Private Equity Investors Check-In to Extended Stay Hotels

When it comes to real estate deals, Barry Sternlicht has few peers. Over the last 18 years, he has struck more than 300 transactions valued over $40 billion. He was also the founder of Starwood Hotels & Resorts Worldwide (HOT).

Interestingly enough, Sternlicht recently issued stock for Starwood Property Trust (STWD), raising $810 million. The prospectus stated: "We believe that the next five years will be one of the most attractive real estate investment periods in the past 50 years."

So this week, Sternlicht has announced that he has formed an investor group -- which includes his Starwood Capital, TPG Capital and Five Mile Capital Partners -- to invest $905 million in Extended Stay Hotels. The proposed deal will bring the company out of bankruptcy -- and most likely, mean another nice return for the real estate tycoon.

Extended Stay's Low-Cost Strategy

At the height of the buyout boom, Lightstone Group agreed to pay $8 billion for Extended Stay Hotels. The previous owner was Blackstone Group (BX), which purchased the company in 2004 for $2 billion.

Lightstone Group, which focused on malls and commercial real estate, was trying to diversify its business. And Extended Stay was a good asset, with 683 locations and 76,000 rooms. It also had a variety of brands like Extended Stay Deluxe, Extended Stay America, Homestead Studio Suites, StudioPlus and Crossland.

With its low-cost strategy, Extended Stay would probably weather a downturn, right? Unfortunately, the debt load was too high, and the economy sank too low. In June 2009, the company filed for bankruptcy, which was the largest in hotel history.

Sternlicht's Proposal

Early this month, Extended Stay received another bid. Investors Centerbridge Partners and Paulson & Co. proposed injecting $450 million into the company. But Sternlicht's deal is certainly much better. He'll commit $450 million in equity, with a possible rights offering of $200 million. There is even a cash alternative of $255 million for creditors who do not want equity.

The plan is expected to reduce Extended Stay's debt load from $7.4 billion to $2.8 billion. This will involve paying $200 million to the mortgage holders, who will get a new mortgage of $2.8 billion and $471 million in equity.

What's more, Sternlicht will become Extended Stay's chairman, and the company will have a valuation of roughly $3.9 billion. At some point, a public offering and more deals to bulk up the company are likely. In fact, it looks like Sternlicht already has plans to rebrand Extended Stay and spin off the real estate assets. Like any good dealmaker, he's always a few steps ahead.