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Extended Stay America Announces Third Quarter 2018 Results

Extended Stay America Announces Third Quarter 2018 Results
  • Net Income of $75.7 million for the third quarter
  • Adjusted EBITDA1 of $173.7 million for the third quarter
  • Comparable system-wide RevPAR grows 1.9% for the third quarter
  • Announces hotel asset dispositions and increased hotel pipeline

CHARLOTTE, N.C., Oct. 31, 2018 (GLOBE NEWSWIRE) -- Extended Stay America, Inc. and ESH Hospitality, Inc. (STAY) (together, the “Company”) today announced consolidated results for the three and nine months ended September 30, 2018.

Third quarter 2018 Highlights

  • Total revenues of $351.1 million
  • Comparable system-wide Revenue Per Available Room (“RevPAR”) grew 1.9% to $55.57
  • Adjusted EBITDA of $173.7 million
  • Adjusted Funds From Operations (“Adjusted FFO”)1 of $0.61 per diluted Paired Share, an increase of 7.5%
  • Adjusted Paired Share Income1 of $0.39 per diluted Paired Share, an increase of 11.5%

Nine months 2018 Highlights

  • Total revenues of $985.3 million
  • Comparable system-wide RevPAR grew 2.3% to $52.35
  • Adjusted EBITDA of $473.2 million
  • Adjusted FFO of $1.60 per diluted Paired Share, an increase of 11.2%
  • Adjusted Paired Share Income of $0.94 per diluted Paired Share, an increase of 15.7%

Extended Stay America’s President and Chief Executive Officer, Jonathan Halkyard, commented, “We made strong progress on our growth strategy during the third quarter. In the last few months, we completed the sale of two portfolios totaling 32 hotels, each of which is now a franchise hotel.”

Mr. Halkyard continued, “Each of these transactions come with agreements to develop additional Extended Stay America hotels. Those commitments, combined with our on-balance sheet development progress and new franchise applications, grew our pipeline to 52 hotels, an increase of more than 50% during the quarter.”

___________________________________________
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, 2018 were $351.1 million, an increase of 0.1% over the same period in 2017. Revenue growth was driven by an increase in RevPAR and franchise and management fees, largely offset by hotel dispositions in 2017 and in 2018. Total room and other hotel revenues on a comparable Company-owned basis increased 2.3% for the quarter. Total revenues for the first nine months of 2018 were $985.3 million, an increase of 0.5% over the same period in 2017. Total room and other hotel revenues on a comparable Company-owned basis increased 2.5% for the first nine months of 2018 compared to the same period in 2017.

Comparable system-wide RevPAR for the three months ended September 30, 2018 grew 1.9% over the same period in 2017 to $55.57, driven by an improvement in average daily rate (“ADR”) of 0.5% and a 110 basis point increase in occupancy. Comparable Company-owned RevPAR increased 2.0% during the quarter to $57.15. Total Company-owned RevPAR increased 2.7% during the quarter, reflecting the sales of non-core hotels and the increase in comparable Company-owned RevPAR. Comparable system-wide RevPAR for the first nine months of 2018 grew 2.3% over the same period in 2017.

Hotel Operating Margin1 for the three months ended September 30, 2018 was 55.5% compared to 57.2% in the same period in 2017.  The decline in Hotel Operating Margin was driven primarily by an increase in payroll, reservation, marketing and maintenance expenses. Hotel Operating Margin for the first nine months of 2018 was 54.8% compared to 55.7% in the same period in 2017.

Net income for the three months ended September 30, 2018 was $75.7 million compared to $66.3 million in the same period in 2017, an increase of 14.3%. Net income in the third quarter was favorably impacted by decreases in our effective tax rate, depreciation, general and administrative expenses and a gain on asset dispositions. Income tax expense for the three months ended September 30, 2018 was $15.0 million compared to $20.3 million in the same period in 2017. Net income for the first nine months of 2018 was $172.4 million compared to $132.0 million in the same period in 2017, an increase of 30.5%.

Adjusted EBITDA for the three months ended September 30, 2018 was $173.7 million, a decline of 3.7% compared to the same period in 2017. The decline in Adjusted EBITDA was due primarily to asset dispositions in 2017 and 2018 resulting in lost contribution of approximately $5.7 million. Adjusted EBITDA excludes non-cash equity-based compensation expense of $1.8 million, a $3.5 million gain on asset dispositions and net expense of $1.5 million in other items. Adjusted EBITDA for the first nine months of 2018 was $473.2 million, a decline of 2.0% compared to the same period in 2017, due to asset dispositions in 2017 and 2018 resulting in lost contribution of approximately $13.9 million.  

Adjusted FFO for the three months ended September 30, 2018 was $115.1 million compared to $109.3 million in the same period in 2017. The increase in Adjusted FFO was primarily due to a lower effective tax rate. Adjusted FFO per diluted Paired Share was $0.61 compared to $0.57 in the same period in 2017, an increase of 7.5%. Adjusted FFO for the first nine months of 2018 was $305.0 million compared to $279.9 million in the same period in 2017. Adjusted FFO per diluted Paired Share for the first nine months of 2018 was $1.60 compared to $1.44 in the same period in 2017, an increase of 11.2%. 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, 2018 was $74.0 million, or $0.39 per diluted Paired Share, compared to $67.8 million, or $0.35 per diluted Paired Share, in the same period in 2017, an increase of 11.5% per diluted Paired Share. The increase in Adjusted Paired Share Income per diluted Paired Share was due to a lower effective tax rate, lower depreciation expense and a reduction in share count as a result of Paired Share repurchases. Adjusted Paired Share Income for the first nine months of 2018 was $177.8 million, or $0.94 per diluted Paired Share, compared to $156.8 million, or $0.81 per diluted Paired Share, in the same period in 2017, an increase of 15.7% per diluted Paired Share. 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

The Company invested $57.8 million in capital expenditures during the third quarter of 2018. This included approximately $22.4 million in capital expenditures for new hotel development and conversions. For the first nine months of 2018, the Company invested $147.5 million in capital expenditures.

Asset Dispositions and Acquisitions

The Company completed the sale of two portfolios totaling 32 hotels during the third quarter for gross proceeds of $124.6 million, including pre-paid franchise application and development fees. The Company expects to complete the sale of an additional portfolio of 14 hotels in November 2018, subject to customary due diligence. Each of these sold portfolios come with franchise agreements on all of the hotels sold and with agreements from the buyers to develop or convert at an additional five or more Extended Stay America hotels each, which we expect to be completed over the next several years.

In the third quarter of 2018, the Company purchased a new hotel under construction for approximately $12.3 million. That hotel is expected to open in early November 2018.

Hotel and Development Pipeline

As of September 30, 2018, the Company had a pipeline of 52 hotels representing approximately 6,500 rooms.

           
  Company Owned Pipeline & Recently Opened Hotels as of September 30, 2018  
  Under Option   Pre-Development   Under Construction   Total Pipeline     Opened YTD  
  # Hotels # Rooms   # Hotels # Rooms   # Hotels # Rooms   # Hotels # Rooms     # Hotels # Rooms  
  8 992   8 1,016   2 231   18 2,239     1 115  
                                 
                                 
  Third Party Pipeline & Recently Opened Hotels as of September 30, 2018  
  Commitments   Applications   Executed   Total Pipeline     Opened YTD  
  # Hotels # Rooms   # Hotels # Rooms   # Hotels # Rooms   # Hotels # Rooms     # Hotels # Rooms  
  27 3,348   6 744   1 124   34 4,216     0 0  
                                 
                                 
                                 
  Definitions                              
  Under Option   Locations with a signed purchase and sale agreement                
  Pre-Development Land purchased, permitting and/or site work                  
  Under Construction Hotel is under construction                      
  Commitments   Signed commitment to build a certain number of hotels by a third party            
  Applications   Third party filed franchise application with deposit                
  Executed   Franchise application approved, various stages of pre-development and/or under construction      
                                 

Distributions and Share Repurchases

On October 31, 2018, the Boards of Directors of Extended Stay America, Inc. and ESH Hospitality, Inc. declared cash distributions totaling $0.22 per Paired Share for the third quarter of 2018. The distributions are payable on November 29, 2018 to shareholders of record as of November 15, 2018. 

During the third quarter of 2018, the Company repurchased 0.6 million Paired Shares for an aggregate purchase price of $11.7 million. For the first nine months of 2018, the Company repurchased 4.0 million Paired Shares for an aggregate purchase price of $79.7 million. As of market close on October 31, 2018, the Company had approximately $113.5 million in share repurchase authorization remaining.

2018 Outlook

The Company’s outlook for 2018 is updated as follows:

Full Year 2018          Updated Outlook
      Previous Outlook  
in millions, except % and # of hotels         Low   High       Low   High  
                             
# of hotels owned on 12/31/18         554       600  
Total Revenues         $ 1,271     $ 1,277         $ 1,257     $ 1,279  
Comparable system-wide RevPAR % Δ           1.75 %      2.25 %         1.0 %     2.75 %
Net income         $ 202     $ 209         $ 194     $ 208  
Adjusted Paired Share Income/Paired Share         $ 1.10     $ 1.14         1.07     $ 1.15  
Adjusted EBITDA         $ 596     $ 603         $ 595     $ 610  
Depreciation and amortization         $ 209     $ 209         $ 213     $ 213  
Net interest expense         $ 128     $ 128         $ 130     $ 130  
Effective tax rate           16.5 %     17 %         16.5 %     17 %
Capital expenditures         $ 215     $ 235         $ 205     $ 235  
Expected capital returns         $ 260     $ 300         $ 260     $ 300  

Our updated guidance reflects the sale of 32 hotels in the third quarter of 2018 as well as expected disposition of 14 hotels in the fourth quarter of 2018, which reflects lost contribution of approximately $4.5 million in the fourth quarter of 2018 for those 46 hotels. Our prior revenue guidance was for Company owned hotel revenue, while our updated revenue guidance for 2018 includes franchise and management revenues and 46 additional asset dispositions.

Webcast and Conference Call Details

The Company will host a conference call on Thursday, November 1, 2018 at 8:00 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 8, 2018, 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 13683749.

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.

Forward Looking Statements

This release contains forward-looking statements within the meaning of the federal securities laws. Forward looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results or performance to differ from those projected in the forward-looking statements, possibly materially. For a description of factors that may cause the Company’s actual results or performance to differ from projected results or performance implied by forward-looking statements, please review the information under the headings “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” included in the Company’s combined annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 27, 2018 and other documents of the Company on file with or furnished to the SEC. Any forward-looking statements made in this release are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, will have the expected consequences to, or effects on, the Company, its business or operations.  Except as required by law, the Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. We caution you that actual results may differ materially from what is expressed, implied or forecasted by the Company’s forward-looking statements.

About Extended Stay America
Extended Stay America, Inc. (“ESA”) and its brand Extended Stay America® is the leading brand in the mid-priced extended stay segment in the U.S with 626 hotels, with approximately twice as many rooms as its nearest competitor.  ESA’s subsidiary, ESH Hospitality, Inc. (“ESH”), is the largest lodging REIT in North America by unit and room count, with 567 hotels and approximately 62,700 rooms in the U.S. ESA also manages or franchises an additional 59 Extended Stay America® hotels. Visit www.esa.com for more information.

Contacts
Investors or Media:
Rob Ballew
(980) 345-1546
investorrelations@esa.com

  EXTENDED STAY AMERICA, INC. 
  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
  (In thousands, except per share data)
  (Unaudited)
                       
  Three Months Ended   Nine Months Ended
  September 30,   September 30,
  2018
  2017   % Variance   2018   2017   % Variance
            REVENUES:          
  $   340,917     $   345,089     (1.2 )%   Room revenues $   958,075     $   963,505     (0.6 )%
      5,943         5,777     2.9 %   Other hotel revenues     16,710         16,715     (0.0 )%
      1,446       -     n/a     Franchise and management fees     3,493       -     n/a  
      348,306         350,866     (0.7 )%       978,278         980,220     (0.2 )%
                       
      2,770       -     n/a   Other revenues from franchised and managed properties     7,066       -     n/a  
                                       
      351,076         350,866     0.1 % Total revenues     985,344         980,220     0.5 %
                       
            OPERATING EXPENSES:          
      156,341         152,155     2.8 %   Hotel operating expenses     443,025         442,726     0.1 %
      21,921         23,823     (8.0 )%   General and administrative expenses     71,406         75,560     (5.5 )%
      52,138         57,314     (9.0 )%   Depreciation and amortization     159,652         172,789     (7.6 )%
      -        -     n/a   Impairment of long-lived assets     43,600         20,357     114.2 %
      230,400         233,292     (1.2 )%       717,683         711,432     0.9 %
                       
      2,770       -     n/a   Other expenses from franchised and managed properties     7,066       -     n/a  
                                       
      233,170         233,292     (0.1 )% Total operating expenses     724,749         711,432     1.9 %
                       
      3,517       -     n/a   GAIN (LOSS) ON SALE OF HOTEL PROPERTIES     41,599         (1,897 )   2,292.9 %
                       
      39         344     (88.7 )% OTHER INCOME     501         2,400     (79.1 )%
                                       
      121,462         117,918     3.0 % INCOME FROM OPERATIONS     302,695         269,291     12.4 %
                       
      (251 )       (278 )   (9.7 )% OTHER NON-OPERATING (INCOME) EXPENSE     48         (426 )   111.3 %
                       
      31,007         31,651     (2.0 )% INTEREST EXPENSE, NET     95,072         96,958     (1.9 )%
                                       
      90,706         86,545     4.8 % INCOME BEFORE INCOME TAX EXPENSE     207,575         172,759     20.2 %
                       
      15,014         20,295     (26.0 )% INCOME TAX EXPENSE     35,218         40,721     (13.5 )%
                                       
      75,692         66,250     14.3 % NET INCOME      172,357         132,038     30.5 %
                       
      (3,790 )       (12,374 )   (69.4 )% NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (1)     (20,547 )       (3,286 )   525.3 %
                                       
  $   71,902     $   53,876     33.5 % NET INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS $   151,810     $   128,752     17.9 %
                                       
                       
  $   0.38     $   0.28       NET INCOME PER EXTENDED STAY AMERICA, INC. COMMON SHARE - DILUTED $   0.80     $   0.66      
                                       
      189,253         193,331       WEIGHTED-AVERAGE EXTENDED STAY AMERICA, INC. COMMON SHARES OUTSTANDING - DILUTED     190,111         194,001      
                                       
  (1) Noncontrolling interests in Extended Stay America, Inc. include approximately 43% of ESH REIT's common equity as of September 30, 2018 and 2017.
 
                       
                       
            CONSOLIDATED BALANCE SHEET DATA          
            AS OF SEPTEMBER 30, 2018 AND DECEMBER 31, 2017          
            (In thousands)          
            (Unaudited)          
              September 30,   December 31,    
              2018   2017    
            Cash and cash equivalents $   370,355     $   113,343      
            Restricted cash $   16,286     $   37,631      
            Total assets $   4,032,572     $   4,076,005      
            Total debt, net of unamortized deferred financing costs and debt discounts (2) $   2,478,861     $   2,541,901      
            Total equity $   1,318,499     $   1,345,847      
                       
            (2)  Unamortized deferred financing costs and debt discounts totaled approximately $42.9 million and $49.0 million as of September 30, 2018 and December 31, 2017, respectively.    
               
                       

 

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  EXTENDED STAY AMERICA, INC.   
  KEY OPERATING METRICS  
                         
                         
   COMPARABLE SYSTEM-WIDE OPERATING METRICS  
  FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017  
  (Unaudited)  
                         
  Three Months Ended   Nine Months Ended  
  September 30,   September 30,  
    2018       2017     Variance     2018       2017     Variance  
    625   (1)   625   (1)   -   Number of hotels (as of September 30)   625   (1)   625   (1)   -    
    68,780   (1)   68,780   (1)   -   Number of rooms (as of September 30)   68,780   (1)   68,780   (1)   -    
    80.1%   (1)   79.0%   (1) 110 bps Comparable System-Wide occupancy   76.0%   (1)   76.2%   (1) (20) bps  
    $69.35   (1)   $69.01   (1) 0.5 % Comparable System-Wide ADR   $68.85   (1)   $67.15   (1) 2.5 %  
    $55.57   (1)   $54.55   (1) 1.9 % Comparable System-Wide RevPAR   $52.35   (1)   $51.16   (1) 2.3 %  
                         
                         
                         
  COMPARABLE COMPANY-OWNED OPERATING METRICS  
  FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017  
  (Unaudited)  
                         
  Three Months Ended   Nine Months Ended  
  September 30,   September 30,  
    2018       2017     Variance     2018       2017     Variance  
    80.7%   (2)   79.6%   (2) 110 bps Comparable Company-Owned occupancy   76.2%   (3)   76.4%   (3) (20) bps  
    $70.84   (2)   $70.41   (2) 0.6 % Comparable Company-Owned ADR   $69.64   (3)   $67.83   (3) 2.7 %  
    $57.15   (2)   $56.03   (2) 2.0 % Comparable Company-Owned RevPAR   $53.08   (3)   $51.82   (3) 2.4 %  
                         
                         
     
  COMPANY-OWNED HOTEL OPERATING METRICS  
  FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017  
  (Unaudited)  
                         
  Three Months Ended   Nine Months Ended  
  September 30,   September 30,  
    2018       2017     Variance     2018       2017     Variance  
    80.2%   (4)   79.0%   (4) 120 bps Company-Owned Occupancy   76.0%   (4)   76.1%   (4) (10) bps  
    $69.85   (4)   $69.01   (4) 1.2 % Company-Owned ADR   $69.24   (4)   $67.15   (4) 3.1 %  
    $56.02   (4)   $54.55   (4) 2.7 % Company-Owned RevPAR   $52.65   (4)   $51.13   (4) 3.0 %  
                         
                         
                         
  (1) Includes hotels owned, franchised and/or managed for the full three and nine month periods ended September 30, 2018 and 2017.          
                         
  (2) Includes 566 hotels owned and operated by the Company for the full three month periods ended September 30, 2018 and 2017.          
       
  (3) Includes 598 hotels owned and operated by the Company for the six month periods ended June 30, 2018 and 2017, and 566 hotels owned and operated by the Company for the three month periods ended September 30, 2018 and 2017.