IPO Preview: Extended Stay America / ESH Hospitality

Nov.12.13 | About: Extended Stay (STAY)

Based in Charlotte, NC, Extended Stay America / ESH Hospitality (NYSE:STAY) scheduled a $551 million IPO on the NYSE with a market capitalization of $3.9 billion at a price range midpoint of $19.50 for Wednesday, November, 13, 2013.

Ten operating company IPOs are scheduled for this week. The full IPO calendar can be found at IPOpremium.

S-1 filed October 30, 2013.

Manager, Joint managers: Deutsche Bank, Goldman Sachs, JPMorgan

Co-Managers: Citi, BofA Merrill Lynch, Barclays, Morgan Stanley, Macquarie Capital, Blackstone Capital Markets, Baird, Houlihan Lokey, Stifel

Summary

STAY is the largest owner/operator of company-branded hotels in North America.

STAY's business operates in the extended stay lodging industry, and it owns and operates 682 hotel properties comprising 75,900 rooms located in 44 states across the United States and in Canada.

For the nine months ended September 2013, revenue was up 14% to $864 million, net income was up 77% to $98 million, average revenue per available room was up 12% to $40.98.

Valuation

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

Annualizing Sept 9 mos

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

Extended Stay America/ ESH Hospitality

$3,900

3.4

29.8

3.0

3.5

14%

Compare

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

Profit

Annualizing Sept 9 mos

Cap

Sls

Erngs

BkVlue

TanBV

Margin

Extended Stay America/ ESH Hospitality

$3,900

3.4

29.8

3.0

3.5

11%

Hyatt (NYSE:H)

$7,450

1.8

31.9

1.6

1.8

6%

Marriott (NASDAQ:MAR)

$13,980

1.1

22.1

-9.9

-4.1

5%

Starwood (NYSE:HOT)

$14,330

2.3

21.2

4.1

7.0

11%

Click to enlarge

Glossary

Conclusion

STAY is focused, has the largest market share in the mid-priced extended stay market, and owns most of its rental properties. Key numbers are trending up (see summary, above). The rating is neutral to positive.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:

History
Blackstone Group LP (NYSE:BX), Centerbridge Partners LP and Paulson & Co. bought STAR out of bankruptcy three years ago. The timing was perfect. The economy was emerging from a recession and interest rates were at historic lows.

Business

STAY is the largest owner/operator of company-branded hotels in North America.

STAY's business operates in the extended stay lodging industry, and it owns and operates 682 hotel properties comprising 75,900 rooms located in 44 states across the United States and in Canada.

STAY owns and operates 630 of its hotels under the core brand, Extended Stay America, which serves the mid-price extended stay segment and accounts for half of the segment by number of rooms in the United States.

In addition, STAY owns and operates three Extended Stay Canada hotels, 49 hotels in the economy extended stay segment under the Crossland Economy Studios and Hometown Inn brands, and also manages two Extended Stay America hotels.

For the year ended December 31, 2012, STAY had total revenues of $1.0 billion, Adjusted EBITDA of $434.3 million and net income of $22.3 million.

U.S. Extended Stay Segment

Extended stay hotels represent a growing segment within the U.S. lodging industry with approximately 355,700 rooms that generated approximately $7.6 billion of revenues for the year ended December 31, 2012, according to The Highland Group. The extended stay segment tends to follow the cyclicality of the overall lodging industry.

Focused on mid-price segment

Extended stay hotels are further differentiated by price point into economy, mid-price and upscale segments. STAY's business is focused primarily on the mid-price extended stay segment, which comprised 39% of the supply of extended stay rooms in 2012.

RevPAR (revenue per available room) growth for the mid-price extended stay segment has outpaced the U.S. lodging industry as a whole since 2009 as well as the economy and upscale extended stay segments.

The mid-price extended stay segment rebounded from an industry trough with RevPAR growth of 24.7% between 2009 and 2012, which was higher than the overall U.S. lodging industry as well as the economy and upscale extended stay segments, each of which grew at 21.8%, 17.1% and 21.2%, respectively, for the same period.

Underserved
STAY believes the extended stay segment is an underserved segment of the overall U.S. lodging industry with the majority of extended stay demand served by traditional hotels.

In 2012, the overall extended stay market represented 7.4% of U.S. room supply. However, stays longer than five nights represented 22% of total U.S. room demand.

Furthermore, the extended stay segment has experienced continued growth, even through several economic downturns, as evidenced by 20 consecutive years of growth in rooms sold. As the extended stay segment continues to increase in size and customer awareness, STAY believes that more guests will opt for extended stay hotels as an alternative to traditional hotels.

Alternative to traditional lodging
STAY's extended stay hotels are designed to provide an affordable and attractive alternative to traditional lodging or apartment accommodations and are targeted toward self-sufficient, value-conscious guests.

STAY's hotels feature fully-furnished rooms with in-room kitchens, complimentary grab-and-go breakfast, free WiFi, flat screen TVs and limited housekeeping service, which is typically provided on a weekly basis.

STAY's guests include business travelers, professionals on temporary work or training assignments, persons relocating, temporarily displaced or purchasing a home and anyone else in need of temporary housing. These guests generally rent accommodations on a weekly or longer term basis.

Competition (click)

5% stockholders

Blackstone Group LP , Centerbridge Partners LP and Paulson & Co. bought STAR out of bankruptcy three years ago.

Seasonality

The lodging industry is seasonal in nature. Based upon the operating history of the hotels, STAY believes that its business is not as seasonal in nature as the overall lodging industry.

However, STAY's revenues are generally lower during the first and fourth quarters of each calendar year as is typical in the U.S. lodging industry.

Because many of STAY's expenses are fixed and do not fluctuate with changes in revenues, declines in revenues cause disproportionate fluctuations or decreases in quarterly earnings and cash flows during these periods.

Use of proceeds

STAY expects to net $509 million from its IPO. Proceeds will be divided between the STAY and ESH REIT based on their estimated valuations.

STAY will use the majority of the proceeds it receives to purchase Class A common stock of ESH REIT to maintain its ownership of 55% of the outstanding common stock of ESH REIT.

STAY will use any remaining balance, which it estimates will be $21.5 million, for general corporate purposes.

ESH REIT intends to use the net proceeds from this offering and the sale of Class A common stock to the STAY and cash on hand to repay indebtedness under ESH REIT's 2012 Mezzanine Loans and assumed mortgage loan.

Disclaimer: This STAY IPO report is based on a reading and analysis of STAY's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.