ESA evaluating corporate structure as franchising grows
ESA evaluating corporate structure as franchising grows
26 JULY 2018 3:29 PM

Company shareholders and industry analysts have raised the possibility of Extended Stay America spinning its subsidiary REIT into its own company, and ESA’s Jonathan Halkyard said any changes are purely speculative at this point, though the company is open to considering all options.

CHARLOTTE, North Carolina—As Extended Stay America continues to increase its franchising activity, executives admitted there has been some outside interest about the company re-evaluating its corporate structure similar to Hilton’s spinoff of Park Hotels & Resorts and La Quinta Holdings’ spinoff of CorePoint Lodging.

President and CEO Jonathan Halkyard fielded several questions from analysts on the subject Thursday during ESA’s second-quarter earnings conference call.

“Over the past several months, many investors and some in the equity research community have inquired about the potential for Extended Stay America to revisit its corporate structure as a means to increase shareholder value,” Halkyard said. “Indeed, a number of analysts on the call this morning have modelled the company on this basis, using recent transactions and trading multiples to support various valuation analyses of our company under an (operating company/property company) structure or some other method of separating the C-Corporation from the (real estate investment trust). … We continue to evaluate the merits of alternatives to our current corporate structure, and not withstanding our considerable progress in executing the ESA 2.0 strategy … we have preserved all optionality with respect to any structural alternatives that our board may consider in the future.”

ESH Hospitality, a subsidiary REIT of Extended Stay America, owns 599 ESA hotels in the U.S. that comprise approximately 66,000 rooms. Extended Stay America manages all hotels owned by ESH as well as 27 additional franchised ESA properties.

Halkyard wouldn’t comment on any timeline of a decision to spin off ESH from the parent company and added he felt it was important to be transparent given the level of similar activity in the industry.

“It’s not that we have a higher level of interest necessarily, but it has become a more frequent topic of questioning that the company has gotten,” he said. “Clearly in the last couple of years there has been a couple of transactions along the lines of this type, whether it be Hilton or La Quinta of course, and so there are some different factors that we’ve been able to take a look at, but it’s mostly because it’s been more a topic of conversation and questioning from our shareholders and the equity research community that we thought it was important to make a statement.”

Halkyard also emphasized that any spinoff considerations would happen in conjunction and not opposed to Extended Stay America’s asset dispositions, franchising negotiations or renovation initiatives.

“There’s no particular goalpost or milestone with respect to our ESA 2.0 activity and growth strategy that would need to occur in order for us to consider any change to our structure,” he said. “Our message really is two-fold: Our main interest is to increase shareholder value, and just as we evaluate capital allocation decisions or M&A decisions and investment, we consider the company’s corporate structure in that light.

“The second is we’re moving forward; we are ambitiously going after this ESA 2.0 strategy, and we think we’ve made pretty significant progress this past quarter and will for the remainder of the year. … (We’re) building the value of our brand by bringing on new franchisees and growing the portfolio and improving value of the owned portfolio through recycling capital and selling lower-ADR assets at attractive valuations, investing in new hotels that we think will drive attractive returns. We think both of those broad activities will make a lot of sense whatever structure the company pursues, either maintaining its current structure or doing something different.”

Franchising first and sales strides
During the quarter, Extended Stay America approved its first four franchise applications, which Halkyard said were “independent of asset sales.”

The company also signed purchase and sale agreements with three investment groups to sell and refranchise 46 ESA hotels.

“We expect to close on these three portfolios in next several months, at which time the buyers will collectively commit to build or convert an additional 15 Extended Stay America hotels,” Halkyard said. “When completed, this set of transactions will bring the total number of sold and refranchised hotels to 71, approximately halfway to our goal of 150 by the end of 2021.”

Halkyard said ESA’s pipeline comprises 34 hotels with more than 4,200 rooms, and should grow to 50 hotels in development by the end of 2018 given the company’s franchising discussions and its own new-build developments.

ESA will also begin its next phase of renovations in the fourth quarter of 2018, but Halkyard said the company will renovate about 450 hotels it plans to retain at four different renovation tiers instead of a “one-size-fits-all” prototype.

Q2 earnings
Comparable systemwide RevPAR increased 1.6% year over year during the quarter to $53.91, according to ESA’s earnings release. The RevPAR growth was driven by a 3.4% ADR increase to $69.50 since occupancy declined 1.6% to 77.6%.

“The slowdown in RevPAR growth as compared to the first quarter was not unanticipated, and was primarily due to a reduction in business, related to hurricanes in Florida and Houston last fall,” Halkyard said.

The company’s strong markets in the quarter were San Francisco, Florida, Houston and Philadelphia, and these were offset by weaker performance in Austin, Dallas, Boston and Lost Angeles, Halkyard said.

“It is gratifying to see the San Francisco area business rebound during the quarter,” he added.

Adjusted earnings before interest, taxes, depreciation and amortization declined 3.2% during Q2 to $167.3 million, and net income increased 31.9% to $65.6 million.

Extended Stay America revised the upper end of its comparable full-year 2018 RevPAR guidance down 0.25%. The company now projects RevPAR growth between 1% and 2.75%.

On Thursday afternoon, ESA’s stock was trading at $21.54, up 13.4% year to date. The Baird/STR Hotel Stock Index was down 0.1% over the same period.

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