Extended Stay America – Back to the Future

CRE Finance World, Winter 2014

Extended Stay America — Back to the Future 10 Years and $10+ Billion of Valuation Swings “If my calculations are correct, when this baby hits 88 MPH…you’re gonna see some serious shi…” —Dr. Emmett Brown, ‘Back to the Future’ 1985 he public offering of Extended Stay America (NYSE: STAY) (“ESA” or the “Company”) in November 2013 capped a ten-year odyssey for CMBS investors who had witnessed valuation swings of more than $10 billion for ESA during that timeframe. This paper explores the circuitous route that ESA took to its public offering, the role of, and impact on, ESA CMBS during that period, and what the ESA IPO may portend for other large-scale CMBS privatizations made during 2004-2008. Has the recovery in the public equity markets (with the DJIA exceeding 16,000), coupled with record CMBS issuance post financial crisis of circa $90 billion for 2013 (still less than 40% of peak issuance in 2007), brought us “Back to the Future?” For scalable real estate portfolios with adept managers who can access the public debt and equity markets, the answer is “yes.” Background As illustrated in the chart below, from 2004-2008, the total transaction volume of public real estate companies taken private was approximately $143 billion. Nearly 75% of those transactions utilized CMBS financing. Notable transactions include: Trizec, EOP, Archstone, CarrAmerica, CNL Hotels, Hilton and Innkeepers, among others. The shared characteristic of these transactions was aggressive financing of up to 90% provided by the CMBS market and by privately-funded mezzanine debt. What the equity market was unwilling to provide or withstand in terms of valuation and leverage levels, the debt market was more than willing to supply. As a result, numerous highly-leveraged transactions were completed during this period that could only work under the rosiest of scenarios. Chart 1 $143 Billion of REIT Privatizations (2004–2008) Source: NAREIT and Talmage research CRE Finance World Winter 2014 42 Extended Stay America, assembled in various stages by Blackstone through 2004, spectacularly rode the market up through 2007, filed for bankruptcy (with a different owner) in 2009 and was reborn via the IPO market in 2013. Over this ten-year period, ESA has gone full-circle from public-to-private, to public again, each time with different owners and with over $10 billion of valuation swings. CMBS investors ultimately fared well during this roller-coaster ride while mezzanine investors absorbed substantially all of the losses. Today, ESA is valued at close to $9 billion (the Company’s stock has increased more than 25% since the IPO), which is approximately 10% greater than its 2007 sale price. However, ESA now benefits from a vastly more conservative, and scalable, capital structure. Chart 2 Extended Stay America — Back to the Future Source: Talmage research and various Offering Circulars ESA Formation and the 2004/2005 CMBS Securitizations Today’s ESA was formed by The Blackstone Group through a series of acquisitions that started in 2001 and concluded in 2004. Just months after the September 11 attacks in 2001, Blackstone acquired Homestead Village for $600 million. It added to the portfolio over time, increasing it to approximately 250 properties by the time that it took Extended Stay America (comprised of 425 hotels) private in 2004. Blackstone merged the two companies and created Extended Stay America Hotels with 650 properties, net of dispositions. The Company was financed via two CMBS offerings in 2004 and 2005 totaling $3.2 billion in the BSCMSI 2004-ESA (“Tower 1”) and the BALL 2005-ESA (“Tower 2”) securitizations. Blackstone borrowed additional funds through two innovative mezzanine loans of $2.4 billion, nearly doubling the porfolio’s financing burden. The mezzanine debt consisted of approximately $180 million that was secured exclusively by the equity interests in Tower 1 and another $2.2 billion secured by the “crossed” equity T Edward L. Shugrue III Chief Executive Officer Talmage, LLC


CRE Finance World, Winter 2014
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