STAY - Extended Stay

[Spekulatius]

Clarkstreetvalue had a writeup about this stock a while ago and it has become cheaper - too cheap in mine opinion. I recenroy established a position

https://clarkstreetvalue.blogspot.com/2019/08/extended-stay-america-rejects-split-up.html

 

Results have been ho hum recently in terms of ARPU and costs, like with the rest of the hotel industry, but DTAY is cheaper than most. What distinguished STAY is that they are do concentrated on the low end /extended stay Hotel with limited  service and that that also own a small but growing franchising business. With the latter they build the hotels, but resell them, but keep them under their franchise umbrella, similar to what pure plays like MAR or IHG are doing. it’s not a major part of the rig business yet, but should be growing over time. Since the stock sells at <9x EBITDA, selling hotel at 15x EBITDA (their average axis was 15-16x) while keeping the franchising should add quite a bit of value over time. A ~7% dividend yield doesn’t hurt either.

 

Anyways, that the idea. Hotel business are inherently sensitive to the economy so a downturn could hurt. That said, a low end Hotel business most likely will hurt less than those at the a high end. I like it good enough for a position and added to my shares today.

[Foreign Tuffett]

This is an interesting idea.....

 

It isn't clear to me at first glance why they have struggled to create value over an extended period of time. The company went bankrupt in 2007, went through a period of private equity ownership, and IPO'd in late 2013 at $20. Obviously they pay a fat dividend, so just looking at the share price is a little misleading, but there may be something structurally wrong here.

 

Maybe their properties are just too old (19.5 years on average per 2018 10-K)?

 

Maybe they are sub scale (single brand, single segment), and getting out-competed by brands with more robust loyalty programs?

 

Finally, I would think this is a buyout candidate, particularly given the new CEO sold a similar hotel company company several years ago.

 

 

 

 

 

 

[Spekulatius]

I have stayed in their properties from time and time (when relocating) and they are no frills (2*) but OK. pretty much anything else for the same price and in similar locations is pretty much guaranteed to be a dump. they are typically located in suburbs or mid sized towns, near industrial/ multiuse areas cheaper real estate near highways. Cookie cutter building that tend to look the same. It’s a bit like self storage in terms of real estate.

 

Reading back the IPO prospectus, it seems like the rock was overvalued and over leveraged (debt ~6x EBITDA) on the back of strong trends (Revpar, margins etc) when the economy and the hotel business bounced back from the recession. Turn growth stalled and multiples compressed, despite the company reducing leverage (to about 4x EBITDA - still high!) and buying back some stock with proceeds from asset sales. I think per share it’s worth more now than in 2014 post IPO, based on eyeballing the numbers, but the market multiple is significantly lower.

 

Maybe it goes full circle private equity again -  it gets bought by WH, I don’t know. It certainly looks very undervalued as is, even discounting current weak operating trends.

[StevieV]

Spek,

 

I like this idea.  Not a good deal at the IPO, but maybe today.  As you say, overleveraged at the IPO.  They've deleveraged, the price has gone down and the dividend has gone up.  Plus, I like expanding the franchising business.  If they can sell at higher multiples and re-invest in new properties and share buybacks that is great, though I am not sure it is necessary for the stock to work out.

 

The Focused Compounding podcast had an interesting podcast on leverage a little while back.  I'm not sure it was revolutionary, but it helped my thinking around leverage.  In simplest terms, the change in leverage matters.  Adding leverage can goose returns.  Decreasing it painfully hurts returns.  STAY has been in the painful deleveraging stage and is moving on to a steady state.

 

Seems like STAY has a reasonable niche.  I am not sure it is more recession resistant than other hotels, as they may be more business dependent.  Looks like they have 60%+ business, but I am not sure what other hotels are at.  Business isn't all bad though.  Not like they'll start putting people up at Air BnBs.

 

What do you think of the new CEO?  I didn't look at it closely yet, why the change?