2 More US Real Estate Firms to Raise $105 Million on TASE

The wave of major bond issues on the TASE by American Jewish real estate developers is reaching a peak. Spencer Equity Group submitted a draft prospectus to the TASE last week, and investment managers at financial institutions have now heard about prospectuses filed by two additional US companies seeking to issue $79-105 million each in debt in Israel. The two companies are All Year Holdings, controlled by Yoel Goldman, and Lightstone Enterprises, controlled by David Lichtenstein. Both companies were recently founded in the Virgin Islands for the purpose of raising debt in Israel. They are seeking to take advantage of the low interest rates in the Israeli corporate bond market in order to raise cheap credit without collateral. The two companies have asked local rating companies to rate their issued bonds. Poalim IBI Underwriting and Investments Ltd. (TASE:PIU), managed by Erez Goldschmidt, is leading both of these issues, as well as the issue by Spencer Equity, but is not providing them with an underwriting commitment. The issue consultants for all three issues are Rafi Lipa and Gal Amit, who pioneered the trend towards TASE issues by US real estate companies, a trend that began in late 2012. The two consultants have earned$6.8 million in commissions to date from the five issues in which they were involved.

Extended Stay embroglio

Bond issues in Israel by US real estate developers are based on the supply-demand ratio. The developers, who own several projects, each of which has bank financing (against a lien on the property), require equity for their business. If the developer tries to borrow this amount in the US, he will probably have to pay a US mezzanine fund 11-12% annual interest. In Israel, on the other hand, investment institutions have a great deal of liquid cash, and are looking for investment instruments that provide extra yield. In order to raise debt, the US developers found an issuing company incorporating the projects they own, and use it to raise bonds in Israel at 5% interest, thereby reducing their financing costs.

The developers and companies raising money in Israel are all being marketed as experienced and successful in the US real estate market, but the risk of bankruptcy exists. Lightstone’s draft prospectus opens with a warning that its officeholders were involved in the collapse of the Extended Stay US hotel chain. Lightstone chairman of the board David Lichtenstein and executive VP Joseph Teichman, who is also a director in the company and its general counsel, were officeholders in subsidiaries of Extended Stay, which petitioned a US court for a stay of bankruptcy proceedings against it in June 2009 in order to reorganize its debt regarding payments to lenders.

Lichtenstein acquired the US hotel chain from the Blackstone Fund in 2007 for $8 billion with the help of a $7 billion financing package organized by Blackstone. Two years later, in the midst of the global economic crisis, the hotel chain became bankrupt. Lightstone wrote off most of its investment, amounting to hundreds of millions of dollars, and lost ownership of the chain to its creditors, after Extended Stay emerged from bankruptcy in October 2010. Lichtenstein and Teichman currently have no connection to the hotel chain, but according to the prospectus, they are still defendants in a lawsuit filed by the Extended Stay trustee.

On the other hand, it is important to emphasize that even after its enormous loss, the Lightstone group is still a major real estate company, with a variety of properties throughout the US valued at an estimated $2 billion. Since the crisis, the company has replaced some of its managers, and reduced the level of leverage in its business. Its US properties include 11, 000 rental apartments, 836, 000 sq.m. of offices and commercial real estate, 20 hotels, development projects in New York, and land in Arizona, California, Florida, and Nevada.

Published by Globes [online], Israel business news – www.globes-online.com