RCA in the commercial property press:

Extended Stay: One Real-Estate Deal of the Apocolypse

The Wall Street Journal reports: What is striking about the bankruptcy filing of Extended Stay isn’t the filing itself, but how predictable it all seemed. And it isn’t just the many early warning signals, either.

No, it was a deal that seemed doomed from the beginning. LBOs typically sport a 30%-70% split in the amount of purchase price paid with “equity” and the amount paid using the proceeds from the sale of debt. As this April 2007 WSJ article reports, the $8 billion price paid by the New Jersey private-equity fund Lightstone included $1 billion in cash and $7 billion in debt. (The hotel chain is now valued at $3.3 billion, according to Lightstone’s bankruptcy filing.)

Then there were the underlying assumptions mentioned in today’s WSJ article linked to above. At the time of the deal, Extended Stay was generating $545 million a year in earnings before capital expenditures. The buyout was predicated on a belief that would rise nearly 15% to $625 million within two years. Sure, the deal was struck in April 2007, before the full magnitude of the credit crisis became apparent beginning that summer. Still, with a 13 times debt-to-earnings ratio, the Extended Stay acquisition was highly leveraged even by the easy money standards of the time.

Alarms sounded outside the company, too. Bloomberg reported in May that a REIT managed by Tishman Speyer is trying to sell five California office buildings to bolster its balance sheet. Meantime, Standard & Poor’s Ratings Services recently downgraded the debt on Washington area properties held by a Tishman Speyer partnership. Tishman Speyer, you might remember, was part of the $14 billion purchase (with the now-defunct Lehman Brothers) of Archstone-Smith Trust, among other big deals this decade. It was the second largest real-estate LBO in history, according to data tracker Dealogic. (Tishman says it put just $250 million of equity into that deal.)

The Bottom Rung list of Moody’s, which features the companies it views as most likely to default on debts, includes Realogy, bought by private-equity firm Apollo Management for $7.48 billion in a deal announced in December 2006.

For those keeping track at home, that is Nos. 2, 3 and 4 on the list of largest LBOs of a real-estate target or by a real-estate acquirer. In general, the industry is being buffeted by “by poor credit availability, falling rents and rising vacancies in the office sector nationwide,” said Peter Slatin, editorial director of Real Capital Analytics Inc., a New York firm that tracks commercial property sales, as quoted in that Bloomberg story.