• Stress shows in deal structures

Signs of stress with deals struck at the top of the market are beginning to appear. The biggest deal that to date appears in trouble is the $8bn acquisitions of Extended Stay Hotels in the US which was completed in June 2007.

But there are a number of smaller acquisitions done in Europe which are also in problems with the latest one in the UK being Folio Hotels.

Extended Stay is an almost text book example of a deal done at the peak. According to the Wall Street Journal, the group now looks set to transfer to its lenders.

Lightstone paid $8bn for the chain of 687 properties with 76,000 rooms. The deal was funded with $7.4bn of debt including $3.3bn of mezzanine financing from Wachovia, Bank of America, Merrill Lynch and Fortress.

This meant the deal was 92% leveraged with just $644,000 of equity in the total capitalisation of $8.044bn, according to a recent document supplied to prospective purchasers of some of the mezz debt.

This document contained forecasts of a 2% increase in revpar in 2009, a 3% rise in 2010, a 4% rise in 2011 and a 5% rise in 2012. Property EBITDA was a similarly upward rising curve.

Blackstone is thought to have made about $3bn on the disposal to Lightstone. As well as the equity holders being wiped out in any restructuring, much or all of the mezz could also go.

Extended Stay issued a statement this week on the Wall Street Journal article stating that it is profitable and remains in compliance with all of its debt terms.

In the UK, the biggest headline collapse so far has been GuestInvest, thought likely to cost Bank of Scotland up to half of its £213m investment. A plan to sell the group as a whole is understood to have been aborted and now just two of the six properties – Blakes and Leinster Square – are for sale.

Bank of Scotland today said that impairments in its corporate lending division had risen from £1.7bn at the end of September to £3.3bn at the end of November.

Part of HBoS's commercial property investments that are causing it pain include aAim, which collapsed into administration last week. The confusion of its impact led Principal Hayley, the conference centre specialist that leases six properties from a fund set up aAim, to issue a statement that it was unaffected.

Principal sold the six hotels to the aAim fund at the end of 2006 for about £270m. HBoS put in about £230m of debt. Christie & Co was appointed earlier this year to unload a 50% share in the hotels. And it is widely expected that HBoS will seek an exit to its investment in the properties.

Another op-co prop-co split that has run into difficulties is Folio Hotels. The 34-strong outfit called in administrators last week. The main cause is thought to be its rental obligations.

Negotiations with the landlords, who include the Landesberg and Rosenberg families, failed to find resolution. According to the London Times the nine hotels owned by the Landesberg and Rosenberg families are set to be taken over by rival operator Bespoke Hotels.

Folio was set up at the start of 2005 by Nicholas Crawley and Charles Holmes, former directors of the Regal Hotel Group and Four Pillars. It grew rapidly on the back of a series of sale and leaseback deals. Its future is now thought to be dependent on the attitude of its other landlords to a potential rent restructure.

In another example of stress in the market, the owners of the Shelbourne in Dublin are trying to terminate Marriott's management contract.

Marriott is being accused in Dublin's High Court of "serious mismanagement" by the owners, who include property developers Jerry O'Reilly and Bernard McNamara. The property was bought back in 2004 for Eu130m on an eye-popping initial yield of 1%. The refurbishment of the property, a former Meridien that is now branded a Renaissance, cost nearly as much as its acquisition.

Marriott has refuted the claims of the owners stating that the owners have unrealistic expectations. It has offered to settle the dispute for Eu1.2m. The hotel is thought likely to be brought to market once the dispute is resolved.

In another example of stress related disposals, Israeli property group Delek is looking to unload $326m of real estate. Among the assets is RoadChef, the UK motorway service area operator.

Delek has a minority interest in 16 Hilton hotels in the UK bought at the end of 2005 and it was in the consortium that paid £1.1bn to buy 47 Marriott hotels in the UK in April last year.

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