Is Extended Stay's Debt Load Too Heavy Of A Burden?

Extended Stay America Inc STAY is an owner/operator of company-branded hotels in North America in the mid-priced, extended-stay segment. While hotels are as tough of a business as any to be in — as they are asset-oriented — Extended Stay America stands out because of its locations and home-like atmosphere.

A Business Apart

The company places its properties in locations that are neighborhood-like instead of just anywhere off the highway.

By recognizing that hotels are far more than big warehouses divided into rooms with running water, and more homes away from home, the company appeals toward a particular clientele.

For some, quite literally, it's just home; Extended Stay America caters specifically toward clients who travel often and are on location for extended periods of time, beyond the typical business-trip length.

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A Solid Clientele Model Isn't Enough

While the business model may be unique, financial issues are not foreign for the 2.76-billion-market-cap company.

At the end of second quarter, the company had net debt of nearly $2.4 billion and market cap of $2.8 billion. Extended Stay America filed for bankruptcy as part of the Lightstone Group in 2009 because of the overwhelming debt load after Blackstone sold it to Lightstone for $8 billion, including debt, in 2007.

Blackstone, with its consortium, bought it back for $3.9 billion, including debt, in 2010. Then, shares were sold to the public in late 2013. Now, the company sports a debt-to-equity ratio of 0.86, which for a company so dependent on the health of the economy is still too high.

Economic Influence

As with any asset-dependent company, particularly those within the travel & leisure segment, Extended Stay America is heavily affected by the broader market. With the S&P 500 up 20 percent since the company's IPO, Extended Stay America is down over 40 percent, perhaps on market sentiment regarding the debt load as still too high.

While the company is returning money back to shareholders with a yield of 5.5 percent, perhaps this capital would be better used paying down debt instead of making Blackstone shareholders extra cash. One little hiccup in the economy and Blackstone could find itself enjoying the Lightstone Group experience of 2009.

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