News for the Hospitality Executive
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 4th 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:
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.
Kassekert said in her motion to deny the license:
"Staffing was slashed in pursuit of profit. Cleanliness was disregarded in order to meet a predetermined bottom line. Customer service was dismissed.”
"Simply put, I do not believe this applicant has the business ability to operate a facility of this size and magnitude given the decisions that were made." 
Mr. Yung’s approach to reducing costs was noted by the Commission: “Calculus is a marvelous discipline: you start with the answer, and work backwards. In certain respects, that was Yung's approach in dealing with the Tropicana. He needed to get a certain answer, and it mattered little whether there was a cogent analysis to justify the outcome." 
Chairwoman Kassekert remarked on Mr. Yung’s failure to notify the Commission on Tropicana’s layoffs: “Simply put, Yung exhibited a lack of cooperation on a grand scale that did nothing to earn regulatory trust in his ability to operate in this marketplace. Moreover, his decision-making process was seriously flawed.”
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.”
“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.”“On May 5, 2009, the United States Bankruptcy Court for the District of Delaware approved the First Amended Joint Plan of Reorganization, which, among other matters, authorized the creation of a litigation trust, which we refer to as the Tropicana Litigation Trust, for purposes of pursuing any claims against Mr. Yung, Columbia Sussex Corporation and Wimar Tahoe Corporation and certain of their affiliates. On February 17, 2010, Lightsway Litigation Services, LLC, as trustee of the Tropicana Litigation Trust, filed a complaint against Mr. Yung, Wimar Tahoe Corporation, Columbia Sussex Corporation and certain of their affiliates in the United States Bankruptcy Court for the District of Delaware." 
The allegations in the complaint can be found in the Clearview S-11.
Misfortune in Missouri
In 2005, Yung attempted to buy a St. Louis casino out of bankruptcy. After Missouri’s background check, he withdrew.“‘There were things turned up in the [Missouri] investigation that did not comport with law-abiding behavior,’ gaming commission director Gene McNary told the Kansas City Star in December. ‘We gave them a chance to withdraw, and they did.’" 
“On January 12, 2006, PCI [President Casinos, Inc.] filed an adversary action in the Bankruptcy Court for the Eastern District of Missouri, alleging three causes of action: (1) breach of contract based on Columbia Sussex’s failure to purchase the President Casino; (2) prima facie tort claim based on Columbia Sussex's raising of the validated parking rates for the Cherrick Lot; and (3) injunctive relief pursuant to 11 U.S.C. § 105, enjoining Columbia Sussex from blocking access to the Cherrick Lot by casino patrons and from raising the validation parking fee over $1.50. On January 25, 2006, the Bankruptcy Court entered a temporary restraining order granting the requested injunctive relief to PCI." 
US District Court Judge Henry Edward Autrey (Eastern District of Missouri) wrote in his September 25, 2009 order: “…William Yung told John Aylsworth that if President Casino did not drop the breach of contract suit ‘he would just take that parking lot away and chain it up.’ When asked about these remarks, Yung explained that he wanted to retaliate against PCI for what he perceived were threats to bring a breach of contract suit. Then, on the heels of these remarks, Columbia Sussex, with just eight hours notice to the President Casino, without any research into appropriate market rates for validated parking, raised rates 300 percent, from $1.50 to $6.00." 
Judge Autrey affirmed a bankruptcy court’s judgment on the parking dispute which ordered Columbia Sussex to pay $382,884 to the casino, however he “reversed the bankruptcy judge's decision on the breach of contract claim and awarded $42.3 million to President Casinos, which includes damages and prejudgment interest." 
In October 2009, Columbia Sussex made a motion for rehearing.
Unwanted in IndianaIn January 2007, Columbia Sussex acquired an Evansville, Indiana casino as part of its $2.8 billion purchase of Aztar Corp. 
“In March 2007, Evansville Mayor Jonathan Weinzapfel learned Columbia Sussex was laying off about 70 casino workers, a number higher than first discussed, and asked the gaming commission to see if the company was thus violating state standards.
“The commission opened an investigation only to suspend it when New Jersey decided to revoke Columbia Sussex’s license to operate the Tropicana casino in Atlantic City. New Jersey officials said the Tropicana had failed to meet state standards on cleanliness and service. Columbia Sussex, facing a bankruptcy, decided to sell Casino Aztar, Tropicana and a casino in Vicksburg, Miss.: 
“‘My ambition for Evansville was to build a boat in a moat there,’ Yung said. ‘Then I went and met the mayor, He was concerned no one [from Columbia Sussex] came to see him; no one bent to the altar,’ Yung said.
“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.“‘One of them is, you want to be wanted,’ Yung said. ‘Clearly I wasn’t wanted.’" 
Park Cattle Lease Lawsuit
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.” 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.“On April 2, 2008, Tropicana Entertainment, LLC (“Tropicana Entertainment”), Tahoe Horizon, LLC (“Tahoe Horizon”), Columbia Properties Tahoe, LLC (“CP Tahoe”) and certain of their affiliates (the “Unrestricted Affiliates;” and together with Tropicana Entertainment, Tahoe Horizon and CP Tahoe, the “Tropicana Parties”) entered into a Stipulation for Entry of Judgment (the “Settlement Stipulation”) with Park Cattle Co. (“Park Cattle”) pursuant to which the parties agreed to settle their ongoing litigation that had been pending in a Nevada state court with respect to the ground lease for Tropicana Entertainment’s Lake Tahoe Horizon Casino and Resort (the “Horizon Resort”) in South Lake Tahoe, Nevada. Under the terms of the Settlement Stipulation, the Unrestricted Affiliates agreed to make cash payments totaling $165 million (the “Settlement Payments”) to Park Cattle over the next three years, the first of which was made on April 2, 2008 in the amount of $40 million.”
Furthermore, as reported by Tropicana Entertainment, “[T]he proposed Horizon Resort lease amendment provides, among other things, that the ground lease will terminate on March 31, 2011.” That would be 29 years before its expiration.
According to the Las Vegas Sun: “The Horizon also had been fined by the Environmental Protection Agency for mishandling of asbestos in the building and cited by OSHA for violations of the electrical code.”
RevPAR at Columbia Sussex Hotels
Columbia Sussex is known for a particular operating style focused on cutting costs. Because there are costs associated with occupancy gains, Columbia Sussex’s emphasis on cost reductions may limit RevPAR growth from increased occupancy, even in the good years. Potential Clearview investors may want to examine what happened at a distinct portfolio of 14 hotels after their acquisition by Columbia Sussex in the last upcycle.
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. 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. Additionally, "Fitch stressed YE2007 net cash flow (NCF) also declined 6% compared to issuance NCF.” 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.” 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 RecordClearview Hotel Trust touts Mr. Kline’s record at Sunstone Hotel Investors as evidence of a “Proven Track Record”. 
“Our Chairman and Chief Executive Officer, Jon D. Kline, previously served as Chief Financial Officer from 2004 to 2006 and President from 2006 to 2007 of Sunstone Hotel Investors, or Sunstone, a publicly-listed hotel REIT. Mr. Kline played a significant role in transitioning Sunstone from a private hotel owner and operator financed by Westbrook Partners, a real estate private equity fund, to a publicly-listed company. Sunstone completed more than $2.0 billion in acquisitions during Mr. Kline’s tenure.”
resigned from his
position as President of Sunstone effective June 30, 2007, following
appointment of Steve Goldman as Chief Executive Officer in March 2007.
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.Start-up REITS Dragging
Since December 2009, three other REITS have undertaken IPOs to raise capital for hotel acquisitions: Pebblebrook Hotel Trust, Chesapeake Lodging Trust, and Chatham Lodging Trust. All three are trading below their IPO prices, and are underperforming in comparison to the leading hotel REIT, Host Hotels, for the period since their IPOs, through June 16, 2010.
Columbia Sussex’s Growing Labor Disputes
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.At the time of underwriting, occupancy for these 14 hotels was 76%. In 2009, occupancy had dropped to 60%.
The Bear Stearns 2006-BBA7 Mezzanine Debt
Two collateralized debt obligations (CDOs) contain portions of the Columbia Sussex mezzanine debt associated with the2006-BBA7 – Guggenheim Structured Real Estate Funding 2005-1 (Guggenheim 2005-1) and Brascan Structured Notes 2005-2, Ltd./Corp. (Brascan 2005-2). Fitch Ratings downgraded all classes of Brascan 2005-2 in November 2009 and all but one class of Guggenheim 2005-1 in February 2010.
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.”
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.For more information, please visit www.BoycottColumbiaSussex.org or see contact inforamtion below:
 Remarks of New Jersey Casino Control Commission’s Chairwoman Linda Kassekert, December 12, 2007.
 http://www.state.nj.us/casinos/home/news/pdf/opinionandorder.pdf, p.43
 SEC Form S11, p. 121.
 Kentucky Herald Leader, February 10, 2008. http://www.kentucky.com/news/state/story/314039.html
 Opinion, Memorandum and Order, Judge Henry Edward Autrey, US District Court (Eastern District of Missouri), September 25, 2009.
 Opinion, Memorandum and Order, Judge Henry Edward Autrey, US District Court (Eastern District of Missouri), September 25, 2009.
 Missouri Lawyers Media, October 2, 2009, “Bankrupt Missouri casino wins $42M judgment.” http://www.allbusiness.com/legal/trial-procedure-judges/13136912-1.html
 Indianapolis Business Journal, March 1, 2008. http://cms.ibj.com/ASPXPages/6iframes/FrontEndArticlesDetailPage.aspx?ArticleID=11919&NoFrame=1 or http://www.ibj.com/article?articleId=13910
 Evansville Courier & Press, April 1, 2008. http://www.courierpress.com/news/2008/apr/01/01web-AztarName/
 Evansville Courier & Press, May 11, 2007. http://www.courierpress.com/news/2007/may/11/aztar-boss-rips-mayor-yung-says-he-wasn’t/
 SEC, Tropicana Entertainment, 10Q, filed December 6, 2007.
SEC 8K, Tropicana Entertainment, April 8, 2008.
HERE RESEARCH DEPARTMENT
MARIS ZIVARTS 212-414-7247
COURTNEY ALEXANDER 631-834-4681
275 7TH AVENUE • NEW YORK, NY 10001-6708
Study, Collaborated with UNITE HERE, Reports Certain Hotel Workers Are
Injured at Different Rates; 35 Union Hotels in the Full Servie Sector
Studied / August 2007
|Study: Hotel Housekeeper Work is Dangerous; Majority of Housekeepers Cope with Persistent Pain on the Job / April 2006|