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.

With the economy bottoming out, and pundits forecasting an end-of-year upturn in the hotel business, a lot of lodging operators seem to have found a spring in their steps. Yet, while business was soon be getting better (or at least not getting worse), there are a lot of owners waiting for the other shoe to drop, i.e., the wave of foreclosures, property givebacks, bankruptcies and forced and unforced takeovers that seem to be just over the horizon.
News this week seems to suggest the cycle has started. On Monday, Sunstone Hotel Investors simply walked away from its W Hotel in San Diego, in effect giving the keys back to the lenders. The decision is in the numbers: Sunstone bought the 258-room property at the height of the boom for $96 million; depressed occupancies and a local rate war have all but drained the hotel’s cash flow; and, as the kicker, the company owes $65 million on the property, or $252,000 room, more than it’s currently worth.
Sunstone hinted that other properties in its portfolio may receive a similar fate.
Up the California coast in Dana Point, a similar scenario is playing out, as the owners of the St. Regis Monarch Beach fell into default on a $70-million note it owes to Citigroup. Foreclosure proceedings have been scheduled in federal court. The hotel became infamous last fall as the site of the ill-fated $400,000 retreat AIG booked at the hotel days after it took a bailout from the feds. The incident has since cast a pall over the entire luxury hotel segment, as corporations and other groups are loathe to seem imprudent in their business expenses. This so-called AIG effect is in part responsible for a 30-percent decline in RevPAR for luxury hotels so far this year.
While the overall outlook for the industry is improving, we’re bound to see more foreclosures and givebacks, some as high profile as these two, but many quiet and just as painful. It could be a bloody summer for hotel ownership and a wealth of opportunity for vultures with cash or access to financing.

The news in Las Vegas isn’t really improving much, at least based on two recent stories:
Late yesterday, the $3-billion resort development Fontainebleau Las Vegas filed for Chapter 11 after a group of investors bailed on a reported $800-million loan. The story says Fontainebleau is suing the lenders while looking for other financing to finish the project.
Also yesterday, USA TODAY featured an in-depth story from the Associated Press on the once posh resort Lake Las Vegas, whose developer lost the property in foreclosure after defaulting and the new owners filed for bankruptcy last year. A Ritz-Carlton owned by Village Hospitality, the story says, also filed bankruptcy and has been sold. The residential component of the development may be in even worse shape: “Foreclosures have spread like a virus, and home values are falling,” the author wrote.

Leave it to hotel executives to find good in a bad situation. Most of those who spoke during the opening day of the New York University International Hospitality Industry Investment Conference now under way in Manhattan put a positive spin on the industry’s prospects for a recovery as early as the third quarter of the year.
Of course, while the outlooks ranged from nearly polyannish (Chris Nassetta of Hilton) to downright depressing (Mit Shah of Noble Investment), the consensus was that, barring the additional economic shoe-drop, the credit markets and hotel performance have bottomed out and no further declines are expected. Sounds promising, doesn’t it? Or is it a case of spontaneous wishful thinking which people take as gospel simply because so many authority figures say so?
No question some chains and hotel companies are beginning to see incremental increases in business, but it may be premature to think a full-blown and speedy recovery is imminent. I’m not being negative, just realistic. The current hotel downturn is the worst in anyone’s memory and was caused by a myriad of factors, few of which were due to actions by the hotel industry collectively or individually.
Everyone seems to agree, however, that given the pent-up consumer demand for travel and the thirst for transactions, when the turnaround comes it will be swift and dramatic. People want to travel, and hotel owners and developers want to do deals. Let’s hope it happens soon.