No sale: ESA board sees greater value in 2.0 strategy
 
No sale: ESA board sees greater value in 2.0 strategy
07 AUGUST 2019 2:40 PM

Extended Stay America’s 2.0 strategy has enough value-creation potential that the company’s board of directors has decided against any possible sales at this time.

CHARLOTTE, North Carolina—Extended Stay America’s board of directors decided to continue moving forward with the company’s ESA 2.0 strategy instead of pursuing a possible sale, executives said during the company’s second-quarter earnings call.

• Click here to read more Q2 earnings coverage. 

In a process that took several months, the board considered a variety of options, including holding discussions with potential transaction partners, but the board members decided against making any changes at the moment, ESA President and CEO Jonathan Halkyard said. 

“None of these options provide superior shareholder value creation,” he said, adding the board does remain open to options in the future.

The company will continue to progress with its 2.0 strategy, he said. The upcoming steps will focus on being more aggressive in growing the company’s franchise business through increasing its sales and support staff, he said. The goal is to move even faster to a lower-capital, higher-ROI business, he said.

The company is on a nationwide search for a new EVP of operations to help improve its brand and operating performance, he said. Having a focus on GM recruitment and training reduced turnover by 10 percentage points, a number that continues to improve, he said.

ESA also wants to grow its market share profitability with its core extended-stay guests, Halkyard said. That segment is growing and is less prone to predation, he said.

As for its lower-tier hotels, the company is reviewing its options for selling and franchising as well as selling unencumbered, he said.

Downturn prep
As the hotel industry cycle appears to be coming to its end, there have been questions about ESA’s ability to weather a downturn, Halkyard said. The company believes a typical industry downturn would be a 2% to 5% revenue-per-available-room decline instead of the 20% seen in the last recession, he said. Net supply growth at the company’s price points have been significantly lower in this cycle than that last cycle, which should mean less pressure on RevPAR, he said.

“Supply growth in the economy chain scale and midscale has grown at fewer than half of the number of rooms compared to the prior economic cycle, even with nearly twice as many years in this cycle to allow for growth,” he said.

The rest of the hotel industry focuses mostly on nightly transient business, Halkyard said. ESA has three different customer segments to draw upon, he said. While it does seek out the same type of nightly transient guests as other hotels, it also targets business clients who stay for a week up to two months as well as those who stay longer than that and have a similar profile to apartment guests, he said.

“If one of these three area struggles, we believe we can make up a portion of that business amongst our other two segments,” he said.

ESA’s properties tend to be 10% to 15% lower in prices than its systemwide competitive set, which is an indicator the company would provide a strong substitute for guests who still need to travel but would have to economize in a downturn, he said.

The company’s balance sheet is strong and can navigate any normal recession without having to change its long-term plans or reduce capital returns to shareholders, he said. The next maturity is four years from now, he added.

“We have successfully stress tested our balance sheet for recessions significantly worse than the last downturn,” he said.

By the numbers
ESA reported net income of $59.7 million during the second quarter and total revenue of $323.7 million, according to the company’s earnings release. Its comparable systemwide RevPAR grew by 0.1% to $53.94. Adjusted earnings before interest, taxes, depreciation and amortization reached $153.6 million.

The company’s pipeline grew by 18% during the second quarter to 8,700 rooms, representing about 13% of its existing supply. That breaks down to 19 ESA-owned hotels comprising 2,388 rooms and 52 franchised hotels with 6,288 rooms.

ESA reduced its full-year 2019 RevPAR guidance from flat to 2% in the first quarter down to -1% to 0.5% growth.

As of press time, ESA’s stock was trading at $14.83, down 4.8% year to date. The Baird/STR Hotel Stock Index was up 11.3% for the same time period.

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