exercised the final extension remaining on the loan. While performance of the portfolio has been stable, the portfolio is highly leveraged.”

For Guggenheim 2005-1, Fitch reported on February 4, 2010 a base case loss expectation of 16.3% and wrote:

“The largest component of Fitch's base case loss expectation is a mezzanine loan (19.4%) backed by partnership interests in a portfolio of 14 full service hotels (5,822 keys) located across the U.S. The hotels are under the Westin, Sheraton, Marriott, and Hilton flags. In line with most hotel properties, net cash flow has declined precipitously since the loan was originated. Fitch modeled a maturity default in its base case scenario.”

Maiden Lane

On March 31, 2010 the Federal Reserve Bank of New York (FRBNY) announced that it was making public nearly all holdings of the Maiden Lane portfolios. Maiden Lane LLC was the vehicle the FRBNY formed in June 2008 to acquire $29 billion in troubled assets of Bear Stearns as part of the deal which allowed J.P. Morgan Chase to acquire the collapsing investment bank. The Fed’s recent disclosure reveals that as of January 29, 2010, Maiden Lane LLC had on its balance sheet approximately $900 million combined in current principal balance or notional amount in 6 different classes of Bear Stearns 2006-BBA7 securities.

Columbia Sussex Westin Casuarina Loan in Special Servicing

In February 2010, Fitch Ratings released a U.S CMBS Focus Performance Report which looked at the Wachovia Bank Commercial Mortgage Trust Series 2005-C22, containing a loan for the Columbia Sussex Westin Casuarina Hotel and Spa in Las Vegas. The report highlights the Casuarina loan as one of concern, with a modeled loss of 43%. Fitch writes, "As of the TTM [trailing twelve months] ended June 30, 2009 ADR, occupancy, and RevPAR were $118.67, 61.5%, and $72.98, respectively. This represents a RevPAR decline of 26% since YE 2008. The borrower has requested a modification due to the decline in performance of the hotel and Fitch considers it likely that the loan will transfer to special servicing in the near future." On March 31, 2010, Fitch announced the loan entered special servicing. "Reason for Transfer: Imminent Default."

UNITE HERE represents approximately 110,000 members in the non-gaming hotel industry, including employees at 5 hotels owned and operated by Columbia Sussex. UNITE HERE has labor disputes with Columbia Sussex in several cities throughout the United States.