Yesterday's bankruptcy filing by Extended Stay Hotels came as no surprise to me and probably to a lot of other people in the industry. The company, which owns and operates nearly 700 extended-stay properties under several brand names, is leveraged to the hilt and, like many other hotel chains, has seen business slide so far that cash flow wasn't able to cover debt payments.
The Lightstone Group, a company with zero experience in the hotel business, bought the company in early 2007 for $8 billion from Blackstone Group. According to the bankruptcy filing, the company has assets of $7.1 billion and $7.6 billion in debts. The company says it has no immediate plans to close any properties.
Two years ago, a few days after the sale I had a phone interview with Lightstone founder David Lichtenstein. We chatted as he was cruising down the New Jersey Turnpike, and one of the first things he said to me was, “Do you think it was a good idea for me to buy this company?” I nearly dropped the phone as I tried to figure out whether or not he was joking. (I don't think he was, which is very scary.)
While a lot of industry analysts, me included, believe we'll soon see a wave of bankruptcies, forced sales and takeovers, I think Extended Stay is something of an anomaly: a buyer who had no business in the hotel real estate industry, who paid too much, who relied too much on debt and who bought at the top of the market. Any other chain bankruptcies that may follow Extended Stay this year or next will probably be the result of market forces and ill timing, not the stupidity we saw in this example.