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Five Mile Said to Buy $700 Million in Red Roof Debt to Take Over 143 Inns

A joint venture led by Five Mile Capital Partners LLC gained control of 143 hotels by acquiring $700 million of Red Roof Inns Inc. debt, according to a person familiar with the transaction.

Five Mile and Westmont Hospitality Group bought the loans on the economy-level hotels on Aug. 25, said Andrew Alexander, president of Columbus, Ohio-based Red Roof Inns. He declined to say how much the partnership paid. The debt was purchased for 50 cents on the dollar, said the person familiar with the deal, who declined to be identified because the transaction’s private.

The venture contributed $70 million toward renovations in addition to the purchase price as part of the deal. A partnership led by Dune Real Estate Partners, which bought debt on Red Roof Inns earlier this year and gained control of 51 hotels, provided $20 million for upgrades.

“Both of these transactions were completed as acquisitions at a discount to par value,” Alexander said in a telephone interview. He wouldn’t say how big the discount was. “That has allowed them to de-lever the assets and move forward with the renovations.”

Debra Chun, a spokeswoman for Stamford, Connecticut-based Five Mile, declined to comment on the acquisition. A representative for New York-based Dune and Dorraine Lallani, a spokeswoman for Westmont’s U.S. offices in Houston, didn’t return calls seeking comment.

The completion of the Red Roof purchases comes as increasing market turmoil and concerns that the U.S. may be close to another recession are putting pressure on hotel transactions. Last week, Cerberus Capital Management LP and Chatham Lodging Trust (CLDT) terminated their $1.1 billion agreement to buy 64 hotels from Innkeepers USA Trust.

‘A Good Sign’

Red Roof, which has about 350 hotels in the U.S., “has outperformed the economy segment every month since the beginning of the year,” Alexander said. “It’s a good sign to investors and potential lenders.”

Revenue per available room, a lodging industry measure of occupancy and rate, increased 7.1 percent this year through July at Red Roof, Alexander said. That compares with a 5.8 percent revpar gain for all U.S. economy hotels, according to Smith Travel Research Inc. of Hendersonville, Tennessee.

The Standard & Poor’s 500 Index has declined 6.1 percent in August as S&P cut its rating on U.S. debt for the first time in history. Citigroup Inc. (C) and JPMorgan Chase & Co. trimmed forecasts for U.S. growth earlier this month, while Morgan Stanley cut its estimate for 2011 global expansion, saying the U.S. and Europe are “dangerously close to recession.”

‘A Basic Retrenchment’

“For private-equity investors, and more importantly for lenders, there’s a basic retrenchment with the thought that maybe we need to step back a little and slow down major acquisitions and see whether the economic forecasts are realistic,” David Loeb, a hotel analyst at Milwaukee-based Robert W. Baird & Co., said in an Aug. 22 interview after the termination of the Innkeepers acquisition was announced.

Five Mile also is in talks with Innkeepers, two people with knowledge of the discussions said last week. Five Mile lost to Cerberus in a May auction of the Innkeepers properties.

Red Roof’s owners, who included Westmont and Citigroup, had been in talks with creditors since defaulting on about $754 million in loans tied to 127 hotels in 2009, the Wall Street Journal reported in May.

The Red Roof upgrades will involve complete room and lobby renovations, including new carpets, hardwood floors and flat- screen televisions, by the end of next year, Alexander said. The upgrades will start with hotels in such large cities as New York, Boston, Chicago and Miami.

All Red Roof properties in the deals have signed franchise agreements with Red Roof Franchising LLC and will continue to be managed by RRI West Management, a Red Roof Inns affiliate, Alexander said.

To contact the reporters on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net

To contact the editor responsible for this story: Daniel Taub at dtaub@bloomberg.net

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