With renovations done, ESA shifts focus to franchising
 
With renovations done, ESA shifts focus to franchising
02 AUGUST 2017 8:45 AM

Extended Stay America finished its five-year portfolio renovation plan in May, and company executives said they’ve switched gears to emphasize asset sales, franchising agreements and new-build development.

CHARLOTTE, North Carolina—Extended Stay America’s second quarter was highlighted by the completion of a multiyear renovation of its entire portfolio, the completion of four hotel deals and start of new-build development, and serious talks with the company’s first potential franchisees.

Extended Stay America’s final hotel in its 625-property portfolio finished renovations in late May, and CEO Gerry Lopez said company executives were pleased with the pace of the renovations.

“In Q2, we completed our renovation program on time and below budget, with our final hotel completed last May 26,” Lopez told analysts during a Tuesday conference call. “This means all 625 ESA hotels have now been renovated in the last five-and-a-half years. We look forward to the next 18 months or so of significantly lower capital investment and clear positive free cash flow.”

With the renovation program complete, Extended Stay America executives have turned their attention to “ESA 2.0,” a three-pronged initiative focused on asset sales, franchising and new-build development of owned-and-operated properties.

During the second quarter, ESA closed on the sales of four hotels—three properties in Canada and one in Massachusetts—for a combined $60.7 million. Lopez said the deals show a “pattern of asset recycling.”

“We’ve been excited by the level of interest and deep conversations that we’ve been having with potential buyers of additional hotel assets in the last couple months,” Lopez said. “While we have nothing official to announce yet, we are currently in active discussions and at the term-sheet phase with eight experienced owner-operators, all hotel developers, to buy and refranchise approximately 90 existing Extended Stay America hotels.

“We look forward to announcing deals in the coming months as they unfold, and we are confident that we will remain on track to sell and refranchise approximately 150 ESA hotels in the coming four to five years.”

On the franchising front, Lopez said ESA’s franchise disclosure document “outlines compelling value” and the extended-stay brand is discussing franchise agreements with well-established owner-operators. Some of those companies are as interested in franchising as they are in engaging in hotel transactions with ESA, he added.

“We are currently in very active discussions with eight of these types of firms, many of which overlap in the bulk sales offerings,” Lopez said, “and we think we can build as many as 85 or more ESA 2.0 hotels over the next few years. … We remain confident we can meet or exceed the new franchise-build targets that we laid out in June of last year and look forward to announcing signed new franchise hotel deals over the rest of 2017.”

Asked whether aspiring franchisees are focused in certain regions or markets, EVP and Chief Asset Merchant Jim Alderman said his team has had discussions with owners that have several hotels in larger metropolitan areas and are looking to diversify.

“Primarily the ones we’ve had in here have a high degree of concentration in a couple of markets, but there’s always other sexier markets that they want to build in as well, the opportunistic markets—Florida, Texas—the super high-growth areas,” Alderman said. “Most of the ones that have been in so far are … dominant in two or three metro areas and are expanding out from there into the excerpts of those areas where the new growth is in their markets.”

Extended Stay America also plans to launch a new wave of owned-and-operated new-build hotels through ESA 2.0, developed using its new property prototype. Alderman estimated the cost to build to be between $80,000 and $95,000 per key before land purchases, taxes or fees.

Lopez confirmed the company has signed four new-build purchase agreements and plans to sign four more deals this month, with construction on the first property to begin in 2018. He added new-build development should be fully funded by capital from asset sales for the next five years.

Q2 earnings and full-year outlook
In the company’s Q2 2017 earnings news release, ESA reported occupancy increased by 2.9% year-over year to 78.9%, average daily rate dipped 0.5% to $67.21 and comparable revenue per available room increased 2.4% to $53.04. Adjusted earnings before interest, taxes, depreciation and amortization rose 5% to $172.8 million.

Lopez said the company’s second quarter started strong but ended with lower RevPAR growth in the final five weeks. Still, he said he was pleased with ESA’s performance during the quarter, which was boosted by an increase in leisure demand from online travel agency referrals that offset small declines in corporate bookings.

“We saw RevPAR grow 2.4% on a comparable basis in spite of an approximately 60-basis-point headwind from the Easter calendar shift,” Lopez said. “This was roughly in line with industry, but better than STR-reported numbers for suburban locations, where 75% of our hotels are. Our 2.4% RevPAR growth was, again (according to) STR, better than the majority of industry chain scales and better than our comp set, so we’ll take it.” (STR is the parent company of Hotel News Now.)

Extended Stay America executives maintained the company’s full-year 2017 RevPAR growth outlook of between 1.5% and 3.5%. Net income and adjusted EBITDA were revised down slightly, which CFO Jonathan Halkyard attributed to hotel deals that were finalized during the second quarter.

“It’s important to remember that we increased our guidance in the first quarter, the earliest we’ve done that in the time that we’ve been a public company,” Halkyard said. “We did that earlier in the year, and we’re maintaining that higher level of guidance for the remainder of the year.”

As of press time, Extended Stay America’s stock price was trading at $19.76 per share, up 22.4% year to date. The Baird/STR Hotel Stock Index was up 26.9% over the same time period.

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