Over the past two weeks, three separate foreclosure lawsuits have been filed on behalf of bondholders against properties owned by Red Roof Inns, clouding the future of one of the leading players in the lodging industry’s economy segment.

A foreclosure suit was filed in late March against one of Red Roof’s highest-profile locations in downtown Chicago. A week later, two properties in South Florida were hit with similar suits. The properties are parts of national portfolios of company-owned Red Roof Inn hotels used to securitize multiple loans now in default.

In September 2007, Accor sold Red Roof Inns for $1.3 billion to Citi’s Global Special Situations Group and Westbridge Hospitality Fund, a partnership between Westmont Hospitality Group and a number of Canadian pension fund managers.

The leveraged buyout, for almost 250 company-owned properties and a franchise system with more than 90 locations, was financed largely by debt sold to investors as commercial mortgage-backed securities (CMBS).

According to New York City-based CMBS analysis firm Trepp, Red Roof has four CMBS loans totaling $358 million as of March. They are secured with 131 of Red Roof’s company-owned properties in portfolios of 79 and 52 hotels.

Red Roof and its owners stopped making payments last May on both secure and unsecure loans totaling $484 million, according to the lawsuit filed against the Chicago property by David Neff, a partner in the Chicago office of law firm Perkins Coie, which represents special servicer Centerline Servicing. The 195-room Red Roof Inn Downtown Chicago is one of the 79 properties securing loans now being serviced by New York-based Centerline.

The Florida suits were filed by Michael Kreitzer of Miami-based firm Bilzin Sumberg Baena Price & Axelrod on behalf of Miami-based special servicer LNR Partners, which currently is working to resolve loans backed by the portfolio of 52 properties.

Last June, Red Roof said it was in talks to restructure its debt, but no resolution has been reached. A story that month from the Wall Street Journal said Red Roof’s debt also included $655 million in mortgages that weren’t securitized and $164 million in mezzanine debt.

Following the filing of the foreclosure lawsuit against the Chicago property, Red Roof issued a brief statement acknowledging it had received the foreclosure notice. “The property will continue to operate as a Red Roof Inn through any transfer of ownership, and it is anticipated that it will remain as a Red Roof Inn for the foreseeable future thereafter. Red Roof Inn also plans to continue to market non-core assets for sale,” according to Red Roof.

The statement provided no further indication why the lenders or subsequent owners would have to retain the Red Roof flag or what the non-core assets might be.

Uncertain future
Neff says foreclosure suits could be filed against more of the 79 properties on behalf of Centerline. Whether Red Roof is involved in global discussions with all of its lenders is unclear, but Neff says restructuring discussions are ongoing between Red Roof and his client, Centerline, and that the two parties have exchanged proposals.

Foreclosure suits, like with the Chicago property and the Miami and Fort Lauderdale, Fla. locations, are filed individually in the jurisdictions of each property. Laws vary by state, and many have non-judicial foreclosure processes, meaning other Red Roof locations could be facing foreclosure. As a result, other foreclosures may not have come to light yet without the initial and public court filings.

After the Florida suits, Red Roof issued a second statement, saying it had “received notice from its lenders of their intent to foreclose on selective properties.” The statement also added: “Red Roof Franchising, LLC, the franchisor of the Red Roof brand, is not a party to and is not affected by the foreclosures. The property transfers will have no effect on Red Roof’s customers and the Red Roof brand continues to grow nationwide.”

It’s hard to get a clear vision of Red Roof’s future, given that none of the major players are talking. Red Roof, Citigroup, Westmont, LNR and its legal representative all declined to comment for this story. Many industry consultants and brokers are tight-lipped on what may be happening, admitting they’re already involved in some capacity or would like to be.

What’s left is the picture of a company that appears to be struggling, with no clear indication of the final outcome. Extended Stay America, a larger chain with almost 700 properties, filed for bankruptcy protection last June and is still in the midst of reorganization.

Wide range of possible solutions
Could Barry Sternlicht, chairman and CEO of Starwood Capital Group, whose reorganization investment offer of $905 million was turned down by Extended Stay or another of the private equity players sitting on the sidelines make a play for Red Roof?

Or might Red Roof and its owners find a similar solution to Hilton and Blackstone, which in early April bought back some of its debt to reduce the total by almost $4 billion and extend maturity by two years.

Although slowed, the Red Roof brand still has promise and room for growth. With a total of 343 hotels — 204 corporate locations and 139 franchised — the portfolio has only added two properties since Accor sold it in 2007.

After the buyout, in January of 2008, former CEO and industry veteran Joe Wheeling said it was like Red Roof was a “$1.3 billion start-up company with the advantages of starting out with a strong brand, strong franchises, strong investors and a great group of employees.” The goal was to grow the brand through franchising and improving its standing as a leader in the economy segment.

The company’s portfolio has shifted in makeup with the addition of approximately 40 franchise locations since the buyout. It lists seven scheduled franchise openings yet to come this year. What Wheeling and Red Roof’s buyers didn’t see coming, however, was the global economic collapse that propelled the hotel industry into a severe downward spiral.

Wheeling left his post as CEO before the end of 2008, stepping down in November to spend more time with his family, according to a company release.

The statement also quoted Wheeling as saying, “the strategic direction of the company is on target and the financials are sound.” Andrew Alexander, who joined Red Roof in 2007 as senior vice president and general counsel, was named acting CEO and executive vice president last year, and remains in those positions today.

Brand still vibrant
Despite the distress, the Red Roof brand continues to rank second to segment leader Microtel Inns & Suites in J.D. Power and Associates’ annual guest satisfaction index.

Vijay Dandapani, president and COO of New York-based Apple Core Hotels, who has one of Red Roof Inn’s flagship properties in Manhattan, says ultimately the corporate restructuring — and even foreclosures — don’t have much actual effect on franchisees, but perception does matter.

He says corporate communication has improved recently, but still has a ways to go. Dandapani, who recently served on Red Roof’s advisory council, doesn’t worry too much because the franchise system is strong. “The brand will always exist, the name has asset value,” he says. “It’s not going to go away.”

Dandapani says some of his former colleagues on the council were more negative, believing the bad publicity hurt their ability to refinance, although he also notes this was at the peak of the credit crisis last year when just about everyone had trouble with credit.

If Red Roof’s owners are forced or choose to sell the entire company — real estate and the franchise system — the consensus is it could be an attractive offering. “I think this package should be easy to sell,” says Steve Rushmore, president and founder of New York-based HVS, a global hospitality consultant. “They have critical mass and a good brand with opportunity for global growth.”

“Irrespective of debt, it’s a very nice asset,” says Eric Belfrage, vice president of CB Richard Ellis Hotels’ Columbus, Ohio office. “The brand certainly services that segment of the economy tier well and is respected. It’s got the ability to be in the top economy tier brands as they have been in the past.”

Belfrage believes the brand has continued to stay competitive during the downturn and its revenue per available (RevPAR) room “is strong in relation to the competition as it ever was.”

Even if new owners want to change brands and can, the prudent decision may be to keep them under the Red Roof flag. Dan Beider, senior managing director and chairman of Paramount Lodging Advisors, a real estate advisory firm in Chicago, says there isn’t usually much flag jumping in the economy tier because the cost of changing usually doesn’t bring enough of an increase in RevPAR to justify it.

“Ultimately there are a lot of Red Roof Inns throughout the country,” Beider says. “They’re not going to go away. The economy segment is one of the few segments where there’s really no 500-pound gorilla. The truth is Red Roof Inn has as good an opportunity as anyone to be that gorilla. And maybe if we didn’t have this 30% drop in NOI (net operating income) it would have been. The focus for everyone has been on survival as opposed to meeting the business plan.”