Extended Stay's Fate Remains Unknown
By Derek Gale, Senior Editor -- Hotels, 2/28/2009 11:00:00 PM
Late last year, Extended Stay Hotels entered talks that ultimately could result in the hotel chain being turned over to its lenders. The situation is clearly a direct result of the weakened state of the economy in general and commercial real estate in particular.
“Hotel properties are some of the most sensitive types of commercial real estate to general economic conditions—they have daily leases, basically,” says Dan Fasulo, managing director, New York-based Real Capital Analytics.
The nearly 700-hotel Extended Stay portfolio (encompassing more than 75,000 rooms) is currently owned by Lakewood, New Jersey-based Lightstone Group LLC, which purchased the hotel chain from the Blackstone Group for US$8 billion in April/June 2007, funding the purchase with more than US$7 billion in debt.
But as business conditions continue to deteriorate, it looks more and more likely that a transfer of ownership is imminent.
“Occupancies have fallen significantly, and rates and RevPAR have dropped dramatically,” Fasulo notes. And it is possible that Extended Stay has been among the hardest hit, based on the chain's primary guest being the regular business traveler.
“The room rates and occupancy levels just are not there to support debt levels in something like this,” Fasulo says.
Extended Stay has hired Lazard Ltd. as a financial adviser and New York law firm Weil Gosthal & Manges as bankruptcy counsel, according to a report in The Wall Street Journal. But that report goes on to mention that Extended Stay isn't likely to file for bankruptcy protection because of provisions common in commercial mortgage-backed securities (CMBS) deals that would expose the other property assets of owner Lightstone Group (such as office buildings in Chicago and a chain of malls across the United States). The more likely path will be for Lightstone to turn Extended Stay over to lenders, the newspaper reports.
But “it's not just Lightstone” that is in trouble, Fasulo says. He mentions The Chetrit Group LLC and other joint-venture partners, particularly Arbor Realty Trust (a preferred equity partner in the deal), as looking at or having trouble right now.
And because of the complex CMBS financing of the Lightstone/Blackstone deal (with various banks and investment groups pitching in mezzanine financing) and, therefore, a number of potential owners of Extended Stay Hotels, it may be quite some time before the whole thing is sorted out, Fasulo says.
Only one thing seems to be certain: “This is a mess, and there's no question in my mind the equity is wiped out,” he says.
Lightstone Group declined to comment on the situation, and Extended Stay executives did not return phone messages. Meanwhile, rumors are swirling that Extended Stay CEO Gary DeLapp is on his way out, perhaps to be replaced by CFO Joseph Rogers.
“It doesn't get much worse than when the CFO starts taking over the company,” quips Fasulo. “That's when you know it has hit rock bottom.”
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