REPORT FROM THE U.S.—Extended Stay America’s increased initial public offering amount Thursday represents just the latest step in the company’s winding journey that includes being part of an $8-billion deal in 2007 to filing for bankruptcy just two years later.
In an S-1 document filed with the U.S. Securities and Exchange Commission, ESA said it planned to offer 28.25 million shares at an estimated price of between $18 and $21 per share. The IPO is expected to generate net proceeds of approximately $509 million, according to the filing. The company in July filed a placeholder IPO of $100 million.
ESA was acquired by Blackstone Group LP, Centerbridge Partners LP, and Paulson & Company in 2010 for $3.9 billion, less than half the amount paid by real estate investment company The Lightstone Group in 2007. Representatives for Blackstone, Centerbridge and Paulson could not be reached prior to deadline.
“When they acquired us, our sponsors recognized that despite our unparalleled scale in the mid-price extended stay segment, national footprint and high-quality, predominantly coastal locations, our (revenue per available room) was significantly lower than our nearest competitors in the mid-price extended stay segment,” executives from ESA, which owns and operates 682 hotels across the United States and Canada, said in the regulatory filing.
“Our sponsors believed this difference was due to several factors, including under-capitalized hotels across the portfolio due to the severe constraints on our access to capital prior to the acquisition date as a result of financial distress and an over-leveraged capital structure, a lack of brand awareness and strategy as a result of no clear, national brand identity with five disparate brands and limited marketing initiatives and an operating platform that lacked industry standard practices, including sophisticated revenue management systems. In response, we recruited a highly qualified management team with extensive experience in real estate, hospitality, consumer-facing and brand-based businesses.”
Lukas Hartwich, an analyst with Green Street Advisors, said the IPO environment today is a “decent” one as far as IPOs are concerned.
“We are well into the lodging recovery, fundamentals remain relatively healthy, and investors are becoming increasingly interested in investing in hotels,” he wrote in an email.
ESA history
ESA was founded in 1995 as a developer, owner and operator of extended-stay hotels. After a period in which it was focused primarily on development, the company became a consolidator by acquiring extended-stay companies and hotels.
Lightstone’s founder and CEO David Lichtenstein acquired ESA, based in Spartanburg, South Carolina, at the time, for $8 billion in June 2007. The debt taken on post acquisition—$7.4 billion from a Blackstone affiliate—hamstrung the company, which filed for Chapter 11 bankruptcy protection from creditors in November 2009. The company claimed $7.6 billion in liabilities upon entering bankruptcy.
During a deposition with a bankruptcy court-appointed examiner, Lichtenstein said there were errors in how a “significant amount of property-related expenses” were incorrectly placed at the corporate level of ESA that were not caught during the due-diligence process prior to the acquisition.
“The practical effect, according to Mr. Lichtenstein, was the overstatement of the net operating income of the properties, which was problematic because the underwriting of the mortgage debt and mezzanine debt was based only upon the property level numbers and, therefore, made the debt even more difficult for the company to service,” according to the report filed by the examiner, Ralph R. Mabey, himself a former bankruptcy court judge.
“Similarly, the projections in the Offering Memorandum assumed a rate of growth that, in the opinion of Mr. Lichtenstein, was unrealistic and unachievable in even the best of circumstances in the hospitality industry.”
During its time in bankruptcy, competing reorganization plans were pitched by groups led by Starwood Capital Group and investment firms Centerbridge and Paulson, which eventually teamed with Blackstone.
ESA see-sawed back and forth between the competing offers before accepting the Blackstone/Centerbridge/Paulson trio’s offer.
Post bankruptcy
Following the acquisition, the company officially emerged from its 16-month bankruptcy in October 2010.
In addition to relocating its headquarters from South Carolina to Charlotte in 2011, the company in March 2012 hired Jim Donald, former president and CEO of Starbucks Corporation, to replace Gary DeLapp as CEO.
In 2012, ESA recorded a profit of $22.3 million on total revenues of $1 billion. The company has invested $455.1 million of capital into its hotels since the acquisition as part of a $626.4-million capital program that will include the renovation of 633 properties, according to earnings statements.
Further, the company said its average daily rate grew by 25.7% from $41.63 for the 12 months ending 30 September 2010 to $52.34 for the 12 months ending 30 June 2013, and RevPAR increased by 25% from $31 to $38.74 over the same time period.