Extended Stay Hotels, the operator of mid-priced hotels acquired at the peak of the commercial real estate market for $8 billion, filed for bankruptcy protection as the recession cut corporate and leisure travel.
The Spartanburg, South Carolina-based chain, with more than 680 properties in 44 states, collapsed two years after Lightstone Group LLC purchased the company with $7.4 billion in financing. The company said it had $7.1 billion in assets and $7.6 billion in debts at the end of last year, according to papers filed today in U.S. Bankruptcy Court in New York.
Lightstone bought the chain from Blackstone Group LP in April 2007 in its first purchase in the lodging business. Since then, prices have declined nationwide. The U.S. hotel industry is enduring its “weakest year on record,” according to PKF Hospitality Research, a research firm based in Atlanta. U.S. hotel occupancy fell 14 percent in the week ended June 6 from a year earlier and average daily room rates were down 11 percent to $95.90, according to data from Smith Travel Service.
“Between the dip in prices and the overleverage and the reduction in revenue, it’s like one-two-three, you’re out,” said Bruce Ford, senior vice president for sales at Lodging Econometrics, a Portsmouth, New Hampshire-based hotel analyst.
Lightstone, of Lakewood, New Jersey, jumped into the hotel industry as deal-making heated up. About $90 billion worth of hotels changed hands in 2006, the year before Lightstone bought Extended Stay.
Before Lightstone, Blackstone bought Extended Stay in 2004, when it had 425 hotels, for $2 billion and the assumption of $1.1 billion in debt. It added properties through acquisitions.
At the time of Lightstone purchase, Lightstone Chief Executive Officer David Lichtenstein said Extended Stay would continue to benefit even if the economy suffered because budget- minded consumers will favor long-stay properties.
The top holders of Extended Stay secured debt are Wachovia Bank NA., with claims of $984 million in mezzanine debt and $515 million in mortgage debt; and Bank of America Corp., which claims $958 million in mezzanine debt and $400 million in mortgage debt. A government trust for the defunct Bear Stearns Cos. claims $796 million in mezzanine debt and $274 million in mortgage debt.
The government’s Bear Stearns claim is represented in the case by BlackRock Inc., according to the court filing.
“Extended Stay is significantly over-leveraged and the projected cash flows cannot continue to service over $7 billion in debt,” Joseph Teichman, Extended Stay’s secretary and general counsel, said in a declaration filed in the case.
Teichman said Extended Stay’s revenue has dropped because of decreased business spending on travel.
The bankruptcy filing, by Extended Stay and 69 affiliates, follows a failed attempt by the company to restructure $3.3 billion in mezzanine debt. A group of junior debt holders sued in New York and Texas state courts to block that deal.
Reduced travel prompted by the recession led Mariott International Inc., the biggest U.S. hotel chain, and Host Hotels & Resorts Inc., the largest U.S. lodging real-estate investment trust, to report first-quarter losses this year.
Extended Stay rents rooms for government and business travelers, workers on temporary assignment and training and people who are relocating and looking for permanent homes, Teichman said.
“Extended Stay’s business model is a hybrid between a hotel and an apartment,” Teichman said, offering furnished studios with kitchen facilities, on-site laundry and free wireless Internet. The company charges lower rates than hotels by eliminating room service and daily maid service, he said.
Extended Stay’s facilities are managed under contract by HVM LLC, “an entity that is affiliated with, but not directly owned by” the Extended Stay companies, Teichman said.
HVM, which isn’t involved in today’s bankruptcy filing, said in a statement that it expects to continue its Extended Stay operations without interruption. Extended Stay will use its cash flow, rather than debtor-in-possession financing, to fund operations, HVM said.
Extended Stay, through HVM, employs approximately 10,000, the company said in court filings. HVM said in its statement that Extended Stay guests remain for an average of 18 to 20 days, in contrast to a typical two- or three-day hotel stay.
The case is In re Extended Stay Inc., 09-13764, U.S. Bankruptcy Court, Southern District of New York (Manhattan).