For $8B, Blackstone Ends Stay In Hotel Deal

Target: Extended Stay Hotels

Sale Price: $8 billion

Seller: The Blackstone Group

Buyers: The Lightstone Group, Arbor Realty Trust, Blackstone Group

Financial Advisor: Buyers: Citi; Seller: Blackstone Corporate Advisory, Banc of America Securities, Merrill Lynch

Legal Counsel: Buyers: Herrick Feinstein, Proskauer Rose, Dechert; Seller: Simpson Thacher & Bartlett

Executives at The Blackstone Group may well have been anxious ahead of their initial public, but they could at least enjoy one restful night’s sleep following their successful exit from Extended Stay Hotels. The New York-based shop spent $3.1 billion to delist the hotel operator in 2004. It sold it earlier this month for $8 billion to private real estate investment firm The Lightstone Group. The new deal’s 12.7x debt-to-equity ratio surpasses the 11.1x ratio Blackstone relied on when it bought Extended Stay three years ago. Blackstone plunked down $352 million in equity drawn from Blackstone Capital Partners IV and Blackstone Real Estate Partners IV to take Extended Stay private, according to a regulatory filing.

Also participating in the latest acquisition were Arbor Realty Trust Inc., which made a $210 million preferred equity investment in the deal, and Blackstone itself, which rolled equity back into the deal. “Blackstone’s continued investment in Extended Stay substantiates the transaction value,” Lightstone Group Chairman and CEO David Lichtenstein said in a prepared statement. Executives at Blackstone and Lightstone did not return calls seeking comment.

In addition to Arbor’s equity investment, the deal also included about $420 million of subordinated equity split into two tranches. The buyout was financed with approximately $7.4 billion of mortgage and mezzanine debt led by Wachovia Bank and Bear Stearns. Bank of America and Merrill Lynch Mortgage Lending Inc. also participated in the lending.

Under Blackstone’s guidance, Extended Stay expanded its network from 475 hotels in 42 states to 687 hotels in 44 states and Canada. The company operates under five brands: Extended Stay Deluxe, Extended Stay America, Homestead Studio Suites, StudioPlus and Crossland.

Blackstone is one of the most active LBO shops in the hotel market. Over the last 15 years, according to the regulatory filing, the firm’s real estate opportunity funds have acquired 1,422 hotels with approximately 209,500 rooms, representing a value of approximately $27.5 billion.

A number of Blackstone’s recent deals have fallen under its real estate umbrella—a trend that apparently will continue. Just days after announcing the closing of the Extended Stay deal, the firm said it hired Michael Nash, the former head of Merrill Lynch’s Real Estate Principal Investment Group. Nash will assume the post of senior managing director in Blackstone’s real estate division, where he will be responsible for the development of new business initiatives, the firm said.—A.N.