Don't tell David Lichtenstein that fast is always better. He just worked for five long years to close on three New Jersey shopping centers that he calls “environmentally challenged.” He endured endless aggravation to acquire a few profitable properties in good neighborhoods at what he sees as a favorable price — $20 million for the lot.

“It was an exercise in fortitude,” says Lichtenstein, founder and chairman of The Lightstone Group. “It was the longest deal we've ever had — five years from contract to closing. We pride ourselves in trying to work things out, and there are times that's proved to be valuable.”

Lots of things seem to be working out for Lightstone, one of the nation's largest private real estate companies — a self-described “value buyer” that in just 15 years has amassed a portfolio of 15,000 apartments and nearly 9 million square feet of office, industrial and retail properties. Lichtenstein values the company's assets at “between $1 billion and $2 billion.” He wouldn't be more specific.

It's in the retail arena that the Lakewood, N.J.-based Lightstone is making headlines these days. This summer it agreed to buy Prime Retail, the struggling owner of 37 outlet malls, for $638 million. The audacious move will make Lightstone a much bigger player in retail real estate.

Lightstone saw Prime as a good opportunity, but its purchase doesn't signal a strategic shift. “Retail comprises less than 50 percent of our asset base, not because we don't like retail, but because opportunity doesn't always follow a particular class,” Lichtenstein says.

He doesn't want to be pigeonholed, preferring instead to operate across the real estate spectrum. “Putting yourself on one shelf is a little narrow-minded and cliquish, like a guy who says he only eats Chinese food,” he says. So as the firm embarks on an aggressive acquisition and expansion program, it's looking for properties of all types. Whatever purchases the firm makes “will be based on cash flow, not ego,” he says. “We look for opportunities that come up. We've been successful at that.”

For Prime, the country's second-largest owner of outlet malls, Lightstone can only be seen as a godsend. Saddled with debt, the REIT has struggled for years with declining sales and rising vacancies, and barely avoided bankruptcy last year. But Lichtenstein gives a thumbs-up to its management, in particular CEO Glenn Reschke, and says he'll keep the team in place.

“Prime is an out-of-favor stock in an out-of-favor industry,” Lichtenstein says. “We think there's a core of good assets there, and a core of good management. The company has been beaten up because it's been undercapitalized, and every break that could go against them did.

“Given proper capitalization and the ability to sell off some of its more troublesome assets and clean up its debt, the company will right itself,” he says.

But there are doubters. “I guess it's not a bad price for what they're getting,” says Wachovia Securities analyst Jeffrey Donnelly. But he notes that Prime's portfolio contains plenty of debt at high rates and high rents that will doubtless go lower.

As for Lightstone, “they haven't really done that much in retail, especially in outlets,” Donnelly says. Noting that many large owners of outlet properties have tried and failed to make it, he adds, “I wonder how successful they'll be.”

But Lichtenstein sees Prime as the right move at the right time — an acquisition that makes sense on its own terms. “I have no clue what the future is,” he says. “What I can tell you is that day to day, month to month, different opportunities come in different parts of the country. What we do well is figure out those opportunities, and right now, today, this is a good area.”

Why? “Outlets serve a niche nobody else serves,” Lichtenstein says. “There are other places to save money like Wal-Mart, but it's fair to say that most people won't buy a suit at Wal-Mart, or maybe even a shirt or tie. Most of the brand names — Ralph Lauren, Nike, Coach — you'll never find them at Wal-Mart. It's cheapo USA, although they do a wonderful job with it. But you can go to outlet malls and those brands are always on sale.”

By capitalizing Prime, “we can turn it into a viable opportunity. We have a lot of experience at that.”

It's not the first time Lightstone and Prime have done business. Last year Lightstone paid Prime $36.5 million for an outlet center in Barceloneta, Puerto Rico.

The property, called Prime Outlets, consists of 176,327 square feet of existing retail and room for a second phase of 187,000 square feet. At the time, Lichtenstein called the property “a diamond in the rough.”

John Williams, senior vice president of Granite Partners, a real estate investment banking firm that represented Prime Retail in the sale, says Lightstone showed patience in closing the deal, which he says “had some complexity.”

“Both sides worked through the deal rationally and logically, and it was a good transaction for both parties,” Williams says. He added that the center required a buyer “who had the vision to see the long-term potential of the property.” Lichtenstein, he says, “should be well-rewarded in the long run.”

In the larger acquisition, Lightstone will assume Prime Retail's debt of $523 million and pay shareholders $115 million, though two of Prime's major stockholders — Merrill Lynch and Fortress Investment Trust II — are objecting that owners of preferred shares would be paid too little. Prime says it's willing to discuss the terms with Merrill Lynch and Fortress.

The price was right, Lichtenstein says: “We will always like a bargain.” Not that there are many retail bargains now.

“The retail environment is very fully priced,” says Lichtenstein. But he adds that rising rates are certain to have an impact. “The feverish valuations of retail assets have not been magical. They're just a reflection that retail rises and falls with the tide of interest rates,” he says. “There will be a backlash, and I think prices will fall. We're getting faxes about deals that are falling apart.”

Lightstone finances its deals with “one or two institutions that have made lots of money with us over a 15-year period,” he says. “Knock on wood, we've never had a capital call from a partner. We don't promise magic returns, but we've been able to beat the bond market by 8 or 9 points annually.”

Despite his success, the 42-year-old Lichtenstein is self-effacing. He got into real estate, he says, because he wasn't a particularly good student. “I had to feed my family, and I was pretty much unemployable,” he says. “The only way to get a job was to hire myself. I've made every mistake I could make — well, not every mistake, because I'm still making new ones.”

He started by investing in residential properties in the Northeast, then in the mid-Atlantic region. At the time the company was called ASC; Lichtenstein changed the name last year to Lightstone, which is the English translation of his German name.

Lichtenstein soon was investing in retail, then office and industrial properties, then land development. Lightstone now owns properties in 16 states and Puerto Rico. “The only thing we haven't done is hotels, which we see as more of a business,” he says.

Lichtenstein says some of the company's success can be traced to its culture. “I try to tell people in the company a few things. I tell them it's okay to make mistakes, but try to make them once, and try to keep them small,” he says. “I think it's very important to be intellectually honest. We have frequent meetings, and no one ever gets laughed at or criticized. We want to encourage people, so we don't laugh — we listen.”

Which brings us back to the deal he just closed after five years of hard work.

The New Jersey properties — Millburn Mall in Vauxhall, Browntown Shopping Center in Old Bridge and Newbridge Shopping Plaza in Bergenfield — were contaminated with dry-cleaning fluid and required extensive cleanup. On the plus side, they were fully leased and in affluent communities. To Lichtenstein, it was a deal worth doing, even if it did require extraordinary patience.

“Most purchasers would have not wanted to get involved and sit through five years of this aggravation,” he says. Adding to the stress, the seller — Saul Cantor, who died before the deal could close — was known as a tough negotiator, Lichtenstein says.

“There had to be constant cooperation between us and the seller,” he says. Yet the relationship remained friendly and the deal stayed on track. “Anything worth having is worth waiting for,” he says.

GROWTH STRATEGY

PROBLEM:

Retail properties are expensive, and good buying opportunities are rare.

SOLUTION:

The Lightstone Group looks for distressed properties and companies and provides them with the capital they need for a turnaround.

BUZZ

Lightstone captured headlines in July with its planned acquisition of Prime Retail, the struggling outlet-mall owner. It vows to keep management intact and give it the tools and money necessary to regain financial health. But given the difficulties Prime has faced, it may be a tough fight.

DATA

In 15 years, the privately held Lightstone has built a portfolio of nearly 9 million square feet of office, industrial and retail properties, along with 15,000 apartments. With less than 50 percent of its assets in retail, Lightstone has begun an aggressive expansion effort in the category.

In an Acquisitive Mood

Even before bidding to acquire Prime Retail's 37 outlet malls for $638 million, The Lightstone Group's retail portfolio totaled more three three dozen properties in 12 states and Puerto Rico.

Among its purchases in the past year:

  • Three New Jersey retail centers from the Saul Cantor portfolio — Millburn Mall in Vauxhall, Browntown Shopping Center in Old Bridge and Newbridge Shopping Plaza in Bergenfield

  • The Larchmont Commons Shopping Center in Mt. Laurel, N.J.

  • Seventeen East Coast retail centers from Acadia Realty Trust

  • Four centers in Connecticut and Massachusetts from Beckenstein Enterprises