Extended Stay America IPO Holds Big Promise
Extended Stay America plans to become a publicly traded company, according to an S-1 filing made with the SEC this week. With over 682 hotels across the U.S. and Canada generating about $1 billion in annual revenues, the company could become one of the largest hospitality listing in the market and one of the largest initial public offerings in recent quarters.
Unlike traditional hotels, the company focuses on extended stays that have higher operating margins and lower occupancy break-even thresholds. For instance, the average customer stayed an average of 28 days in its hotel, compared to 2.5 days for traditional hotels, with occupancy rates of 73.3 percent in its hotels, compared to 61.4 percent in traditional hotels.
These metrics have made the company very appealing to hospitality investors, particularly given its hotel-level operating margins of 50 percent compared to the industry’s 32 percent average. As a result, investors in companies like Choice Hotels International (NYSE:CHH) or Marriott International (NYSE:MAR) may want to take a second look at the upcoming IPO.
New Management’s Turnaround
On October 8, 2010, ESH REIT and ESH Strategies acquired all of the assets and operations of Homestead Village LLC that were auctioned off from Chapter 11 bankruptcy. These operations were eventually branded under the Extended Stay America brand and the newly public entity will trade under the same corporate name Extended Stay America Inc.
Extended Stay America’s new management team has implemented significant improvements throughout its revival, including improved quality standards, rebranding of mid-price properties, increased marketing to promote awareness, and a focus on customer service excellent, which has helped increase demand and has attracted higher-paying guests.
The impact of these changes have been apparent in its financials, with a 22.8 percent increase in ADR, 21.4 percent increase in RevPAR, and adjusted EBITDA of 37.3 percent compared to 25.2 percent earlier. With the firm’s scale, national footprint, high quality portfolio, low cost operating model, and experienced management team, management’s turnaround has been highly successful.
When looking at the potential market, extended stay hotels represent a $7.6 billion per year industry in the U.S., according to The Highland Group. Management believes that this is the most underserved segment in the U.S. lodging industry with the majority of extended stay demand picked up by traditional hotels that are ill-suited, yielding a big opportunity.
Post-IPO Goals Looking Forward
Extended Stay America has three main goals with respect to its business: Improving the overall experience for customers, creating an exceptional workplace for associates, and increasing shareholder value. Management believes that achieving these goals will help increase ADR, narrow RevPAR differences, and improve margins and profitability over the long-term.
According to regulatory filings, each $1 increase in ADR across the company’s portfolio would have increased EBITDA by $17 million to $19 million. Increasing ADR is therefore a highly effective way to leverage its earnings and unlock significant shareholder value, by implementing a series of strategies addressing its three core goals mentioned above.
In 2012, these strategies included investing more than $625 million in capital improvements, tripling their marketing spend to $15 million, optimizing their customer mix, improving margins by upgrading operations, making select acquisitions in a fragmented market, and building a culture around customer service, with a 13x increase in top-rated hotel destinations.
Looking forward, these metrics have clearly piqued the interest of investors. Additional information will be filed in S-1/A amendments to the original S-1 SEC filing. Investors can sign-up for free alerts when these amendments are made at www.secfilings.com.
Originally written for SECFilings.com, which is a leading provider of SEC filings, real-time alerts, and in-depth analysis, with a team of experienced financial writers that cover quarterly/annual reports, insider trading/hedge fund activity, and IPOs, spin-offs, and other special events found within U.S. regulatory filings.
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