Paulson, Blackstone to Triple Money on Extended Stay IPOHui-yong Yu and David Carey
Blackstone Group LP, Centerbridge Partners LP and Paulson & Co. are poised to almost triple their investment when Extended Stay America Inc. goes public, three years after the firms bought the hotel chain out of bankruptcy.
The initial public offering, set to raise as much as $593 million when it prices next week, will represent a surge in value for the owners after a rebound in the U.S. hotel market. For Blackstone investors, the deal is doubly sweet, as the firm previously made 3.5 times its money buying and selling Extended Stay during the buyout boom that ended in 2007.
“There are few lodging investments that are better than this return,” said Bjorn Hanson, dean of the New York University Tisch Center for Hospitality, Tourism and Sports Management and former chairman of hospitality and leisure for PricewaterhouseCoopers LLP. “It’s impressive.”
Extended Stay, which owns almost 700 mid-price hotels in the U.S. and Canada, plans to sell 28.25 million shares for $18 to $21 each in its IPO, according to a regulatory filing. At the $19.50 midpoint, the shares held by New York-based Blackstone, Centerbridge and Paulson would be valued at $3.26 billion, based on each owning 55.8 million common shares after the sale, the filing shows. The firms aren’t selling any stock in the IPO.
Together with about $1 billion of distributions from Extended Stay, the owners will hold a total of $4.2 billion of realized and unrealized value, according to the filing. That’s about 2.7 times the $1.58 billion of equity they invested when they bought the company in October 2010 after winning a bankruptcy auction that May, a fund-marketing document obtained by Bloomberg News shows. The firms reinvested $626 million of Extended Stay’s cash flow into renovating the properties.
The firms’ return reflects the timing of the purchase near the bottom of the market and the financial condition of the hotel chain at the time, Hanson said.
The owners benefited from a rebound in lending as the Federal Reserve pushed down interest rates to almost zero, fueling demand for riskier assets. They borrowed $3.6 billion last November to refinance Extended Stay’s debt, allowing them to recoup about half their equity investment.
The refinancing included a $2.5 billion mortgage that was sold as bonds in January, at the time, the biggest offering of commercial-mortgage backed securities since 2007.
Peter Rose, a spokesman for Blackstone, declined to comment on Extended Stay, as did Paulson’s Armel Leslie and Susanne Clark of Centerbridge.
The firms bought Charlotte, North Carolina-based Extended Stay just as the U.S. hotel industry was beginning to recover from the recession. Average daily room rates and occupancy, known as revenue per available room, rose 5.5 percent this year through September, after 6.8 percent growth in all of 2012 and an 8.2 percent rise in 2011, according to STR, a travel-research company based in Hendersonville, Tennessee.
“Fundamentals turned positive in the second quarter of 2010, when demand growth outpaced supply growth for the first time in years,” said Kevin Mallory, global head of CBRE Hotels, the lodging-specialty practice of commercial-property brokerage CBRE Group Inc. “Increased liquidity in the capital markets, combined with a recovery in fundamentals, has driven strong investor interest in hotel-sector investments.”
After their purchase of Extended Stay, Blackstone, Paulson and Centerbridge brought in Jim Donald, the former head of Starbucks Corp., as chief executive officer, renovated properties, consolidated five brands under the Extended Stay name and introduced amenities such as free Wi-Fi and breakfast. Its average daily rate rose to $52.34 in the 12 months ended in June from $41.63 in the year ended September 2010, according to the IPO filing. Average occupancy in 2012 was 73.3 percent, compared with 61.4 percent for the hotel industry, the filing shows.
Extended Stay caters to people traveling for work or moving homes and looking to rent apartment-like rooms by the week or month. The company is the largest U.S. owner of mid-price, long-stay hotels. The average stay in its hotels last year was 28 days, compared with 2.5 days for traditional hotels, according to its filing. It is seeking more shorter-stay and corporate guests who would pay higher rates.
Long-stay hotels, a relatively young concept with large growth potential, “has among the best economics of any lodging segment,” said NYU’s Hanson. They “do not require 24-hour front-desk operation and for many, housekeeping services are optional. The barriers to entry are very low but there is also a relatively limited number of developers and brands.”
The company has potential for growth as its name becomes more well-known, said Lukas Hartwich, a lodging analyst at Green Street Advisors Inc., a property-research firm in Newport Beach, California.
“It’s a newer segment of the hotel market and I don’t think it has the same recognition for your average hotel guest,” he said. “I bet most people know what a Marriott or a Hilton looks like. I’m not so sure they know what an Extended Stay is.”
Blackstone’s real-estate investments have been among its best performers this year, helping increase third-quarter profit by 3 percent. The company slumped 4.9 percent to $26.11 at 4:15 p.m. in New York trading, trimming its gain to 67 percent in 2013.
The world’s biggest manager of alternative assets, such as private equity and property, chalked up a bigger return, at least so far, the previous time it bought Extended Stay. In May 2004, the firm’s real estate and private-equity funds teamed up to acquire the chain for $3.1 billion, with each fund investing $352.1 million of equity capital, or $704.2 million combined, according to fund documents obtained by Bloomberg.
Three years later, when buyouts were soaring thanks to cheap financing from the commercial-mortgage backed securities market, Blackstone sold Extended Stay to another private-equity firm, Lightstone Group LLC, for $8 billion. Each Blackstone fund collected proceeds of about $1.22 billion, for a gain of about 250 percent, according to the fund documents.
The sale of Extended Stay was completed the week before Blackstone itself went public in June 2007, close to the market’s top. When defaults in subprime home mortgages spread throughout credit markets, Lightstone couldn’t refinance Extended Stay’s debt, and the hotel chain filed for bankruptcy in June 2009. John Paulson, of Paulson & Co., made $15 billion for his investors in 2007 by betting against subprime mortgages.
Blackstone made its first investment in the long-stay lodging business in November 2001, buying the Atlanta-based chain of Homestead Studio Suites for $740 million. The firm consolidated that and other similar hotel purchases into Extended Stay when it acquired that company.
Homestead turned out to be the firm’s top real estate investment to date, by multiples of cash invested, Jonathan Gray, global head of real estate for Blackstone, said at an investment conference in November 2011. The firm put in $119 million of equity and realized proceeds of $729 million on Homestead, according to a fund-marketing document.
“The real question as investors is, can you buy assets at attractive prices?” Gray said at the time. Homestead “was right after 9/11 and we went on to have 28 months in a row of negative same-store sales. You might have said, ‘Wow, that should be a really bad investment.’ In fact, that turned out to be the best investment we ever made.”