It took some negotiating to get to the finish line. Given the sheer size of the approximately $6 billion take-private transaction, that was not surprising. This is a sector that has surprised observers with its pace of recovery over the past 12 months. It is of little wonder counterparties could have differing views on pricing.
When the deal was announced in March, the Blackstone-Starwood joint offer was $19.50 per paired share. The months that followed saw some shareholders, including family office Tarsadia, and two directors nominated to the ESA board, oppose the offer because they believed it undervalued the company. They maintained the company could benefit from an imminent recovery amid a rebounding travel sector. The final pricing, which received majority shareholder approval, ended up being $1 higher at $20.50 a share, adding $200 million in enterprise value.
That the two parties persisted in their takeover attempt demonstrates their conviction towards the travel and leisure sector, especially the extended stay category, both pre- and post-pandemic. Blackstone – which has historically owned the company on two separate occasions – expressed an interest in acquiring it a third time in January 2021 at a price in the $17 per share range, according to a proxy statement filed by ESA. It was only after a few rounds of back-and-forth pricing – and the introduction of Starwood as a partner – that the deal reached an agreement stage.
According to the proxy filling, Blackstone’s equity will come from its latest opportunistic vehicle, Blackstone Real Estate Partners IX, which closed at $20.5 billion in late 2019. Starwood is tapping Starwood Distressed Opportunity Fund XII Global, which attracted $6.5 billion in the first close in January and has a $10 billion hard-cap target, as PERE reported earlier.
Committing capital from limited life vehicles like these demonstrates the belief – now shared widely across the industry – that the US hospitality sector will turn a corner in the near-term. The extended stay sub-segment was one of the most resilient lodging subsectors in 2020, according to analysts, and that performance is expected to only improve as occupancies start increasing with more leisure travel.
Industry association NAREIT noted in its mid-year outlook that while lodging and resorts REITs posted some of the largest initial stock market declines early in the pandemic, their values have now stabilized. The performance is also gradually improving. NAREIT’s data shows lodging/resorts recorded negative 7.2 percent total returns between February 21, 2020 to May 21, 2021. The returns have since improved to 0.39 percent, as of June 15. CBRE’s February 2021 Hotel Horizons report, is also forecasting a general return to 2019 RevPar levels for hotels in 2024.
ESA deal’s pricing, and the overall sentiment around the sector, also demonstrates there is unlikely to be a lot of distressed opportunities in the hospitality sector, especially in the bigger-ticket platform-level space. And even if hotel owners were in any distressed situation, buyers would not find substantial discounts given the vast amount of dry powder held via large opportunity funds as well as hotel-specific funds. According to PERE data, five US hospitality-specific funds have closed since January 2020, raising an aggregate $1 billion in capital. And two of the top 10 largest funds currently in the market in North America are sector-agnostic, opportunistic vehicles, with a combined fundraising target of $9 billion.
All these things indicate how one of real estate’s hardest hit sectors by the pandemic might end up walking away with its valuations intact after all.
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