Extended Stay America President and CEO Jonathan Halkyard said the company expects to finalize more asset sales and franchise deals in 2018. He also outlined his priorities as the new head of the company in his first earnings call.
CHARLOTTE, North Carolina—During his first earnings presentation Tuesday, Extended Stay America President and CEO Jonathan Halkyard spoke about the latest development in the company’s asset strategy and his priorities as the new lead executive.
Early Tuesday morning, Extended Stay America announced it completed a sale of 25 hotels to an affiliate of New York City-based Three Wall Capital for $114 million. The portfolio includes ESA properties in Ohio, Kentucky, Indiana and Texas. Three Wall Capital also will develop 15 additional ESA hotels over a seven-year period as part of the agreement.
Halkyard said during a fourth-quarter and full-year earnings call with analysts that there has been significant investor interest in Extended Stay America’s properties since the company announced its franchising intentions in June 2016. That has allowed ESA officials to be patient to find the right deals, he added.
“There has been pretty strong demand to look at our assets, and we’ve been selective in the types of deals that we would do—selective not only in terms of the price, but also the partners that we’re going to work with and their commitment to grow our network with additional sites after they buy our sites,” Halkyard said.
“I think Three Wall is a perfect example of this. Not only were we able to get a fair price for these assets for our shareholders, but we’ll have a great partner who we expect will continue to build new (ESA) hotels.”
Extended Stay America has a few similar deals “at various stages of negotiation,” Halkyard said. He added the company will “execute between 10 and 20 franchise deals in 2018” along with asset sales.
“They have a similar flavor to the Three Wall transaction both in terms of the number of hotels, the types of markets and the commitment of these partners to develop additional (ESA) hotels,” he said. “You probably recall from our launch of the 2.0 strategy about a year-and-a-half ago that we indicated that we would potentially sell about 150 hotels and re-franchise them over a three-year period. So, let's say 50 per year."
“At our present course and speed, I think that's still a very good assumption. We’ve completed the sale of 25 hotels now, and I expect that there will be more this year, but there’s not going to be 100 hotels in 2018 that will sell.”
During the fourth quarter, Extended Stay America sold a Denver property for $16 million, according to its earnings release. The company also expects to close on the sale of a property in Austin, Texas, in March for about $45 million, Halkyard said.
Tax reform, infrastructure
During his prepared remarks, Halkyard said the impact of U.S. tax reform will save ESA more than $20 million in 2018. Congress passing an infrastructure bill also could be a significant demand driver to ESA properties across the country, he said.
“We also benefit from increased aggregate demand caused by stimulative economic policy,” Halkyard said. “Our product is ideally suited, for example, to accommodate people working on infrastructure projects, and we believe we are poised to benefit from any potential bill targeting infrastructure over the next few years. … I think we’re very well-positioned for this business. And again, we really don’t have any control over the pace or the types of investments that are going to be made, but we think our product is entirely relevant for those types of workers.”
Priorities in 2018 and beyond
Halkyard said he intends to refocus Extended Stay America on its “core customer” to improve performance, invest in technology initiatives to enhance guest services, and simplify and streamline the company’s internal processes.
“The company's growth in recent years has increased complexity and, at times, slowed our decision-making,” he said. “I intend to reverse that and have convened an internal working team to address this and identify opportunities for improvement.”
Those priorities also include looking for ways to cut costs on the company’s ESA 2.0 prototype.
“A lower-cost prototype will allow expansion into a larger number of markets and provide improved financial returns to our franchise partners and ourselves,” Halkyard said. “That work is already underway, and we expect to complete it in the next couple of months. I do not expect any delay in construction activity as a result of this project.”
Performance during Q4, 2017
In the fourth quarter, Extended Stay America reported total revenue increased 2.3% to $302.5 million, while adjusted earnings before interest, taxes, depreciation and amortization decreased 1.6% to $140.2 million. Occupancy fell 1.3% to 69.8% during the quarter, while average daily rate increased 4.6% to $67.30 and revenue per available room rose 3.2% to $46.98.
For the full year, ESA saw total revenue increase 1% to $1.3 billion and adjusted EBITDA increase 1.2% to $623 million. Occupancy rose 0.5% to 74.5% over 2016, while ADR increased 1.1% to $67.19 and RevPAR rose 1.7% to $50.09.
In its 2018 outlook, the company projects comparable hotel RevPAR to increase between 1% and 3%.
As of press time, Extended Stay America’s stock was trading at $19.75 per share, up 3.8% year to date. The Baird/STR Hotel Stock Index is down 3.4% over the same period.