In September 2018, Newstream Commercial Development (“Newstream”) launched an offering for the repositioning of a 220-room, two-story, interior corridor hotel located in Houston, TX. The purchase of the property was negotiated in an off-market transaction and Newstream planned to immediately reposition and convert it from the Radisson brand to Red Lion Hotel. The Red Lion franchise had a vast technology platform that was expected to aid in brand awareness and attracting new customers. Newstream had negotiated a new professional hotel management contract and planned to expand the local marketing efforts, increase the food and beverage offerings, and target the booking of the 15,000 square foot conference space of the hotel. Newstream believed that the re-branding and targeted marketing efforts would bring a healthy mix of both business and casual travelers. During the previous two years, the seller had completed a comprehensive $2.7 million renovation, resulting in the property having an excellent physical condition and full-service amenities. Newstream projected the property would provide investors an average cash-on-cash return of 12.0% over the hold period, reaching 14.4% upon stabilization.
During the first few months of ownership, Newstream experienced challenges as the acquisition coincided with the beginning of a steep decline in the oil & gas markets, which created a softer local market and had a direct unfavorable influence on room demand and revenue. Prior to the formal takeover of the property, the passing away of the previous general manager caused an additional unexpected disruption. This resulted in staffing challenges upon takeover and caused the hotel to miss the RFP (Request for Proposal) season, which is when the hotel would typically bid on group and corporate account business. Furthermore, upon the transition to the Red Lion Hotel brand, the property was severely mismanaged and temporarily removed from the Global Distribution System (GDS), which connected the property to over 60,000 global travel agents. As a result, the property was offline in most systems for up to 30 days, with the hotel’s positioning affected on such platforms for a more significant 60 to 90 days. As a result of underperformance to-date, Newstream issued a capital call in January 2019 to bridge cash flow shortfalls and allow the sponsor to continue to operate the property in order to stabilize it.
Chapter 11 Bankruptcy
As the hotel continued to underperform, its financial struggles were further exacerbated by an uncompromising lender, which unilaterally determined in summer 2019 that it would no longer allow the property to use its interest reserve to make the monthly payments. In the fall of 2019, Tropic Storm Imelda caused severe flooding in the area, including the entire first floor of the hotel, adding to the challenges already faced by Newstream. In late 2019, when Newstream attempted to refinance the loan, the uncooperative lender blocked the insurance settlement related to the storm damage. With this issue outstanding and unresolved, Newstream was never able to complete the refinance process. In late April 2020, Newstream placed the property in Chapter 11 bankruptcy protection. Newstream hoped to work with the lender’s counsel to try and reach an agreement on terms of a restructuring proposal without having to litigate the lender restructure in federal bankruptcy court.
With the severe effects of COVID on the hospitality industry lingering, and likely to get worse for the Houston airport market as winter approaches, Newstream was not confident the proposed restructuring plan would be able to be confirmed. With the hotel closed, the global pandemic was the last straw and left no viable operational strategy for the hotel to re-open and emerge from the Chapter 11 bankruptcy. Newstream ultimately determined to file a motion to reach a settlement with the lender, resulting in a high probability that there will be no assets left for distribution to equity holders, signifying a likely total loss of capital for investors. As a result of the sequence of events, CrowdStreet has deemed this offering as realized, assuming a total loss of investor equity.
On multiple fronts, Newstream failed to execute the business plan and the operational struggles were further exacerbated by a predatory lender and unfavorable market conditions. Newstream could not adjust to the challenges encountered and turnaround/restructure the investment. The property was placed in Chapter 11 bankruptcy protection and Newstream ultimately filed a motion to reach a settlement with the lender, resulting in a total capital loss for equity investors.
*Given the inherent limitation of the IRR calculation (which requires at least one positive cash flow), the IRR cannot be calculated for this investment. As a result, the 100% loss shown simply represents absolute loss of capital incurred by investors.
This report contains explanations of a series of events associated with Newstream’s Houston Red Lion Hotel offering that resulted in a 100% loss of original equity to investors (including those from the CrowdStreet Marketplace). Certain aspects of the report such as dates of major events and the final outcome are easily verifiable while others, particularly underlying reasons behind the sponsor’s failure to execute its business plan, are not.
The report partially relies upon the sponsor’s explanations, the information contained within sponsor-produced quarterly reports, and conference calls. This analysis is not an assertion of independently verified facts but, rather, is for informational purposes only, to convey CrowdStreet’s understanding of what transpired.
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