Extended Stay America, Inc. STAY, along with its subsidiary, ESH Hospitality, Inc., announced that it completed disposing of 14 branded Extended Stay America hotels. These branded hotels, located in Ohio, Georgia and Illinois, were bought by a subsidiary of Singerman Real Estate, LLC. Singerman Real Estate is a Chicago-based real estate investment firm.
Notably, with the recent portfolio sale, the company has completed 77 total dispositions since it launched “ESA 2.0” in June 2016. In 2018, Extended Stay America sold 72 properties, 71 out of which are under long-term franchise agreements.
Details of the Deal
The disposition of each of the 14 branded hotels has individual franchise agreements. The hotels are to be managed by Sandpiper Hospitality. Additionally, as part of the acquisition deal, Singerman Real Estate is supposed to build or convert seven extra Extended Stay America hotels in the future.
Rationale Behind the Sellout
Extended Stay America has been increasingly focusing on strengthening its franchise relations of late. The move underscores the company’s aim to take its franchise hotel count to 150. In the third quarter of 2018, Extended Stay America already sold 32 hotels and mentioned the disposition of 14 hotels in the fourth quarter of 2018.
The asset disposition is part of Extended Stay America’s strategic endeavors. The company is refocusing on core customers instead of fleeting customers. Additionally, its initiatives toward controlling costs and decreasing capital requirement for fresh hotel builds are commendable.
Extended Stay America is banking on increasing unit growth as well. By 2021, the company’s portfolio will have 700 Extended Stay America branded properties, out of which nearly 70% will be owned or operated and 30% will be franchised. Meanwhile, during the third quarter, the company’s total pipeline grew by over 50%.
We believe that the disposition of assets will help the company lower its general and administrative expenses, which in turn should boost net income. In the third quarter of 2018, net income increased 14.3% year over year, deriving the synergies from asset disposition. We expect net income in the fourth quarter to benefit from the same.
Further, for 2018, Extended Stay America expects total revenues (including franchise and management revenues, and asset dispositions) of $1,271-$1,277 million compared with $1,257-1,279 million stated earlier.
Backed by the company’s efforts, its shares have gained 7.6% over the past year, outperforming the industry’s 18% decline.
Zacks Rank & Stocks to Consider
Extended Stay America currently has a Zacks Rank #3 (Hold). A few better-ranked stocks in the Consumer Discretionary sector include SeaWorld Entertainment SEAS, Callaway Golf ELY and Malibu Boats MBUU, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Current-year earnings for SeaWorld, Callaway Golf and Malibu Boats are expected to increase 138.1%, 98.1% and 30.8%, respectively.
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