Extended Stay America, Inc. and ESH Hospitality, Inc. announced consolidated results for the three and nine months ended September 30, 2020.
Third Quarter 2020 Highlights
Extended Stay America’s President and Chief Executive Officer Bruce Haase, commented, “We are pleased with another strong quarter easily outperforming every industry benchmark and improving our RevPAR index by more than 30% against our closest competition. Our performance illustrates the strength of our unique operating model, our singular focus on the extended stay segment, and the successful implementation of a wide variety of operational, marketing, and distribution channel initiatives.”
“We generated strong free cash flow and fully repaid our REIT’s outstanding revolver during the quarter. While others in the industry are forced to make difficult short-term decisions, we continue to invest in our properties, our people, and our longer term strategies which will enable further long-term success as the lodging markets recover.”
1 See “Disclosure Regarding Non-GAAP Financial Measures” for an explanation of non-GAAP measures included in this release (i.e., Hotel Operating Profit, Hotel Operating Margin, EBITDA, Adjusted EBITDA, Funds From Operations (“FFO”), Adjusted FFO, Adjusted FFO per diluted Paired Share, Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share).
Financial and Operating Results
Total revenues for the three months ended September 30, 2020 were $285.9 million, a decrease of 14.1% over the same period in 2019 due to the impact of the COVID-19 pandemic. Total revenues for the first nine months of 2020 were $783.0 million, a decrease of 16.2% compared to the same period in 2019.
Comparable system-wide RevPAR for the three months ended September 30, 2020 declined 14.7% over the same period in 2019 to $46.75, driven by a 13.7% decline in Average Daily Rate (“ADR”) and a 100 basis point decrease in occupancy to 79.8%. Comparable system-wide RevPAR year over year percentage change improved each month during the third quarter. Comparable system-wide RevPAR for the first nine months of 2020 declined 16.9% to $43.06.
Hotel Operating Margin for the three months ended September 30, 2020 was 47.3% compared to 53.8% in the same period in 2019 due a decrease in RevPAR caused by the COVID-19 pandemic. Hotel operating expenses during the third quarter of 2020 declined by 2.5% from the same period in 2019, or approximately 3.5% on a comparable basis. Hotel Operating Margin for the first nine months of 2020 was 45.1% compared to 52.9% in the same period of 2019, driven by a decrease in RevPAR due to the COVID-19 pandemic.
Net income for the three months ended September 30, 2020 was $31.5 million compared to net income of $53.2 million for the same period in 2019. The decrease in net income was due to a decline in Comparable system-wide RevPAR, partially offset by an income tax benefit, lower net interest expense, and lower hotel operating expenses. Net income for the first nine months of 2020 was $30.6 million, compared to net income of $141.3 million for the same period in 2019.
Adjusted EBITDA for the three months ended September 30, 2020 was $112.7 million, a decline of 27.9% compared to the same period in 2019. The decline in Adjusted EBITDA was due to a decline in Comparable system-wide RevPAR. Adjusted EBITDA for the quarter excludes non-cash equity-based compensation expense of $1.7 million, $1.3 million in loss on disposal of assets and $0.8 million in other expenses. Adjusted EBITDA for the first nine months of 2020 was $284.8 million compared to $426.3 million in the same period of 2019.
Adjusted FFO for the three months ended September 30, 2020 was $70.7 million, or $0.40 per diluted Paired Share, compared to $101.5 million, or $0.54 per diluted Paired Share in the same period in 2019. The decrease in Adjusted FFO per diluted Paired Share was due to a decline in Comparable system-wide RevPAR, partially offset by an income tax benefit, lower net interest expense and a reduction in Paired Shares outstanding. Adjusted FFO for the first nine months of 2020 was $156.4 million, or $0.88 per diluted Paired Share, compared to $269.8 million, or $1.43 per diluted Paired Share, for the same period in 2019. Adjusted FFO, a non-GAAP measure, represents funds from operations, as adjusted, attributable to the consolidated enterprise, whose representative equity security is a Paired Share. A Paired Share entitles its holder to participate in 100% of the common equity and earnings of both Extended Stay America, Inc. and ESH Hospitality, Inc.
Adjusted Paired Share Income for the three months ended September 30, 2020 was $33.1 million, or $0.19 per diluted Paired Share, compared to $62.6 million in Adjusted Paired Share Income, or $0.33 per diluted Paired Share, for the same period in 2019. The decrease in Adjusted Paired Share Income per diluted Paired Share was due to the decline in Comparable System-wide RevPAR, partially offset an income tax benefit, lower net interest expense and a reduction in Paired Shares outstanding. Adjusted Paired Share Income for the first nine months of 2020 was $38.6 million, or $0.22 per diluted Paired Share, compared to $153.3 million, or $0.81 per diluted Paired Share, in the same period of 2019. Adjusted Paired Share Income, a non-GAAP measure, represents net income, as adjusted, attributable to the consolidated enterprise, whose representative equity security is a Paired Share.
Capital Expenditures and Balance Sheet
The Company invested $39.6 million in capital expenditures during the third quarter of 2020. This included $2.9 million in renovation capital and $16.7 million in capital for hotel development. For the first nine months of 2020, the Company invested $144.9 million in capital expenditures.
As of September 30, 2020, the Company had $396.4 million in cash and equivalents, including $14.9 million in restricted cash, and total debt outstanding was $2.73 billion. The Company repaid its $350.0 million revolver at ESH Hospitality, Inc. in full during the third quarter due to the strong increases in RevPAR compared to earlier in the pandemic and the improvement in free cash flow in recent months. Excluding the $350 million revolver repayment made in the third quarter, the Company increased its cash position by $63.9 million despite its investments in renovations and hotel development.
Hotel and Development Pipeline
As of September 30, 2020, the Company had a pipeline of 65 hotels representing approximately 7,900 rooms. One Company-owned hotel and one franchised hotel opened during the third quarter, resulting in a total of 8 system-wide hotels opened in the first nine months of 2020.
Company Owned Pipeline & Recently Opened Hotels as of September 30, 2020 | ||||||||||||||
Under Option | Pre-Development | Under Construction | Total Pipeline | Opened YTD | ||||||||||
# Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | |||||
0 | 0 | 4 | 504 | 6 | 764 | 10 | 1,268 | 5 | 612 | |||||
Third Party Pipeline & Recently Opened Hotels as of September 30, 2020 | ||||||||||||||
Commitments | Applications | Executed | Total Pipeline | Opened YTD | ||||||||||
# Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | |||||
28 | 3,472 | 0 | 0 | 27 | 3,184 | 55 | 6,656 | 3 | 280 | |||||
Definitions | ||||||||||||||
Under Option | Locations with a signed purchase and sale agreement | |||||||||||||
Pre-Development | Land purchased, permitting and/or site work | |||||||||||||
Commitments | Signed commitment or build or convert a certain number of hotels by a third party, generally associated with a prior portfolio sale | |||||||||||||
Applications | Third party filed franchise application with deposit | |||||||||||||
Executed | Franchise and development application approved, geography identified and deposits paid, various stages of pre-development and/or under construction |
Distributions and Share Repurchases
On November 9, 2020, the Board of Directors of Extended Stay America, Inc. declared a $0.01 distribution to common shareholders payable on December 8, 2020 to shareholders of record on November 24, 2020. Management and the Boards of Directors of Extended Stay America, Inc. and ESH Hospitality, Inc. intend to review future Company distributions as pandemic and business conditions continue to evolve. ESH Hospitality, Inc. will continue to distribute at least 90% of its pre-tax earnings to maintain its REIT status and expects to make a catch-up dividend in the first quarter of 2021 in order to meet its 2020 REIT distribution requirements.
The Company did not repurchase any Paired Shares during the third quarter and has $101.1 million in authorization outstanding.
Q4 and Full Year 2020 Outlook Update
The Company’s Q4 2020 Outlook is as follows:
in millions, except % | Low | High | |||||||||
Comparable system-wide RevPAR % Chg. | -15 | % | -11 | % | |||||||
Adjusted EBITDA | $ | 78 | $ | 88 | |||||||
The Company’s 2020 Outlook is as follows:
in millions, except % | Low | High | ||||||||||
Comparable system-wide RevPAR % Chg. | -16.5 | % | -15.5 | % | ||||||||
Net Income | $ | 31 | $ | 45 | ||||||||
Adjusted EBITDA | $ | 363 | $ | 373 | ||||||||
Depreciation and amortization | $ | 203 | $ | 206 | ||||||||
Net interest expense | $ | 130 | $ | 130 | ||||||||
Capital expenditures | $ | 170 | $ | 190 | ||||||||
Performance for the fourth quarter is subject to risks and uncertainties, in particular the ongoing impact of the COVID-19 pandemic, which could cause actual results to deviate materially and adversely from current trends and expectations. In such event, the Company does not expect to, and undertakes no obligation to, announce changes in expectations prior to the announcement of actual fourth quarter and full year 2020 results.
Webcast and Conference Call Details
The Company will host a conference call on Tuesday, November 10, 2020 at 8:30 a.m. Eastern Time. The conference call will be webcast simultaneously in the Investor Relations section of the Company’s website at www.aboutstay.com. A replay of the call will be available for 90 days following the webcast on the Company’s website. Alternatively, the conference call can be accessed by dialing 1-877-705-6003 for domestic callers or 1-201-493-6725 for international callers. A telephone replay will be available from shortly after the call until November 17, 2020 and can be accessed by dialing 1-844-512-2921 for domestic callers or 1-412-317-6671 for international callers. The passcode for the replay is 13712117.
RevPAR Index
RevPAR Index is stated as a percentage and calculated by comparing RevPAR for owned hotels or system-wide hotels to the aggregate RevPAR of a group of competing hotels generally in the same market. As such, the RevPAR Index is only a measure of RevPAR relative to certain competing hotels and not a measure of our absolute RevPAR or profitability. We subscribe to STR, Inc. (“STR”), an independent third-party service, which collects and compiles the data used to calculate RevPAR Index. We select the competing hotels included in the RevPAR Index calculation subject to STR’s guidelines. The competing hotels included in STR guidelines will generally include certain hotels that are not considered part of the extended stay lodging segment of the hospitality industry and, instead, fall within the category of short-term stay hotels. STR does not endorse the Company, or any other company, and STR data should not be viewed as investment advice or as a recommendation to take a particular course of action.
Disclosure Regarding Non-GAAP Financial Measures
Hotel Operating Profit, Hotel Operating Margin, EBITDA, Adjusted EBITDA, FFO, Adjusted FFO, Adjusted FFO per diluted Paired Share, Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share (collectively, the “Non-GAAP Financial Measures”), which are detailed in the reconciliation tables that accompany this release, are used by the Company as supplemental performance measures. The Company believes these measures provide useful information to investors regarding our results of operations and allow investors to evaluate the ongoing operating performance of our hotels and facilitate comparisons between the Company and other lodging companies, hotel owners and capital-intensive companies, including those which include a REIT as part of their legal entity structure. The Non-GAAP Financial Measures are not recognized terms under U.S. GAAP. These measures as presented may not be comparable to measures calculated by other companies. These measures should not be considered as alternative measures of, or superior to, operating profit, net income, net income per share or any other measure of the Company, Extended Stay America, Inc. or ESH Hospitality, Inc. calculated in accordance with U.S. GAAP. The Company’s presentation of the Non-GAAP Financial Measures does not replace the presentation of the Company’s consolidated financial statements and other disclosures prepared in accordance with U.S. GAAP.
About Extended Stay America
Extended Stay America® is the leading brand in the mid-priced extended stay segment in the U.S. with 638 hotels. ESH Hospitality, Inc. (“ESH”), a subsidiary of Extended Stay America, Inc. (“ESA”), is the largest lodging REIT in North America by unit and room count, with 562 hotels and over 62,000 rooms in the U.S. ESA also manages or franchises an additional 76 Extended Stay America® hotels. Visit www.esa.com for more information.
Contacts
Investors or Media:
Rob Ballew
(980) 345-1546
investorrelations@esa.com