Citigroup and Goldman Sachs are securitizing a $405 million commercial mortgage loan taken out to help finance a private equity-led acquisition of the WoodSpring Suites low-priced extended-stay hotel chain.
Seven classes of notes will be issued in the transaction, called CGGS Commercial Mortgage Trust 2018-WSS, including $164.6 million of Class A notes with preliminary triple-A ratings from DBRS and Moody’s Investors Service.
The borrower, Brookfield Asset Management, used proceeds, along with $125 million in mezzanine financing and $177 million in equity, to fund the $707 million acquisition. Brookfield acquired the 92-hotel portfolio through one of its two closed-end funds as part of a larger $767.7 million takeover of the full 107-property WoodSpring Suites chain from the former owners, private equity firm Lindsay Goldberg, in December.
That fund, Brookfield Strategic Real Estate Partners II, launched in April 2016 with $9 billion in committed capital.
Brookfield will finance separately the 15 WoodSpring properties excluded from the CGGS 2018-WSS transaction.
In a related move, Brookfield entered into a 20-year franchise agreement with operator Choice Hotels to market the WoodSpring Suites properties within Choice’s nationwide reservation system. Choice simultaneously acquired the WoodSpring Suites branding and franchise business in a separate $231 million deal with Lindsay Goldberg.
The 92 hotels are located in mostly secondary markets in 22 states covering 10,978 rooms. All of the hotels were built between 2003 and 2016, with some still bearing the Value Place brand the chain previously operated under. Lindsay Goldberg has invested more than $54.6 million in capital expenditures to upgrade and convert the properties to the WoodSpring Suites banner since 2013.
The rebranding has paid significant dividends, boosting average revenue-per-room (RevPAR) up 14.9% and cash flow for 18.6% for the 107-property chain between 2015 and 2017. The small number of hotels still operating as Value Place had a comparative 3.7% decline in RevPAR and 14.4% net cash flow decline during the same period.
The transitional stage of the portfolio, and the inclusion of some lagging markets, had DBRS assigning a valuation of only $424.8 million, a “significant” 40.2% discount from the bulk-sale appraised value of $710 million. That resulted in a relatively high-leverage 95.3% loan-to-value ratio, but DBRS said it expects that ongoing improvements and rebranding, along with “the expertise of Brookfield and Choice,” will help minimize the gaps in performance and property values.
