Innkeepers USA Buyout Doomed, Analysts Estimate

Add one more bruise to the growing list of battered Apollo management investments. Analysts at Stifel Nicolaus believe Inkeepers USA, a hotel REIT investment made by the firm’s publicly traded BDC, is heading for default in ’09.

For background, Apollo Investments is a BDC traded on NASDAQ under the ticker AINV. It makes equity, debt and senior secured loan investments across a variety of sectors and has a $1.34 billion market cap. You may remember the fund’s CEO, John Hannan, resigned in November; he’s been replaced by COO James Zelter.

The fund took Innkeepers USA Trust private in April 2007 for $1.5 billion. According to the analyst report, the deal brought Innkeepers from 4x leverage to an estimated 10x proforma expected 2008 EBITDA (page nine has a nice before and after cap structure chart). The report states that the investment is “significantly underperforming,” and likely to see a rocky ’09.

This is based on the company’s performance in the last recession, which doesn’t look so hot. During the hospitality downturn of 2002 and 2003, Innkeepers’ EBITDA declined 43%, according to the report. Even worse, at the time of the buyout, Apollo investment had projected a steady EBITDA growth during this period.

Innkeepers management projected EBITDA would grow approximately 18% from 2007 to 2008[2]. …If we apply Innkeeper’s previous EBITDA declines (43% seen in the last recession) to Innkeepers management’s expected 2008 EBITDA ($145mln – 43% = $82.6mln), we estimate Innkeepers would be on the verge of being unable to meet its total debt payment obligations ($79 million) and would not be able to pay its preferred equity obligations.

It doesn’t help faith in the company when you note the performance of its Pink Sheets preferred stock, which has declined from $25 per share at the time of the buyout, to its current price, of around $1.75 a share. That’s $0.07 cents on the dollar.

Naturally, the analysts at Stifel Nicolaus have downgraded AINV to “sell.”

For 23 more pages of analysis on AINV, download the report here: Downgrading To Sell On Div. Risk, Innkeepers Concerns and Premium Valuation

For a look at AINV’s entire portfolio, click here.