Why John Paulson and Other Big Investors Are Betting on Extended Stay America’s IPO

Today, John Paulson's Paulson & Co. disclosed its holdings in Extended Stay America / ESH Hospitality (NYSE:STAY), the largest company-branded mid-price long-stay hotels owner and operator in the U.S. and Canada. The stock began trading on the NYSE this morning. Paulson declared holding 55,711,591 shares of the company, plus 7,036 shares of Series A Preferred stock.

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Extended Stay America’s shares surged about 16% on its debut and already trade at around $23.15, making Paulson’s holdings worth roughly $1.3 billion. In addition to the increase that the stock price experienced today, the company raised $565 million in an initial public offering (IPO), selling 28.25 million shares at $20 each--well above its expectations of raising only $200 million. Given that the company sold about 14.1% of its shares in the IPO, its market value is somewhere close to $4 billion.

The bankrupt hotel chain was acquired in 2010, and held equally by The Blackstone Group L.P. (NYSE:BX), Centerbridge Partners LP and Paulson & Co. Since that moment, they have invested about $626 million in renovations, which are close to completion. According to Bloomberg analyst Hui-yong Yu, the investors are seizing the opportunity provided by hotel stocks trading close to all-time highs and “a rebound in room rates and occupancies to extend the busiest year for real estate IPOs since 2004.” Consequently, none of the aforementioned firms are known to have sold their stakes at the company, but are rather betting on its growth going forward.

According to the filing presented at the U.S. Securities and Exchange Commission, the proceeds from the IPO will be used to pay off debt, which currently reaches almost five times Extended Stay America’s equity. By paying off debt, the company’s CEO declared, Extended Stay America’s balance sheet will be strengthened, and thus, the firm will be able to pay off dividends in the near future.

Back to John Paulson.

Famous for having made billions of dollars by shorting the mortgage market ahead of the financial crisis through investments in credit-default swaps, his investment in Extended Stay America still puzzles me. Although the company (and its stock) looks quite promising in terms of future profitability, margins and returns, this investor is known for specializing in small and emerging growth companies with capital needs of $5 million to $50 million.

And this, as we have already seen, is not the case here: not only did the fund spend more than $1 billion when it originally purchased a part of the company, but also it invested a couple of hundred million on renovations, later. Now holding about $1.3 billion in stock, this is one of Paulson’s top 3 equity holdings, along with Sprint Corporation (NYSE:S) and SPDR Gold Trust (ETF) (NYSEARCA:GLD).

One way or another, we’ll have to wait and see how this develops, but the outlook for this market share leader look quite encouraging.

Disclosure: none

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