EXTENDED STAY AMERICA RESPONDS TO TARSADIA AND HIGHLIGHTS COMPELLING REASONS TO SUPPORT THE TRANSACTION WITH BLACKSTONE AND STARWOOD CAPITAL.
Highlights:
New Letter to Shareholders Provides Comprehensive Discussion of the Transaction Rationale and the Immediate, Certain and Compelling
Addresses Tarsadia's Misleading and Flawed Arguments
Urges Shareholders Vote 'FOR' the Transaction on the WHITE Company Proxy Card in Vote Set for
The transaction has received all regulatory approvals and is on track to close on
Compelling Shareholder Value: The Right Price, The Right Process, The Right Time
The letter provides a comprehensive discussion of the history, and the compelling strategic and economic rationale for the transaction with
The Right Price: At
The Right Process: The transaction marks the culmination of the Company's thorough, multi-year actions to explore value-enhancing alternatives, during which time only
The Right Time: The Company's unique extended stay business model and recently implemented strategic initiatives led to significant operating and share price outperformance during the pandemic. The transaction comes at a time and at a valuation such that the future upside expected in the Company's 5-year business plan, which projects 2023 EBITDA to exceed 2019 by approximately 10%, is reflected in the transaction price on a time and risk-adjusted basis.
Tarsadia's Misleading Claims and Highly Flawed Arguments Offer No Clear Path to Value Creation
Extended Stay welcomes open communication with its shareholders and constructive input toward the shared goal of enhancing shareholder value. However, many of Tarsadia's claims are misleading, as detailed in the letter, and provide no credible alternative path to value creation. Among them:
Tarsadia is focused on an agenda of ill-advised alternatives for the Company: After nine months of engagement, Tarsadia has offered no new and credible ideas for value creation, and instead has focused on ill-conceived and even irresponsible ideas of levered share repurchases and variations on OpCo/PropCo that bear no merit.
Tarsadia's valuation claims are flawed and hypocritical: In Tarsadia's own 'white paper,' shared with the Company in
Tarsadia's claims that the two dissenting directors were 'ignored' and 'brushed aside' are patently false: Strong and diverse opinions are to be expected, particularly following a pandemic when views of operating outlook, risk tolerance and value may vary. The Boards are proud of having created a forum for opposing views to be voiced, listened to and respected. The lack of unanimity reflects best-in-class governance and a highly qualified board with independence and diversity of thought.
Extended Stay strongly recommends that shareholders vote 'FOR' the proposal on the WHITE proxy card to approve the transaction and secure the certain, immediate and compelling value of
The full text of the letter to shareholders follows:
Dear Extended Stay America Shareholders,
The Special Meetings of Shareholders to vote on the proposed sale of
Your vote 'FOR' the transaction is critical to protecting your opportunity to realize immediate, certain and compelling value through a sale of the Company for
At the announcement of this transaction on
The Right Timing: Why We Support the Transaction 'Now'
We fundamentally believe that the transaction as proposed today, at
Unique Platform Drives Unique Results
Over many years, the market has told us quite clearly that the value for such a platform, regardless of ownership, management team or specific strategy, is roughly 9-10x EBITDA. It has been our constant objective to seek to improve both our EBITDA and the valuation multiple of that EBITDA. As our track record over the last eight years as a public company has shown, we have considered and explored value creating opportunities through strategic initiatives, a separation of our operations from our real estate, asset sale transactions - and everything in between. When the global pandemic shined a spotlight on our truly unique and resilient business model - as evidenced by our significant outperformance versus other lodging companies from a fundamental and market valuation standpoint (as referenced in the charts below) - the substantial outperformance of our shares suggested an overdue and welcome recognition of performance and value. And when we received a proposal from
Extended Stay Has Dramatically Outperformed the Broader Lodging Sector Since COVID On Fundamentals...1
Figure 1 is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/5aeeb251-ee95-4995-9c82-b43dcc2dad71
...Leading to Dramatic Outperformance Not Only Compared to Lodging Companies Through the Pandemic, but Also the Broader Markets2
Figure 2 is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/24811b9d-e23c-4d9f-8981-b5fab846bf61
Extended Stay is a unique business, with unique opportunities and risks. We do not view the Company as a 'traditional' lodging company, nor do our guests, associates, shareholders and broader stakeholders for that matter. Central to our consideration of the pending transaction is our assessment of company-specific opportunities reflected in our strategic plan, associated execution and broader market risks, and probability-weighted outcomes. We are optimistic about our prospects as we implement our strategic plan. At the same time, in evaluating a premium proposal such as the one that these negotiations brought before us, we needed to translate our optimism into specific expectations for the future, with related sensitivities, and then consider associated upside and downside possibilities, to determine the best outcome for shareholders.
To assess the execution risk of our business plan, the Boards placed significant weight on the people in the best position to provide that informed input - our management team. Management's plan projects EBITDA to recover to above 2019 levels by 2023 -- and that is only if we are able to realize the benefit of over
Transaction Value Trumps Prospects of Unlikely Long-Term Multiple Re-Rating
The value of the Company's paired shares is a function of both its earnings and the valuation multiple applied to those earnings. And so, the evaluation of a purchase offer also must consider the opportunities and risks associated with potential future earnings multiples. In our case, that requires an assessment of the likelihood that the Company will garner a significant premium to historical multiple levels in the years ahead. As depicted in the chart below, when evaluating the proposed purchase offer against the prospects of remaining public, we estimate that the Company would need to sustain close to an 11x EBITDA multiple in the future, nearly a 2x multiple premium to its pre-pandemic level and a level the Company has never come close to sustaining in its near decade as a public company, in order to justify not transacting at
Figure 3 is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/457d6274-debc-4374-a926-7820038e3b88
The Right Price: Unpacking ESA's Valuation Multiple and Transaction Premium
As illustrated in the chart above, price and timing are inextricably linked. Said differently,
By any measure,
The
51% premium to the company's pre-pandemic share price4
15% premium to the
23% premium to the 30-trading day volume weighted average price
28% premium to the 3-month volume weighted average price
44% premium to the 6-month volume weighted average price
76% premium to the 12-month volume weighted average price
15% premium to the 52-week high closing price
Further, since the sale transaction announcement on
Figure 4 is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/36dce966-1e9d-47af-ba84-7f8862a0b6c6
The Facts About Our Valuation Multiple
Extended Stay's valuation multiple is a central pillar to the assessment of whether or not to transact at
The transaction values the Company at 15.6x 2020 EBITDA, 13.0x 2021 estimated consensus EBITDA and 11.6x 2022 estimated consensus EBITDA. These represent significant premiums to where Extended Stay has consistently traded over its time as a public company, averaging a 9.5x NTM EBITDA multiple over the five years prior to the pandemic, and 9.1x NTM EBITDA for the year prior to the pandemic.7
Implied Transaction Multiple Far Exceeds Extended Stay's Past Trading Multiples Over Any Measurable Period
Figure 5 is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/e96b61c5-4643-48a8-971b-6e9d02a62caa
Tarsadia's opposition to this transaction is premised on misleading and hypocritical claims about the Company's multiple. Tarsadia claims that the Company's multiple should be more in-line with luxury hotel brands, luxury and upper upscale hotel REITs and pure play hotel franchise companies, which have typically been valued in the 15-20x range. The market disagrees and has consistently valued Extended Stay at a much lower relative EBITDA multiple than these companies. In its prepared materials, Tarsadia has inaccurately claimed the NTM EBITDA multiple implied by the pending transaction is '11.6x', which is in fact the 2022E or 2-year forward multiple (see chart above indicating the 2021E multiple is 13.0x). Comparing Extended Stay to these fundamentally different businesses and passing fiction as fact is not useful, practical or responsible in making this decision for our shareholders.
Any suggestion that Extended Stay should trade or transact at a run-rate multiple more in line with luxury and upper upscale hotel brands and REITs (i.e. 15-20x) is simply not credible. In fact, these recent claims from Tarsadia run directly counter to the views they previously shared with us. While their recent public disclosures reference some of their ideas for value creation, they fail to disclose that just a few months ago, in their so-called 'white paper' shared with the Company, they asserted that Extended Stay should be valued at 10x EBITDA as a standalone public company, which, according to their analysis, yielded a valuation for the Company of
We agree that Extended Stay's valuation discount compared to other lodging companies warrants further exploration. It is perhaps one of the most important questions our Boards and management team over the years have endeavored to understand and address. After all, closing the persistent ~2x multiple discount to the select service lodging REITs (arguably our 'closest' comparison group) would create massive value uplift.
In order to understand our multiple discount, one must first understand the unique nature of our business. Our business model has many advantages compared to other publicly traded lodging companies: operational control of our assets, earnings visibility with ~30-day average length of stay, higher margins and more stable performance. But our model has many disadvantages as well: slower growth in upcycles compared to higher chain scales and an outsized capital expenditure burden that comes with long-duration guest stays and the oldest average age portfolio among all lodging REITs (21 years vs.
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