Extended Stay America and ESH Hospitality announced consolidated results for the three months ended March 31, 2020, that illustrate the relative strength of the extended-stay segment during the COVID-19 pandemic and resulting economic crisis.
“Thanks to the hard work of our nearly 8,000 employees and our franchisee partners every single Extended Stay America hotel has remained open through the pandemic, we have maintained relatively healthy overall occupancy levels, and we have not been forced to enact any widespread furloughs or staff reductions as seen by others in the industry,” said Bruce Haase, ESA’s president/CEO. “Our property teams have done a remarkable job keeping their colleagues and our guests safe while continuing to provide an essential service for their communities and I’d like to thank them for all their hard work.”
Haase pointed out that the company saw the highest revenue per available room index scores in its history in March and April.
“We believe that our positive RevPAR performance relative to the industry during this difficult time period demonstrates the resiliency of our extended-stay business model and the unique characteristics of our business compared to traditional transient lodging brands,” he said. “We are also pleased to see improved RevPAR and occupancy trends during the last few weeks compared to earlier in the nationwide response to the virus. We believe the company is in a strong financial position to navigate through this crisis and well positioned as the economy reopens.”
Financial and Operating Results
Total revenues for the three months ended March 31, 2020, were $266.3 million, a decrease of 4.1 percent over the same period in the previous year due to the impact in March from the COVID-19 pandemic.
Comparable systemwide RevPAR for the three months ended March 31, 2020, declined 5.8 percent over the same period in 2019 to $43.98, driven by a 6.5 percent decline in average daily rate, partially offset by a 60-basis-point increase in occupancy to 71.9 percent. Comparable systemwide RevPAR growth for the first two months of 2020 was 2.6 percent prior to the impact of COVID-19 in March 2020. The company’s positive results for this period were completely offset by March’s RevPAR, which declined approximately 19 percent over March 2019 due to the COVID-19 Pandemic. Depressed levels of RevPAR continued into Q2 2020, although as noted above have shown preliminary signs of moderation.
Hotel operating margin for the three months was 45.7 percent compared to 50.1 percent in the same period in 2019. The decline in hotel operating margin was driven primarily by a decrease in comparable systemwide RevPAR and increased hotel payroll expenses. Hotel operating expenses declined approximately 2.4 percent in March 2020 compared to March 2019.
Net income for the three months was $7.8 million compared to $28.4 million in the same period in 2019, a decrease of 72.4 percent. The decline in net income was due to a decline in comparable systemwide RevPAR and an increase in hotel operating expenses, partially offset by lower income tax expense.
Adjusted earnings before interest, taxes, depreciation and amortization for the three months ended March 31, 2020, was $97.7 million, a decline of 16 percent compared to the same period in 2019. The decline in adjusted EBITDA was due primarily to a decline in comparable systemwide RevPAR as well as an increase in hotel labor expenses. Adjusted EBITDA excludes noncash equity-based compensation expense of $1.1 million, $3.3 million in loss on disposal of assets and $1.1 million in other expenses.
Adjusted funds from operations for the three months was $55.1 million compared to $68.4 million in the same period in 2019. The decline in adjusted FFO was primarily due to a decline in comparable systemwide RevPAR, an increase in comparable company-owned hotel operating expenses and an increase in interest expense, partially offset by lower income tax expense. Adjusted FFO per diluted paired share was 31 cents compared to 36 cents in 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 percent of the common equity and earnings of both Extended Stay America and ESH Hospitality.
Adjusted paired share income for the three months ended March 31, 2020, was $12.2 million, or 7 cents per diluted paired share, compared to $29.5 million, or $0.16 per diluted paired share, in the same period in 2019. The decline in adjusted paired share income per diluted paired share was due to a decline in comparable systemwide RevPAR, an increase in comparable company-owned hotel operating expenses and increased interest expense, partially offset by lower income tax expense. 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.
The company invested $54.6 million in capital expenditures during the first quarter of 2020. This includes $8.9 million in renovation capital and $20 million in capital for ESA 2.0 hotel development and land acquisitions.
Hotel and Development Pipeline
As of March 31, 2020, the company had a pipeline of 73 hotels representing approximately 8,800 rooms with two hotels opened through the end of the quarter. Since the end of the first quarter, one new franchise-built hotel and one new company-owned hotel have opened.
Distributions and Share Repurchases
On May 6, 2020, the board of directors of ESH Hospitality declared a 1-cent distribution to ESH Class A and B shareholders payable on June 4, 2020, to shareholders of record on May 21, 2020. Management and the boards of directors of Extended Stay America and ESH Hospitality intend to review future company distributions once business conditions have stabilized. ESH Hospitality will continue to distribute at least 90 percent of its pretax earnings to maintain its real estate investment trust status.
The company repurchased approximately 2.2 million paired shares in the first quarter of 2020 for an aggregate purchase price of $31 million. The company has not repurchased any paired shares since early February. The company has $101.1 million in authorization outstanding but does not intend to repurchase any additional paired shares for the foreseeable future.
COVID-19 Pandemic Response
The company has taken a number of steps in response to the pandemic in the United States. These include but are not limited to:
- Provided additional cleaning in the company’s hotels, with a focus on high-touch areas, in accordance with Centers for Disease Control and Prevention guidelines
- Purchased and supplied personal protective equipment for employees
- Reduced interactions between guests and associates, including temporarily suspending the grab-and-go breakfast and switching to every other week housekeeping from weekly housekeeping
- Increased effort and focus for the remainder of 2020 to attract guests staying for a month or longer at a time, which has proven significantly more resilient to date than typical transient and group guests in the broader lodging industry
- Reduced payroll hours due to lower occupancy and longer length of stay guests at a number of properties
- Drew $400 million on the company’s revolvers. The company had approximately $725 million in cash, including restricted cash, on its balance sheet as of March 31, 2020.
- Executed an amendment to the corporation revolving credit facility and obtained a suspension of the quarterly tested leverage covenant from the beginning of the second quarter of 2020 through the end of the first quarter of 2021. For the second quarter of 2021 through the fourth quarter of 2021, the leverage covenant calculation has been modified to use annualized EBITDA as opposed to trailing 12-month EBITDA. Additionally, the amendment provides for the corporation to borrow up to $150 million from ESH REIT through an intercompany loan facility. During the suspension period, the company has agreed to maintain minimum liquidity of $150 million and to limit share repurchases and dividend payments made by the corporation.
- Utilizing the Coronavirus Aid, Relief and Economic Security Act act to reduce 2020 tax liabilities and other measures
- Suspended paired share repurchases and reduced the quarterly distribution
- Due to the uncertain nature of local and state responses as well as macroeconomic uncertainty from the COVID-19 pandemic, the company will not update business performance guidance for 2020. The company expects depreciation and amortization for the year between $190 and $195 million, net interest expense between $135 and $145 million, and capital expenditures between $160 to $190 million.
The company will continue to review the situation as conditions improve or decline and may take additional actions as the situation warrants and believes it has sufficient liquidity to withstand a prolonged industry downturn.
To date, the company has not had to close any of its hotels due to COVID-19 and our comparable systemwide occupancy for the month of April was approximately 61 percent. The company experienced comparable systemwide RevPAR declines in April 2020 of approximately 35 percent. The company’s absolute RevPAR and occupancy levels have improved in the previous three weeks compared to the first half of April.
April 2020 saw the company’s highest RevPAR index for a month in the company’s history by a wide margin, with an index in excess of 150, based on preliminary results, compared to approximately 96 for full-year 2019.