Page 46

CRE Finance World, Winter 2014

Within just over three years, from the Lightstone acquisition in June 2007 until the bankruptcy sale in October 2010, $4 billion of losses had been realized against the ESA portfolio. New Ownership and the 2013 CMBS Refinancing Under new ownership and without the crushing debt load from the 2007 acquisition, the ESA portfolio performed well and improved with the overall economy. Having grown portfolio cash flow by more than 28% since the acquisition, the new owners recapitalized the portfolio in 2013 with a $3.6 billion CMBS and mezzanine debt offering (including an innovative “certificated” senior mezzanine tranche that trades under CMBS conventions), lowering their borrowing costs, repatriating capital and setting the stage for an IPO or portfolio sale. Chart 5 ESA Capital Structure Comparison 2010 vs. 2013 Source: Various Offering Circulars The Initial Public Offering Taking advantage of trends in the public equity markets (the DJIA had increased by 14% from the January 2013 financing to November 1, 2013 and 41% since they had acquired the Company in 2010), ESA was taken public at $20 per share indicating a valuation of close to $8 billion or nearly double its 2010 purchase price. Rather than pursue a private disposition as had been done in 2007 by relying on high levels of financing, the public offering took advantage of favorable hospitality multiples in the public markets to recapitalize and grow their business. CRE Finance World Winter 2014 44 Significantly, none of the Company’s owners (Centerbridge, Paulson and Blackstone) sold stock in the IPO. Additionally, proceeds from the offering were used to pay down debt further deleveraging the Company. As seen below, while the 2007 and 2013 equity valuations are nearly identical, the 2013 capital structure is significantly more stable with half of the debt burden of the 2007 transaction. Chart 6 ESA Capital Structure Comparison 2007 vs. 2013 Source: Various Offering Circulars Benefiting from historically low levels of leverage, aligned management and access to the public capital markets, the Company is well-poised for growth. CMBS investors likewise benefit from the substantially increased credit support and de-leveraging from the IPO proceeds. Conclusions/Back to the Future It has been an exciting 10-year trek for Extended Stay America and an equally volatile ride for CMBS investors who participated in the Company’s financing transactions. Of note, despite the more than $10 billion of valuation swings for ESA during this period, buy-and-hold CMBS investors have fared well throughout (in terms of ultimate recovery) while mezzanine and equity investors have absorbed substantially all of the realized losses and/or gains. Today, ESA has a valuation in excess of its “top-of-the-market” valuation of 2007 but with a significantly more conservative and flexible capital structure that poises the Company for growth. Below are certain of our “Key Takeaways” from the ESA experience and how that may impact/relate to similar vintage transactions. Extended Stay America — Back to the Future “Reflecting the top of the market, Lightstone financed 95% of their $8 billion ESA purchase.”


CRE Finance World, Winter 2014
To see the actual publication please follow the link above