We wouldn't be surprised if Extended Stay America's first quarter and upcoming second quarter operating results together were among the very best of the battered public U.S. hotel companies. Going long on long-stay has never been such a safe business model as it is now during the coronavirus pandemic.
“Extended Stay America is very different from traditional transient brands, and those differences have never been more apparent than they are today,” said CEO Bruce Haase during a conference call with investors to discuss first-quarter earnings.
Some large investors agree. In the past two months, Charlotte, North Carolina-based company has drawn interest as the largest owner-operator of extended-stay hotels in the mid-priced market. Blackstone Group, said to be the world’s largest owner of real estate, purchased an approximately 5 percent stake at a price of about $100 million in March, the Wall Street Journal reported, while Starwood Capital snapped up 8.5 percent.
Some context on why: The hotel business is all about boosting occupancy because an owner has fixed costs to run facilities and employ labor for core operations. At a typical U.S. property, if you have, say, 100 rooms, your profit margins begin to improve once your occupancy surpasses 60 percent, on average.
Extended Stay America requires a lower occupancy to break even than do traditional hotel brands, Haase said, and it has “maintained relatively healthy overall occupancy levels” during the coronavirus pandemic.
Extended Stay America said it hasn’t shut down any of its 634 locations during the epidemic and in April had an average occupancy of 61 percent. It has had more hotels with 80 percent or higher occupancy than ones below 50 percent occupancy system-wide, and only a handful below 30 percent. That contrasts with an average below 30 percent for many well-known leisure hotel brands, it said.
Occupancy is just one factor. Hotel operators also fixate on a metric called revenue per available room (RevPAR), which is a function of occupancy multiplied by the daily rate. During the first three months of the year, Extended Stay America’s system-wide RevPAR was $43.98, a decline of 5.8 percent compared to the same period a year earlier.
That strength in revenue per available room has kept the company in a roughly breakeven position. In the first quarter, the company generated $266.3 million in revenue, a drop of 4 percent year-over-year. It earned $7.8 million in net income, a crash of 72 percent from $28.4 million year-over-year. That comfortable financial position has enabled the company to avoid having to furlough any field-based management or enact any other wide-spread furloughs or staff reductions as seen by others in the industry.
Some analysts agreed. The company’s financial performance should be the best among the major U.S. hotel companies in the first half of the year, wrote Michael Bellisario, a senior travel industry research analyst at Baird, in a note to investors.
Hasse, who has led the company since November 2019, claimed that Extended Stay America’s performance would continue to outshine rivals in the hospitality sector this year. He noted that most locations are near highways and suburban areas that will likely rebound first as domestic travel picks up in the U.S., and many customers drive rather than fly.
Extended Stay America has limited dependence on group business, Hasse added. That spares it from exposure to a likely cratering of the convention and events business this year. It has also brought some costs down through hygiene-enhancing measures such as by removing daily breakfasts and reducing the cadence of housekeeping for long-stay guests.
It’s not all roses, though. The company’s cash burn requires making some assumptions about RevPAR and expenses. But the company said that assuming late April levels of occupancy and operational costs it would have enough cash to last about four years.
Baird’s Bellisario calculated that Extended Stay America’s leverage, or amount of debt, is 4.5 times its expected earnings, an elevated level from 4.3 times at the end of last year.
Debt ratios like that are rough measures of how many years it would take for a company to pay back its debt if net debt and earnings remain constant. Ratios higher than four can suggest a company may be less likely to be able to take on more debt to grow the business.
Yet the company’s creditworthiness is still better than average when compared with the industry average. It has $1.02 billion in secured debt, and no significant debt maturities until September 2024, the company said.
Going Long on Long-Stay
Extended Stay America’s main competition from public company hotel brands in the mid-priced segment is Choice Hotels, with its WoodSpring Suites and Mainstay Suites brands.
Yet Extended Stay America may face new competition from online travel agency Airbnb.
“I think one thing you’re going to see is that a huge percentage of the accommodations business going forward will not be limited to travel,” said CEO Brian Chesky in an April live-streamed video interview with Skift CEO Rafat Ali. Nearly half of Airbnb’s revenue in early April came from long-term stays, Chesky said.
Intentions aside, Airbnb has little influence over whether its short-term rental property owners offer extended stays, and owners may not persist in offering such stays as long as dedicated hotel brands will. The exception is Airbnb’s multifamily program that lets real estate owners host stays of any length via the online agency.
For more data on the broader trend, see Skift’s earlier report on how economy extended stay segment is the strongest of the weak U.S. hotel sector and our story on how Blackstone’s earlier Hilton investment will guide its hotel strategy now.
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Photo credit: An Extended Stay America property in Beachwood, Ohio. The company reported first quarter 2020 earnings on Thursday, saying its segment has done relatively well during the coronavirus pandemic. Extended Stay America