ESA: Strong RevPAR growth boosted 2016
ESA: Strong RevPAR growth boosted 2016
01 MARCH 2017 8:54 AM

While most U.S. hotel companies experienced a decent but less-than-stellar year, Extended Stay America executives reported strong revenue streams and strategy for further success.

CHARLOTTE, North Carolina—With revenue-per-available-room growth coming in at the top end of previous guidance and a developing franchise model, executives at Extended Stay America were upbeat during their fourth-quarter and full-year 2016 earnings call with investors.

“We have plenty to be proud of, but in the end, the storyline of our fourth quarter is that above-average topline growth and tight operating discipline combined to deliver our best quarterly adjusted EBITDA growth in 3 years,” President and CEO Gerry Lopez said.

The final numbers for full-year 2016 show new records for RevPAR growth, average daily rate and adjusted earnings before interest, taxes, depreciation and amortization, he said. The company’s strong performance allowed it to invest about $225 million in CapEx during the year, including more than $100 million in renovation capital as the company nears the completion of this multi-year renovation initiative. ESA also paid down about $170 million in debt, and completed work begun in 2015 to refinance its entire balance sheet, he said.

“Combined, these add up to $735 million invested in CapEx, returns to shareholders and debt retirement in just one year, which simply highlights the power of our operating model and ability to generate free cash flow,” he said.

Strategy for success
Last year was the first year the company could benefit from its investment in a centralized sales team, and enhanced sales structures and processes helped to improve the team’s focus and effectiveness, Lopez said. During the year, the team leveraged its efforts to get the right business from corporate clients to the right hotels at the right time and price.

“It worked, with business account revenues increasing through each quarter in 2016 and successfully shifting guest mix in many markets to a more profitable blend,” he said.

The teams are responsible for driving demand, pricing it correctly and then serving it efficiently, he said. The company will focus on specific vertical segments in 2017: health care, construction and technology. ESA has a variety of established relationships with these industries, he said.

“As we look at these three channels, they are … at the top of the list,” he said. “Getting into a lot of the details as to what percent of the mix they are, I will tell you that our corporate business is just under half of our business, in the high 40s and it is consistently so during the low and the high season, as it fluctuates from one part of the country to the other. So, these three are the most significant chunk—the most significant piece of that 40, call it 46% to 48% of our business quarter-in, quarter-out.”

Progress of franchises
Lopez said he wasn’t prepared to share any numbers on franchises at this time because the company is in the midst of conversations with potential franchisees. Conversations have been positive, he said, but the progress has been deliberately slow because the company wants to be well prepared and have an offer that is compelling for both the company and franchisee group.

“We are still at the very early stages,” he said. “We are proceeding very cautiously and deliberately as we build the team and as we entertain offers.”

The company finished its legwork developing the franchise offering, he said, which is both simpler than its competitors’ fee models and less expensive, reflecting a leaner business model at the hotels.

“We will be ready to offer franchises in connection with the asset sales and new deals as market opportunities present themselves,” he said.

Advantages in the segment
ESA has limited exposure to urban core markets that might be hurt by potential travel restrictions or a stronger U.S. dollar, Lopez said. While other companies worry about supply growth this year, he said, the majority of supply growth will be in the upper midscale and upscale segments. Because ESA fits in the economy segment, he said, it’s fairly well protected as the economy segment makes up about 20% of total supply and only 5% of the forecasted supply growth.

“What it means is that our chain scale has a supply growth rate of less than a quarter of the overall industry,” he said.

The company will continue to focus on its unique guests in the economy segment that stay on average a month at a time, he said, and expects further demand growth in the coming years.

The company outperforms the economy segment throughout the year, CFO Jonathan Halkyard said, particularly in markets where the property was recently renovated. RevPAR grew 5% in the first quarter, 3.3% in the second, 3.7% in the third and 4.1% in the fourth, he said.

“In the first, third and fourth quarters, those were anywhere from 50 to 100 or even 300 basis points higher than the industry, and maybe 50 basis points to 70 basis points higher than the economy chain scale,” he said.

As of press time, ESA’s stock was trading at $17.30, up 7.1% year to date. The Baird/STR Hotel Stock Index was up 18.3% for the same time period.

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