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Extended Stay (STAY) Banks on Unit Expansion, RevPAR Dismal

Zacks Equity Research
·4-min read

Extended Stay America, Inc. STAY is likely to benefit from cost control and digital efforts, unit expansion and four-pillar strategy. Also, increased focus on future cash distributions bodes well. However, dismal revenue per available room (RevPAR), elevated expenses and coronavirus-related woes remain concerns.

Let us delve deeper into factors highlighting why investors should hold on to the stock for the time being.

Growth Catalysts

In a bid to drive growth in the long run, Extended Stay is banking on numerous strategic efforts. Notably, the company is refocusing on core customers. Also, its initiatives toward controlling costs and reducing capital requirement for fresh hotel builds are commendable. Under its ESA 2.0 strategy, the company aims to franchise its brands and drive growth through various strategies. It also plans on enhancing its digital capabilities that would eventually boost revenues and earnings.

Moreover, the company is banking on increasing unit growth to drive RevPAR. As of Sep 30, 2020, the company had a pipeline of 65 hotels. Nevertheless, after completing its pipeline on balance sheet development, the company anticipates further unit growth. It also expects several franchise conversions during the fourth quarter of 2020.

Meanwhile, the company continues to focus on its four-pillar strategy to unlock and create shareholder value in the coming years. The first pillar is to maximize core operations and drive more extended stay demand at the company's properties. The second pillar is to pursue accretive asset sales for certain assets that can yield a higher value through alternative uses. The third pillar is furthering on the company's asset light strategy, with focus on franchise growth. The last pillar is return of capital to shareholders.

With the pandemic and business conditions improving, the company continues to review future distributions in order to maintain its REIT status. Nonetheless, the company expects to boost shareholders’ revenues and offer cash distributions to the range of 15 to 20 cents per share by early 2021.

So far this year, shares of the company have fallen 5.5% compared with the industry’s 8% fall.

Concerns

The coronavirus pandemic affected the company’s operations during the third quarter of 2020. Notably, travel restrictions, stay-at-home directives and changing consumer patterns in response to the pandemic also impacted the company. Resultantly, during the quarter, the company’s RevPAR and Adjusted EBITDA declined 16.0% and 27.9%, respectively, from the prior-year period. Meanwhile, the company expects the pandemic to continue to affect operations.

Extended Stay has been facing escalating expenses owing to franchise operations. The company’s hotel operating margin in third-quarter 2020 was 47.3%, reflecting a decline of 650 bps from the prior-year quarter due to COVID-19. Margins in the coming quarters will continue to be impacted by the surge in expenses.

Zacks Rank

Extended Stay — which shares space with Marriott International, Inc. MAR, Hyatt Hotels Corporation H and Hilton Worldwide Holdings Inc. HLT in the Zacks Hotels and Motels industry — has a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Marriott International, Inc. (MAR) : Free Stock Analysis Report
 
Hyatt Hotels Corporation (H) : Free Stock Analysis Report
 
Extended Stay America, Inc. (STAY) : Free Stock Analysis Report
 
Hilton Worldwide Holdings Inc. (HLT) : Free Stock Analysis Report
 
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Zacks Investment Research