What distress? The $6 billion price tag on Extended Stay America is a result of its real estate and durable customer base. Period. That is why it is significantly outpacing the rest of the hotel industry during the pandemic.
Blackstone and Starwood Capital’s $6 billion joint acquisition of Extended Stay America is the largest hotel deal announced from the pandemic so far — but it isn’t the kind of pandemic hotel bargain many investment firms are jockeying for.
Extended Stay America, through its ESH Hospitality lodging trust subsidiary, owns 564 hotels and only franchises out 86 properties. This is unique, given the hotel industry’s push in recent years to go asset-light and instead focus on management agreements and licensing deals for brand affiliation.
“Extended Stay America is a real estate company, but it’s effectively a $6 billion real estate company,” said Michael Bellisario, a senior analyst covering the hotel sector at Baird. “In order to take a company like that private, the debt market has to be functioning and available as a source of capital.”
The Chase: The extended stay hotel sector has been the hotel industry’s most durable for the duration of the pandemic. Extended Stay America never closed any hotels in the first months of the pandemic when many operators chose to suspend operations in light of cratered demand. The company even ended 2020 with a 74 percent average occupancy rate compared to the greater hotel industry’s 44 percent U.S. national average.
Blackstone and Starwood each invested in the company early in the pandemic, but Blackstone cashed out of that initial investment last summer, the Wall Street Journal reported. So why the return … and why not make a deal earlier in the pandemic when occupancy rates were lower and a potential better bargain could have been struck?
This is an all-cash transaction to take Extended Stay America private, but both investment firms were likely waiting for more certainty in the hotel industry’s recovery before striking on an acquisition — even with something resilient like the extended-stay hotel sector.
“It would have been hard to underwrite in, say, October of last year before we had official vaccine news,” Bellisario said. “The fundamentals have been better for Extended Stay. We’re on the other side of the pandemic, there’s more clarity today, and the debt market is better.”
Don’t Hold Your Breath: The Extended Stay America deal arrives on the heels of Hilton Grand Vacations’ $1.4 billion acquisition plans for timeshare operator Diamond Resorts. Does this mean the floodgates are slowly opening for further pandemic opportunities? Probably not — yet.