UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

In re:
INNKEEPERS USA TRUST, et al.,l
Debtors.
)
) Chapter 11
)
) Case No. 10-13800 (SCC)
)
) Jointly Administered
________________ )
SECOND SUPPLEMENTAL DECLARATION OF WILLIAM Q. DERROUGH IN
SUPPORT OF DEBTORS' MOTION FOR ENTRY OF AN ORDER (I) AUTHORIZING
THE DEBTORS TO ENTER INTO THE COMMITMENT LETTER WITH FIVE MILE
II POOLING REIT LLC, LEHMAN ALI INC., AND MIDLAND LOAN SERVICES,
(II) APPROVING THE NEW PARTY/MIDLAND COMMITMENT BETWEEN THE
DEBTORS AND MIDLAND LOAN SERVICES, (Ill) APPROVING BIDDING
PROCEDURES, (IV) APPROVING BID PROTECTIONS, (V) AUTHORIZING AN
EXPENSE REIMBURSEMENT TO "BIDDER D," AND (VI) MODIFYING CASH
COLLATERAL ORDER TO INCREASE EXPENSE RESERVE
I, William Q. Derrough, declare as follows:
1. I am over the age of 18 and competent to testify. I am a Managing Director of
Moelis & Company LLC ("Moelis"), resident in Moelis's New York office, located at 399 Park
Avenue, 5th Floor, New York, New York 10022. I have over 20 years of investment banking
experience, having begun my career in 1988 at Salomon Brothers. During my career, I have
worked on a number of transactions in the hotel, leisure, and real estate industries, ranging from
debt and equity financings, to mergers, acquisitions, and restructurings. In the past 16 months,
Moelis & Company has completed or is engaged in a number of large real estate transactions
(financings, restructurings, and mergers and acquisitions) representing approximately $100
The list of Debtors in these Chapter II Cases along with the last four digits of each Debtor's federal tax
identification number can be found by visiting the Debtors' restructuring website at
www.omnimgt.com/innkeepers or by contacting Omni Management Group, LLC at Innkeepers USA Trust c/o
Omni Management Group, LLC, 16161 Ventura Boulevard, Suite C, PMB 606, Encino, California 91436. The
location of the Debtors' corporate headquarters and the service address for their affiliates is: c/o Innkeepers
USA, 340 Royal Poinciana Way, Suite 306, Palm Beach, Florida 33480.
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billion in value. These include transactions involving Centro Properties Group (corporate
restructuring), Chrysler Corp HQ building (mortgage financing), Dubai World Holdings (advisor
to government of Dubai), Fiddler's Creek (chapter 11 debtor advisory), Fleet Street (CMBS
vehicle restructuring), Fontainebleau Resorts (restructuring, sale), GGP (chapter 11), LNR
Partners (corporate restructuring), Stuyvesant Town/Peter Cooper Village (CMBS restructuring),
and Xanadu (restructuring, equity financing). Moelis was the advisor to Hilton Hotels in its
$26.5 billion sale to Blackstone Group in 2007. Our real estate group has completed numerous
transactions for REITs, including for Simon Properties, Diamond Rock Hospitality Company,
Starwood Financial Group, and iStar Financial.
2. I submit this declaration (the "Second Supplemental Declaration") in
accordance with Rule 1007-2 of the Local Bankruptcy Rules for the Southern District of New
York in support of the Motion for Entry of an Order (I) Authorizing the Debtors to Enter into the
Commitment Letter with Five Mile Capital II Pooling REIT LLC, Lehman ALI Inc., and Midland
Loan Services, (II) Approving the New Party/Midland Commitment Between the Debtors and
Midland Loan Services, (III) Approving Bidding Procedures, (IV) Approving Bid Protections,
(V) Authorizing an Expense Reimbursement to "Bidder D, " and (VI) Modifying Cash Collateral
Order to Increase Expense Reserve (the "Motion") and to supplement my previous declarations
submitted in support of the Motion (the "Declaration" and the "Supplemental Declaration")
[Docket Nos. 821 and 916], which I incorporate by reference herein.
2
3. The facts set forth in this Second Supplemental Declaration are based upon my
personal knowledge, upon information and belief (where indicated), or upon client matter
records kept in the ordinary course of business that were reviewed by me or other employees of
2
Capitalized terms used herein but not otherwise defmed shall have the meanings ascribed to such terms in the
Motion.
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Moelis under my supervision and direction.3 To the extent I express opinions in this Second
Supplemental Declaration, those opinions are based in part on my specialized knowledge,
training, skill, and approximately 20 years of experience in investment banking, restructuring,
and finance. If called and sworn as a witness, I could and would testify competently to the
matters set forth herein.
4
4. On or around March 24, 2010, the Debtors engaged Moelis to provide general
investment banking and financial advice in connection with the Debtors' attempts to complete a
strategic restructuring, reorganization, and/or recapitalization of all or a significant portion of the
Debtors' outstanding indebtedness, as well as to prepare for the potential commencement of
chapter 11 cases.
A. The Debtors' Marketing Process Since Filing the Motion Has Generated
Significant Interest from a Variety of Potential Buyers.
5. Since the filing of my Supplemental Declaration on February 9, 2011, the Debtors
and their advisors have continued to engage in a broad marketing process that is designed to
maximize the value of the estates. Consistent with the directions of the Board and the
Independent Committee, Moelis and the Debtors' management have contacted a broad range of
prospective buyers, representing a spectrum of potential interest, from established hotel owners
and operators, to large private equity investors, sovereign wealth funds, and individual investors.
3
4
In my initial Declaration [Docket No. 821], I stated that "[o]n October 22, 2010, the Debtors and their advisors
presented the Board with, and the Board approved, proposed timelines for selecting a stalking horse bidder and
engaging in a process to achieve that." Decl. 'If 7. The date provided in paragraph 7 of the Declaration related
to the Board's approval of proposed timelines for selecting a stalking horse bidder was incorrect. On October
19, 2010, the Board held a meeting to discuss the form of potential restructuring transactions. On October 22,
2010, Moe lis provided the Board a distribution of materials discussing proposed time lines for selecting a
stalking horse. On October 26, 2010, the Board discussed the proposed timelines and approved them.
In accordance with Fed. R. Civ. P. 26, Moelis' compensation in connection with these Chapter 11 Cases is set
forth in the Debtors' Application for the Entry of an Order Authorizing the Retention and Employment of
Moe/is & Company LLC as Financial Advisor and Investment Banker to the Debtors Nunc Pro Tunc to the
Petition Date [Docket No. 21].
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The Debtors and their advisors have continued to facilitate due diligence, hold discussions, and
coordinate site visits to encourage proposals.
6. On February 11, 2011, Moelis conducted a meeting with financial advisors to the
Debtors' key constituencies. At the meeting, Moelis provided an update on the Debtors'
marketing process in detail and solicited feedback from the financial advisors.
7. On February 18, 2011, the Debtors' management and their advisors provided an
update to the Board on the status of the restructuring and the marketing process. Specifically, the
Board was advised on the status of litigation and discovery related to the Motion. In addition,
the Debtors' advisors provided the Board an update on the Debtors' 2010 financial results, as
well as discussed the 2011 budget and the 2011-2015 forecast. Finally, the Debtors and their
advisors updated the Board on the broader marketing process, including a discussion of a letter
received from Lehman on February 15, 2011, proposing certain amendments to the Commitment
Letter.
8. On March 2, 2011 the company's management and advisors provided a further
update to the Board on the status of the ongoing marketing process, including that since the filing
of the Motion, Moelis had identified and contacted approximately 200 potential buyers, sent
marketing materials to approximately 120 of those parties, and executed non-disclosure
agreements with approximately 30 potential bidders. Moelis also provided an update on the five
non-enterprise bids received from bidders, as well as the proposed Amendment to the
Commitment letter proposed by Lehman.
9. As of the date of this Second Supplemental Declaration, the Debtors and their
advisors have increased the scope and intensity of their marketing process in an effort to subject
the Five Mile/Lehman Bid to a thorough market test and attract overbids. Among other things:
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Moelis compiled a list of more than 200 potential buyers;
Moelis made contact with 200 of these parties and sent teasers to approximately
120 parties;
The Debtors have executed over 30 non-disclosure agreements and have
responded to detailed diligence requests from approximately 30 potential
investors. 5
Moelis has also reached out to nine potential financing sources, four of which
have executed non-disclosure agreements;
The Debtors circulated a more detailed and updated process letter (the "Follow-
Up Process Letter") to potential bidders, which reiterated that, in addition to
superior enterprise-based transactions, the Debtors are willing to consider all
value-maximizing restructuring proposals, including those for pools of assets or
individual assets; and,
In addition, the Debtors issued a press release on January 24, 2011 announcing
the Five Mile/Lehman Bid and the related Motion. The press release was
published by a number of media outlets, including the Wall Street Journal and
Bloomberg, and described and further highlighted the Debtors' continued pursuit
and consideration of all value-maximizing proposals, including non-enterprise
based proposals; and,
On January 24 through January 26, 2011, a representative of Moelis attended the
American Lodging Investment Summit Conference in San Diego, California (the
"ALIS Conference") to promote or generate potential investor interest. At the
ALIS Conference, Moelis representatives engaged with numerous potential
buyers to discuss the investment opportunity in acquiring the Debtors' enterprise
or their individual assets. In addition to seven scheduled meetings with
prospective investors, Moelis conducted several ad hoc discussions with
potentially interested parties during the ALIS Conference.
10. In concert with these activities, the Debtors and their advisors continue to engage
in discussions with interested parties to facilitate due diligence, solicit bids, and explore potential
interest in offering proposals in advance of the Hearing (as described in the Follow-Up Process
Letter), submitting an Overbid at the Auction (as described in the Motion), or acquiring pools of
assets or individual assets. The current discussions between the Debtors and their advisors and
5
As of the date of this Second Supplemental Declaration, approximately 55 potential buyers have told Moelis
that they are not interested in pursuing a transaction with the Debtors, either on an enterprise or non-enterprise
basis.
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numerous potential bidders, as well as the Debtors' efforts to solicit and explore all transactional
options that would maximize value, demonstrate that the marketing process has generated
significant interest.
11. The Debtors also continue to engage with constituencies (and their respective
financial advisors) that have objected to the Motion, including the Ad Hoc Committee of
Preferred Shareholders and LNR, and have made a concerted effort to engage with parties
advocated by these constituencies to build consensus around potential reorganization structures.
Consensus is a key goal of the Debtors' restructuring process. To that end, the Debtors and their
advisors are focused on reaching agreements with LNR and the Ad Hoc Committee of Preferred
Shareholders for treatment of the Seven Sisters, including by way of carving out the Seven
Sisters from the Five Mile/Lehman Bid as amended. The Debtors and their advisors continue to
work to facilitate due diligence by the Ad Hoc Committee and have coordinated meetings
between Five Mile and the Ad Hoc Committee, as well as facilitating site visits between
February 8 and February 17. The Debtors and their advisors are focused on reaching consensus
with the Ad Hoc Committee through carving out the Seven Sisters from the Five Mile/Lehman
Bid as amended.
B. The Debtors and Their Advisors Have Clearly Communicated with the
Marketplace about the Marketing Process.
12. I understand certain objectors have asserted that the marketplace is confused
about the Debtors' stalking horse and marketing process, which (these objectors argue) will lead
to a less robust marketing and auction process. Contrary to these assertions, I have not seen
evidence to support a conclusion that the marketplace is confused. Beginning in early January
2011, Moelis began contacting over 200 potential buyers. Each buyer was informed through the
Follow-Up Process Letter and/or through numerous communications from the Debtors and their
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amendments to the Commitment Letter, which included the elimination of certain of the
concessions the Debtors previously fought hard to obtain.
18. The Debtors discussed Lehman's proposal with the Board at the February 18,
2011 Board meeting, and determined that the proposed amendments to the Commitment Letter
would not be in the best interests of the Debtors' estates or for a successful reorganization
because, while the Board encouraged any modifications to the Five Mile/Lehman Bid that may
increase value or the likelihood of consensus, it would not be desirable to eliminate hard-fought
concessions obtained for the benefit of constituents in exchange for an agreement to separate the
Seven Sisters from the Commitment Letter.
19. On February 21, 2011, the Debtors responded to Lehman's proposal and
explained that the proposed amendments to the Commitment Letter were not acceptable to the
Debtors and that the focus should remain on building consensus between Lehman, Five Mile,
and the Ad Hoc Committee of Preferred Shareholders on potential reorganization structures.
20. On February 22, 2011, Lehman responded to the Debtors' February 21, 2011
letter with a revised proposal for amendments to the Commitment Letter (the "Second
Modification Letter").
21. After reviewing Lehman's proposal with the Board at the March 2, 2011 Board
Meeting, the Debtors, at the direction of the Board and the Independent Committee, the Debtors
and their advisors worked to reach an agreement with Lehman, Five Mile, and Midland to
modify the Five Mile/Lehman Bid. Through these negotiations, the Debtors ultimately reached
an agreement to modify the Five Mile/Lehman Bid as follows:
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The Debtors and Five Mile/Lehman and Midland have agreed to modify the
Commitment Letter to remove the Seven Sisters from the Five Mile/Lehman
Bid. The Five Mile/Lehman Bid will cover only the properties securing the
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Fixed Rate Loan and the Floating Rate Loan (the "Fixed Rate Pool" and
"Floating Rate Pool," respectively).
Five Mile/Lehman will not be the stalking horse bidder for the Seven Sisters.
The Debtors will continue to market the Seven Sisters independent of the
Fixed Rate Pool and Floating Rate Pool.
Five Mile/Lehman's equity commitments and Midland's "stapled" financing
will remain unchanged (provided that the Sources and Uses Table annexed to
the Term Sheet will be adjusted to reflect the modified Five Mile/Lehman Bid
other than the new cash requirement of $17 4.1 million).
Subject to the Creditors' Committee agreeing to support the modified Five
Mile/Lehman Bid, unsecured creditors with claims against the Fixed Rate
Pool Debtors and Floating Rate Pool Debtors will share in a distribution of up
to $3.75 million, but not to exceed a recovery of 65% of the face amount of
allowed general unsecured claims against such Debtors.
Apollo will contribute $375,000, all of which will be included in the amounts
distributed to unsecured creditors ofthe Fixed Rate Pool Debtors and Floating
Rate Pool Debtors. Apollo will retain whatever rights it may have with
respect to Debtors and property that are not covered by the modified Five
Mile/Lehman Bid.
To the extent modified bidding procedures agreed to by Five Mile/Lehman
and Midland with respect to the modified Five Mile/Lehman Bid (the
"Modified Bid Procedures") are approved before the March 29, 2011
omnibus hearing, the Debtors will seek, and Five Mile/Lehman and Midland
will support, an extension of exclusivity to no later than June 30, 2011. The
Debtors reserve their rights to seek additional extensions and Five Mile/
Lehman and Midland reserve their rights to oppose such extensions or to
move to terminate exclusivity.
The Commitment Letter will be revised to include a termination event in favor
of Five Mile, Lehman, and Midland in the event the Debtors do not file a plan
encompassing the revised bid by April 8, 2011.
Nothing in the modified Five Mile/Lehman Bid will impact the rights of any
person or entity with respect to the $7.4 million in cash that is currently held
in a bank account of Debtor Innkeepers USA Limited Partnership, which is
not subject to the revised bid. No amount of the cash will be distributed under
the modified Five Mile/Lehman Bid.
Confirmation of the plan encompassing the modified Five Mile/Lehman Bid
will not be tied to the confirmation of any plan related to the Seven Sisters'
Debtors and the company agrees to seek confirmation for such Debtors
accordingly.
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cost of capital due to the Debtors' size and the diversity of their assets; (b) the ability to take
advantage of tax and cost of capital benefits of the public REIT status of a reorganized
enterprise; (c) economies-of-scale for corporate and management functions; (d) operational and
management benefits of brand and geographic diversity; (e) the relationships with key
franchisors; and (f) avoiding additional incremental costs associated with a disparate sales
process with multiple transactions, including likely higher administrative and transaction costs.
27. I also believe that both the level of interest and quality of potential bidders in the
Debtors' marketing process to date further underscores that an enterprise-based restructuring is
the most likely structure to maximize value for the estates, because it has and will attract parties
with significant experience in the hospitality sector, sufficient capital, and ability to conduct due
diligence and close a transaction on an expedited basis.
28. While the Debtors have and will continue to solicit and consider non-enterprise
based proposals (both in advance of the Hearing and after), such an approach raises numerous
potential issues that may undermine a value-maximizing restructuring, especially to the extent
certain objectors, like LNR, have advocated a "logical cluster" sales approach. First, a "logical
cluster" approach would lead to numerous issues related to franchisor relationships and how to
group assets according to brand, geographic, or building-type diversity. This approach may also
leave the Debtors' enterprise with a set of remaining assets that would languish potentially for an
extended time and may result in value destruction, rather than value maximization. The
bifurcation of transferred assets from those that remain may jeopardize the Debtors' franchisor
relationships by requiring additional licensing transactions, causing additional loss of value.
Second, a "logical cluster" approach would likely discourage or limit favorable financing
because restructuring the existing debt structure on an enterprise-based level would provide for
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more flexibility and, in effect, offer attractive "stapled financing" to a potential plan sponsor.
Third, I disagree that a "cluster" approach would attract a broader universe of potential investors;
indeed, to date, the overwhelming interest from potential buyers has been to discuss an
enterprise-level transaction. Further, the objectors have failed to identify a "logical cluster"
approach that will address the sale of the Debtors' hotels in a holistic manner. Fourth, the
Debtors' relationships with their franchisors are strong and provide significant value to the
overall enterprise. Finally, the Debtors' management team provides significant value to the
overall enterprise, as evidenced by critical achievement of operational milestones and
achievements since filing for chapter 11.
29. Thus, while the Debtors remain open and willing to both soliciting and receiving
non-enterprise based bids, the Debtors continue to believe an enterprise-level restructuring will
maximize value to the estates because of, among other factors, (a) important considerations
regarding transaction costs and distraction associated with having multiple, concurrent sale
processes running for overlapping assets, (b) concern regarding the impact numerous smaller
sales may have on franchisor relationships, and (c) the difficulties of attempting to close
numerous sales simultaneously in order to avoid leaving behind a subset of assets.
30. The Five Mile/Lehman Bid as amended remains as the highest and best offer
received to date and contemplates a value-maximizing auction of a substantial portion of the
overall enterprise for the reasons stated in my Declarations. The Five Mile/Lehman Bid as
amended continues to contemplate the highest implied enterprise value of all received bids and
sets significant baseline recoveries for the Debtors' constituencies, which may increase
significantly if Overbids are received at the proposed Auction or otherwise if value-maximizing
bids are received outside of the Auction process.
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31. I have also reviewed the objections related to the issue of value allocation
between debt pools in the event of an Overbid at the Auction. While I believe valuation
discussions and objections are premature at this stage, I believe the allocations contemplated by
the Five Mile/Lehman Bid are reasonable and represent a reasonable starting point for overbids
and a baseline for value. To the extent the value allocations are somehow demonstrated to be
unreasonable by the market, the Debtors have the ability through their fiduciary out to solicit and
accept other offers. In addition, through the agreement to carve out the Seven Sisters, the
allocation issue will effectively be moot because Lehman and Midland have agreed to the
relative valuations of the Floating and Fixed Rate Pools as contained in the Five Mile/Lehman
Bid as modified.
32. I have reviewed the objections related to the requirement that Lehman must
receive cash on account of its claim in the event of an Overbid at the Auction. As previously
indicated in my Declarations, the Debtors sought to aggressively negotiate to remove or modify
this provision in the final Five Mile/Lehman Bid. However, Lehman required the provision to
support the Five Mile/Lehman Bid. The Debtors and their advisors determined that the Lehman
cash provision on balance does not detract from the overall strength of the Five Mile/Lehman
Bid. The Lehman cash payment provision ensures that an Overbid will comply with Midland's
70% loan-to-value ratio requirement, which is a key beneficial feature of the overall Bid because
it offers favorable stapled financing to Qualified Bids.
33. I have also reviewed the objections and comments from various constituencies
that suggest the Debtors somehow ignored the Seven Sisters in their negotiations with Lehman
and Five Mile. Contrary to these assertions, during discussions with Lehman and Five Mile
throughout December and January, the Debtors sought to improve recoveries to the Seven Sisters
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from the earlier November Five Mile proposal. Ultimately, the Debtors were able to negotiate
increases in value for four of the seven properties in the final Five Mile/Lehman Bid.
Furthermore, after filing the Motion, the Debtors have continued to engage with Lehman, Five
Mile, and other constituencies to maximize value to the Seven Sisters and believe the agreement
to amend the Five Mile/Lehman Bid offers a significant step forward in this regard. The Debtors
and their advisors are working to achieve consensus on the a mendment in advance of the
Hearing.
34. Because the Debtors' marketing process is ongoing and the Debtors and their
advisors continue to engage with interested parties to solicit bids in advance of the Hearing, I
reserve the right to supplement the opinions contained in the Second Supplemental Declaration.
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03-MAR-2011 08:52 From: To:90012128804268
I
I
I
I r---
& Company 45 p m 04-02-2011 212
Pursuant to 28 U.S.C. t 746, l declare under penalty of perjury that the foregoing is true
and correct,
Dated: March 3. 20 t t
William Q. Oerrough
Managing Director. Moclls & Company LLC
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