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By Joy Wiltermuth
NEW YORK, Feb 27 (IFR) - When the final slug of a US$1.8bn Motel 6 mortgage bond deal sold on Thursday, the Blackstone Group took its US$626m equity in the low-cost lodging chain off the table.
Some take a dim view of such large cash outs, particularly on far flung properties still recovering from the real estate crash. But with bond investors increasingly willing to finance big name real estate operators at low costs, the lure of a cash out can be hard to resist.
“It’s still a strong sponsor - and they got the deal done,” said Jason O’Brien, a vice president and portfolio manager focused on ABS, CMBS and MBS at Nuveen Asset Management. “But last time, the levels made more sense to us.”
The five-year Triple A class of Blackstone’s US$1.05bn original Motel 6 CMBS deal in 2012 sold at Swaps plus 115bp, whereas demand for this week’s equivalent class narrowed pricing to S+95bp, according to IFR data.
The Triple As represent a big portion of the original US$1.99bn price tag that Blackstone paid to Accor for the motel chain three years ago.
This week’s CMBS, the second-largest so far this year, was larger than the first and included a re-jigged structure.
JP Morgan and Deutsche Bank led both transactions, but the second CMBS included thicker classes of meatier BB- and B-/B rated securities than the prior trade.
Bankers on Thursday morning were still working to offload the two bottom layers of the structure, after filling orders on the bulk of the Motel 6 securities since Monday, a banker said.
And when the bond classes priced later that afternoon, it was at a discount and offered up to 15bp more in spread from initial whispers.
Blackstone has already spent US$192.1m in three years on its facelift of the 507-property Motel 6 franchise, with Fitch noting that another US$93.8m is earmarked this year to spruce up properties.
Rooms rent out during weekdays for US$45 to US$65 per night, and the chain is still best known for its folksy mid-1980s advertising campaign, “We’ll leave the light on for you.”
“They are going to roll out a new, national marketing campaign once they are through 70 percent of the renovations, which is expected this summer,” said Laura Wolinsky, an analyst at Kroll who worked on the CMBS transaction.
“It will go a long way to institutionalize the brand and image.”
The revamp may give Motel 6 a leg up on rival economy brands like Travelodge and Super 8, which Wolinsky noted often lack a uniform look across locations.
Still there were questions. “What is their end game here?” one strategist asked. “That is what we are wondering.”
The new financing package piles more debt on the properties. Opinions differ as to how much more, but Standard & Poor’s calculated it at 109.1% above what the chain’s actual worth in its pre-sale report.
“If Blackstone sells in five years, who takes them out?” a strategist asked, noting that rates are unlikely to stay low forever.
And while the Blackstone name and its extensive experience in the lodging sector were noted as positives - it has owned the Hilton Hotel chain, Extended Stay America and La Quinta - their dominance in the space also leaves open questions about how it will complete its “buy it,” “fix it” and “sell it” cycle this time around.
Blackstone did not respond to repeated requests for comment.
Some US$16.5bn in equity was taken by borrowers on property loans rolled into conduit CMBS deals from 2013 to mid-2014, according to a Kroll Bond Rating Agency report from September.
It detailed cash outs on roughly US$40bn in loans, the top 20 mortgages in those transactions, which the report noted as “on the top of the list” of investors concerns.
And while leverage, piling risk on top of risk, and interest-only loans were also listed as concerns, the report noted that one bright spot was that cash outs thus far had been largely reserved for healthier loans. (Reporting by Joy Wiltermuth; Editing by Shankar Ramakrishnan)