Portfolio of 680 Hotels Gained $900 Million in Appraised Value Over Last Two Years Under New Sales Strategy
It looks like The Blackstone Group may have done it again. This time the private equity firm appears about to demonstrate its Midas touch when it comes to real estate through a huge new CMBS offering being readied for its Extended Stay America hotel chain.
The extended stay hotel market has morphed a great deal since Blackstone sold the largest chain of such hotels (680 of them) to the Lightstone Group at the peak of the market back in June 2007 for $8 billion and then regained control of the chain two years later after the recession forced Lightstone to put the chain into chapter 11 bankruptcy.
Blackstone and two other institutional funds ended up controlling the portfolio again, buying it out of bankruptcy for $3.9 billion, less than half the former sales price.
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Since then, the new ownership group has embarked on a major repositioning of the chain pumping billions into remodeling -- and in a somewhat contrarian move, repositioning the brand as a short-stay option hotel.
Now lenders to Blackstone and its partners in Extended Stay, private equity fund operator Centerbridge Capital Partners and hedge fund operator Paulson & Co., are ready to cash out. Lenders JPMorgan Chase Bank, German American Capital Corp., Citigroup, Bank of America and Goldman Sachs are selling $2.5 billion in Extended Stay Hotel loans into a new CMBS offering: Extended Stay America Trust 2013-ESH.
In preparations for the offering, appraisals completed for each of the 680 properties found that the value of the portfolio increased by $900 million more than what Blackstone and its partners paid for it. If sold in its entirety to a single buyer, the portfolio was valued at $4.82 billion as of November 2012.
Operated by Extended Stay Hotels under the flag Extended Stay America and managed by HVM LLC (Homestead Village Management) in Charlotte, NC, the portfolio accounts for nearly 25% of all extended stay products and half of mid-price extended stay products in the U.S., according to a pre-sale report on the CMBS offering from Moody’s Investors Service.
As part of a repositioning / rebranding strategy, 634 of the hotel properties (97% of the pool by allocated loan balance) will be renovated and rebranded under the Extended Stay America flagship.
From October 2010 through November 2012, management has invested more than $358 million ($4,726 per key) as part of the repositioning / rebranding effort, with an additional $40 million expected to be invested in the first two months of this to complete the plan.
The other 46 hotel properties (3%) will remain or be converted to Crossland Economy Suites.
Notably, the repositioning strategy has seen the portfolio being marketed more as a short-stay option.
According to the Moody’s pre-sale report, ESH management initially focused on the chain's core long-term lodging program beginning in late 2009. While this helped the portfolio recover at a quicker pace than the national average, ESH Management eventually eliminated that program and adopted a new one favoring short-term stays in an effort to optimize the portfolio’s room rate structure.
On average, stays of 30 nights or longer are discounted at 26% compared to guests who stay one to six nights. Over the past 12 months, the management team has pushed to shorten the average length of stay and boost daily room rates. Room night mix increased for the one- to six-nights segment from 21.8% to 24.3% and decreased for the 30+ night segment from 59% to 54.5% over the past 12 months.
Despite disruptions from renovations over the past year, RevPAR for the portfolio increased substantially from when the sponsors acquired the portfolio in August 2010.
Having recovered from a low in 2009 of $281.8 million in net cash flow, the chain has continued to see its financial picture improve. NCF for trailing 12-month period ending November 2012 was $408.8 million, an increase of $126.9 million or 45.1%. RevPAR for this segment has also improved significantly since a low in 2009 ($30.06). RevPAR for the trailing 12-month period ending November 2012 was $37.09 (an increase of 23.4% since 2009).
This shift in strategy to increase the mix of shorter lengths should allow for further increases in portfolio wide RevPAR growth, so long as occupancy levels do not decline at a faster pace, Moody’s analysts noted.
The CMBS offering is expected to close in mid February.
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