EQUITY RESEARCH: EXTENDED STAY AMERICA, INC.

Extended Stay America is the leading company in the mid-price extended-stay segment of the accommodation industry in North America. This enterprise is formed by the “Corporation” (or “ESA”) - focused on franchising and the hotel management business - and by its controlled subsidiary, ESH Hospitality (or “ESH REIT”), a Real Estate Investment Trust dedicated to hotel property management. Both these entities had securities that were publicly traded on NASDAQ under the form of a Paired Share, composed by one share of common stock of ESA and one share of Class B common stock of ESH REIT. On June 15th, 2021, the company was acquired in a joint venture between Blackstone and Starwood Capital, in an all-cash transaction at a price of $20.50/share. This day consequently marked the company’s exit of the NASDAQ Global Market, with a closing price of $20.46. This project began in November 2020, with the original goal of determining a price target for 2022YE and issuing an investment recommendation based on it. As the acquisition was announced in March 2021, the purpose of this report became to determine the company’s intrinsic value on June 15th, 2021, and to compare it with the acquisition price. It was defined that a fair valuation would consist of an acquisition price within a 5% range of the company’s intrinsic value. The company’s paired share was valued at $21.58 on its final trading day, using the WACC method in a DCF model. This valuation was complemented with two additional DCF approaches (APV and Flow-to-Equity), and a relative valuation, based on the EV and Price multiples of a group of selected peers. The output obtained implies that the acquisition price is 5.0% below intrinsic value, meaning the company was fairly valued – although at the threshold of being considered undervalued by the acquirers. The current economic uncertainty regarding the COVID-19 pandemic can largely explain more conservative investment approaches, despite an expected gradual recovery. On the other hand, the company’s business model proved to be outstandingly resilient to this downturn, and its strategic plan, along with the launch of its new premium brand, provide a solid positive outlook on the future of Extended Stay America. JEL classification: F01; G10; G17; G30; G32; G34