STAY Extended Stay America Inc

You are being asked by STAY to adopt the Merger Agreement. It is a condition to the consummation of the Merger that STAY’s shareholders adopt the Merger Agreement. For the reasons discussed below, we oppose the Merger and the adoption of the Merger Agreement. To that end, we are soliciting your proxy to vote AGAINST Proposal 1.

We recommend that you demonstrate your opposition to the proposed Merger and send a message to the Board that the proposed Merger is not in the best interest of STAY’s shareholders by using the enclosed GOLD proxy to vote by telephone or internet today. Alternatively, you may sign, date and return the enclosed GOLD proxy card by mail.

Reasons to Vote Against Adopting the Merger Agreement:

Tarsadia believes the Company’s proposed sale to Blackstone and Starwood is not in the best interests of STAY’s shareholders for two primary reasons: first, because it undervalues the Company and, second, because it comes just as STAY and the entire lodging industry emerges from the COVID-19 pandemic to embark on a significant, multi-year recovery in revenue per available room (“RevPAR”) and earnings.

But don’t just take our word for it.

Two of ESH’s very own directors—Neil Brown and Simon Turner—voted AGAINST the signing of the Merger Agreement because they believed that now is “not the appropriate time to sell” especially “in light of the recent rebound in stock prices in the hotel sector, potential for further recovery […], the low interest rate environment, and [the] perspective that […] management […] could generate superior value by executing their business plan” and, importantly, that the transaction price was “insufficient.”²

It is extremely unusual that two sitting directors – who have full knowledge of the Company’s internal plans, risks and value creation opportunities – vote on the record to oppose a merger transaction that is nevertheless approved by the rest of the Board. We believe shareholders should be extremely concerned that these two directors had such significant reservations about the price and timing of the transaction that they voted against the signing of the Merger Agreement.

We believe Messrs. Brown and Turner have it right.

The Timing of the Merger is Wrong

STAY and the lodging sector more generally are at an inflection point. Hotel companies are just emerging from the worst downturn the industry has ever seen. The tailwinds of COVID vaccine distribution, pent-up travel demand and fiscal stimulus create a massively positive backdrop for lodging companies over the next several years. April 2021 will mark the one-year anniversary since the U.S. hotel RevPAR troughed at a year-over-year decline of over 80%.

This year will be the first year of a new lodging cycle, which has historically been the most attractive time to invest in lodging stocks. In the prior 2001 and 2009 lodging recessions, after the one-year anniversary of a RevPAR trough, the three-year average lodging stock total shareholder returns were +124% (2002 to 2005) and +59% (2010 to 2013).³ 

The opportunities at STAY go beyond mere cyclical forces. With capital returns from over $100 million in contracted asset sales, $75 million in tax returns and an under-levered balance sheet compared to industry peers, STAY is ideally positioned for above-market returns. In fact, we believe there are operational, structural and capital structure adjustments that could be made that would produce materially stronger results and create significant value for shareholders in the years to come.

As recently as February 26, 2021, Mr. Haase noted on the Company’s earnings call that “We’re encouraged and optimistic with the progress of our asset disposition initiative, and we believe there are significant additional opportunities in our REIT to transact at highly accretive multiples.” The current policy and macroeconomic backdrop create a unique opportunity for the Company to sell a significant portion of the portfolio for multi-family and affordable housing conversions at a material premium to the $92,000/key price in the Blackstone and Starwood transaction. We also believe there is a meaningful opportunity to increase unit growth and profits through more aggressive franchising efforts. Furthermore, with an under-levered balance sheet, there is an opportunity to further increase capital returns to shareholders.

² See page 62 of the Company’s Proxy Statement.

³ Source: Bloomberg. Returns from September 20, 2002 through September 20, 2005 are an average of MAR, HST, RHP and CHH. Returns from March 14, 2010 to March 14, 2013 are an average of MAR, HST, RHP, CHH and SHO.

In short, we agree with Messrs. Brown and Turner of the ESH Board of Directors. We believe that the timing of the Merger is wrong and that selling now, before the cyclical upturn and before these operating, asset sale, balance sheet optimization and capital return opportunities are realized, is a massive mistake unless the buyer is paying a significant premium to account for these inherent opportunities.

The Price is Wrong

The sale to Blackstone and Starwood, if completed, would conclude STAY’s seven years as a public Company at a price below its original IPO price. Despite (or perhaps because of) cycling through four different Chief Executive Officers and four different Chief Financial Officers in six years, the Company’s record of stark underperformance has persisted.

The proposed transaction price of $19.50 per share values STAY at a 11.6x consensus 2022E EBITDA, a 36% discount to the current median trading multiple of its lodging peers (18.0x) and a 21% discount to the next lowest peer, Apple Hospitality REIT.⁴ On a forward EBITDA basis, the proposed price is the lowest transaction multiple in the U.S. lodging space in more than five years.⁵

Given the strategic value of STAY to Blackstone and Starwood – both of whom own assets that can be readily combined with STAY’s lodging assets – and the potential cost savings and revenue synergies, a transaction with these parties should come in-line or at a premium to multiples observed in the lodging M&A market, not at a material discount. Indeed, when Tarsadia first met with Company management in September 2020, Tarsadia specifically said that its “worst fear” was that STAY would sell itself to an acquirer for a price per share in the “high teens.” Unfortunately, our fear has now been realized with the Board accepting a merger consideration price of $19.50 per share (the “Merger Consideration”).

The Board Relied Upon a Flawed Fairness Opinion

Goldman Sachs, STAY’s financial adviser, departed from convention and its own typical methodology, in analyzing the proposed transaction on behalf of the STAY Board and rendering its fairness opinion (the “Opinion”). According to the Company’s Proxy Statement, Goldman Sachs did not analyze the proposed Merger Consideration relative to publicly traded peers or to precedent transactions.

We reviewed the six significant acquisitions of U.S. public companies in the lodging space that included a fairness opinion by the target company’s financial advisers dating back to 2015. In each of those fairness opinions, the financial adviser included a Selected Precedent Transaction Analysis or Comparable Companies Analysis.

Goldman Sachs did not selectively exclude certain transactions or public companies, they completely omitted a Selected Precedent Transaction Analysis and Comparable Companies Analysis from its Opinion. We believe these analyses were omitted because they would show that the proposed transaction values STAY at a 36% discount to the current median trading multiple of its lodging peers (18.0x) and a 33% discount to the average U.S. lodging transaction multiple over the past 5 years (17.4x).

⁴ Source: Bloomberg as of April 23, 2021. Lodging peers include: APLE, CHH, DRH, HLT, HST, INN, MAR, PEB, PK, RHP, RLJ, SHO, WH, XHR.

⁵ Source: Belmond Proxy statement filed with the SEC on January 8, 2019.

The Process Has Been Inadequate

According to the Company’s Proxy Statement, over the course of the last four years, the Board has only reached out to two possible acquirers other than Blackstone and Starwood. Those discussions never advanced.

Goldman Sachs, the financial advisor to the Company, confirmed in its Opinion that it did not to seek alternative proposals to the Blackstone and Starwood proposals and was not asked to do so by the Board:

“Goldman Sachs was not requested to solicit, and did not solicit, interest from other parties with respect to an acquisition of, or other business combination with, the Paired Entities or any other alternative transaction.”

It is noteworthy that the Chairman of the Board, Mr. Geoga, has longstanding ties to Blackstone, including that Mr. Geoga was appointed to the STAY Board itself by a group of sponsors including Blackstone when the sponsors controlled STAY before the November 2013 IPO.⁶

Tarsadia believes STAY is worth significantly more than the $5.9 billion implied by the deal price due to the value of the Company’s substantial real estate portfolio. Mr. Haase as recently as the Company’s last earnings call on February 26, 2021, articulated a bullish view of STAY’s real estate: “We believe our real estate portfolio has significant value creation upside to our shareholders, that is not reflected in the current price of our shares.”

In fact, according to the Company’s Proxy Statement, at a February 5, 2021 Board meeting following the Blackstone expression of interest, the Boards specifically considered the sale of 156 hotels at “average multiples of 2019 adjusted EBITDA of 14.0x, 16.0x and 18.0x, resulting in illustrative total sale proceeds to the Paired Entities of approximately $1.6 billion, $1.9 billion and $2.1 billion.” These asset sale multiples are significantly higher than the multiples implied by the Merger Consideration and the gross proceeds represent 46%, 55% and 61% of the Company’s market cap at the $19.50 Merger Consideration.

Despite this asset sale strategy having the potential to create substantial value to STAY shareholders, the Company’s Proxy Statement indicates that “no conclusions were reached at this meeting with respect to potential next steps, and the Boards determined to discuss the topic at their next regularly-scheduled board meetings several days later.” Unfortunately, the Company’s Proxy Statement makes no further mention of the planned follow-up discussion on the real estate sales, depriving shareholders of a thorough assessment on the strategic value of STAY’s real estate assets.

After performing substantial diligence on the Company, we identified a number of opportunities for the Company to unlock shareholder value, such as: i) retaining a real estate broker to formally market a portfolio of assets for sale for higher and better uses, ii) providing operational and financial support to franchisees, iii) corporate structures that would facilitate a spin-off of the Company’s REIT assets and iv) optimizing balance sheet leverage. In an attempt to work constructively with the Company to maximize value for all shareholders, we engaged with the Company for several months and shared these potential initiatives that the Board could readily pursue to maximize shareholder value. However, as with the lost asset sale opportunity, the Board failed to act.

⁶ See STAY, Form S-1, June 10, 2014 at p. 46 (“Mr. Geoga was appointed by the Sponsors to serve on the board of directors of the Corporation.”)

Accordingly, on February 23, 2021, Tarsadia privately indicated to the Company that it intended to nominate three independent, world-class hospitality executives to the STAY Board of Directors. Tarsadia believes that these candidates, if elected, can help ensure the Company is pursuing the right strategic path.

The independent nominees put forward by Tarsadia are:

Ross Bierkan – Former CEO of RLJ Lodging Trust (NYSE: RLJ), where he oversaw over $8 billion of real estate acquisitions, and $2.5 billion of dispositions. Currently Principal of Wellfleet Equity, a private investment company with a hospitality industry focus;

Stephen Joyce – Former CEO of Choice Hotels (NYSE: CHH) and Dine Brands Global, Inc. (NYSE: DIN). Board member at Hospitality Investors Trust, Inc. (OTC: HPIT) and RE/MAX Holdings, Inc. (NYSE: RMAX); and

Michael Leven – Former President and Chief Operating Officer of Las Vegas Sands (NYSE: LVS). Member of the Board of Trustees of Hersha Hospitality Trust (NYSE: HT). Formerly President and Chief Operating Officer of Holiday Inn Worldwide.

Unfortunately, instead of considering the potential value that these independent nominees would bring to the Company by helping guide the Company on a path to unlock the tremendous value not reflected in its stock price, the Board chose to rush into the Merger and to avoid scrutiny. We believe the failure of the Board to even interview these extraordinary candidates and to explore their considered views on how best to independently create value for shareholders is disappointing. We believe the concrete strategy and operational ideas developed by these candidates can create significantly more value than the Merger for STAY shareholders.

Shareholders Should Vote AGAINST the Merger

Tarsadia believes that the Merger is not in the best interests of shareholders. We believe the timing is wrong, the price is inadequate, the fairness opinion is flawed, the process was rushed and alternatives (including remaining independent with new directors) were not adequately considered.

We believe shareholders should oppose the transaction, insist on a new Board and reap the full benefits of a better plan and better business structure.

There is, in our view, no reason to sell now and certainly no reason to sell at this price. We urge all shareholders to join us in voting AGAINST the Merger on the GOLD proxy card.

Vote Required.

According to the Company’s Proxy Statement, the approval of the Merger Agreement Proposal requires the affirmative vote of the holders of a majority of all of the issued and outstanding shares of Common Stock entitled to vote at the Company’s Special Meeting. An abstention vote will have the same effect as if the shareholder voted “AGAINST” the Merger Agreement Proposal. Nevertheless, we urge shareholders to vote “AGAINST” the Merger Agreement Proposal to make sure their voices are heard and that there can be no doubt that the Company’s shareholders stand in opposition to the Merger.

We urge you to vote today using our GOLD proxy card. If you have already voted using the Company’s white proxy card, you have every right to change your vote by using the enclosed GOLD proxy card to vote again by telephone or by Internet. In light of ongoing delays in the postal system, we encourage all shareholders to submit their proxies electronically. If you do not have access to a touch-tone phone or Internet, please sign, date and return the enclosed GOLD proxy card in the postage-paid envelope provided. Only the latest validly executed proxy that you submit will be counted; any proxy may be revoked at any time prior to its exercise at the Special Meeting by following the instructions under “Can I change my vote or revoke my proxy?” If you have any questions or require any assistance with voting your shares, please contact our proxy solicitor, Morrow Sodali, toll free at (800) 662-5200 or email at Tarsadia@investor.morrowsodali.com.