Bond investors this week are getting their first deep look into the financing behind Blackstone Real Estate Partners and Starwood Capital Group’s three-year quest to buy Extended Stay America and its paired-share real estate investment trust ESH Hospitality for $6 billion.
J.P. Morgan Chase Commercial Mortgage Securities is going to market with $4.65 billion in commercial mortgage-backed securities tied to its financing of the acquisition completed last week.
The offering will be the largest CMBS deal since October 2019. That too was a Blackstone-led transaction, a $5.6 billion offering backed by 406 industrial properties totaling over 65 million square feet that it acquired as part of the larger $18.7 billion acquisition of more than 170 million square feet of U.S. industrial assets from Singapore-based GLP.
It is also the first single-borrower deal tied to lodging properties since October of last year, when a $265 million bond offering was issued tied to 58 Starwood-owned InTown Suites.
Extended-stay hotels have performed relatively well in the United States in the pandemic, sometimes acting as a buoy for other hotel types that struggled more, according to panelists this month at the 2021 Hunter Hotel Investment Conference.
Research from The Highland Group shows that the economy extended-stay segment is the only one that’s posted monthly gains in revenue per available room since February 2020.
The collateral for the Extended Stay CMBS transaction is a loan that was co-originated by JPMorgan Chase Bank at 50% of the amount, Citi Real Estate Funding at 35%, and Deutsche Bank AG at 15%, according to bond deal analysis by Kroll Bond Rating Agency.
The floating-rate loan is structured with an initial two-year term with three one-year extension options. The loan requires monthly interest-only payments based on one-month LIBOR, the global benchmark rate. The spread is 2.55% for the initial term.
The borrowers entered into a cap agreement that holds the interest rate at 3.5%.
The loan is secured by 555 lodging properties totaling 61,650 keys and the leasehold interests in five hotels totaling 607 keys, all operating under the Extended Stay America flag located in 40 states.
The acquisition represents New York-based Blackstone Group’s third go-round owning Extended Stay America, the first two being highly profitable.
Affiliates of the private equity giant owned ESH and its predecessor companies from 2001 through 2007, when ESH was sold for over $7 billion. Blackstone was then one of three firms that bought the company through a bankruptcy auction for $3.9 billion in July 2010. The group took ESA public again in 2013 at a market value then of $4.1 billion.
Extended Stay hotels, ranging in size from 59 to 198 rooms, were built between 1988 and 2021. The portfolio represents all its owned hotels and more than three-quarters of its total franchised or managed properties.
Since 2011, about $1.4 billion, or $22,607 per room, has been spent on maintenance and renovation projects across the portfolio, according to KBRA analysis. Blackstone and Starwood have budgeted an additional $197.5 million, or $3,172 per room annually over five years, for renovation and maintenance projects.
The portfolio’s occupancy was 75.7% with an average daily rate of $59.62, resulting in revenue per available room of $45.11.