Extended Stay America officials on a first-quarter earnings call told analysts the company is in negotiations to sell 45 hotels in 2018 and is working to attract more long-term guests.
CHARLOTTE, North Carolina—Extended Stay America is on track to sell 45 more hotels in 2018, and executives on a first-quarter earnings call said the company is investing in growing the business of long-term stays.
Jonathan Halkyard, president and CEO at ESA, said the company is currently working on the sale of those 45 hotels, but does not “have any real urgency to dispose of additional hotels” after that.
“We don’t need to do this,” he said. “We set out a five-year timeframe back in 2016 to complete these sales, and while we are ahead of pace, I’m not moving that five-year time frame up at all.”
He added that ESA intends to get the “maximum value for our shareholders as we move through this process.”
Halkyard said long-term guests—or guests staying at ESA properties for three weeks to a few months—represent an attractive segment for many reasons.
“One is they bring to us, if priced correctly … an (earnings before interest, taxes, depreciation and amortization) contribution that is equal or better than any other customer segment,” he said. “Those monthly guests who are business travelers staying with us … typically come to us through corporate accounts. Their retention rate or loyalty rate can be very high, and they come to us predominantly through our owned distribution channels.”
He added that this is a customer segment that’s not really being addressed by ESA’s competitors.
“We have increased the numbers and the revenue from our shorter-stay guests over the last couple of years,” Halkyard said. “We really expected to bend that curve back toward our longer-stay guests (and) made progress in that regard this quarter. Monthly business contributed the majority of our growth in revenue.”
Cutting development costs
On the company’s fourth-quarter earnings call in February, Halkyard announced an initiative to cut the construction cost of ESA’s “new unit,” he said. The project began in January and will wrap up in a few weeks.
Halkyard said ESA was able to reduce cost by doing three key things through the effort.
“We reduced the square footage of the new rooms to what has been contemplated, although I would add the redesigned prototype rooms are still of the same size or larger than those of our existing estates,” he said, adding that most of the savings came from cutting back on square footage. “The second is in some of the fit and finish of the rooms themselves, and actually I think this is a win-win, from what our developers and our architects designed is not only a reduced cost, but increased durability.”
He said the third cost-saving effort was achieved through “innovative construction techniques” that have been used in multi-family projects that ESA will be testing over the next year.
The strength of the first quarter put ESA on a good start to the year, Halkyard said. Comparable systemwide revenue per available room increased 3.7% to $47.50, boosted by 4% average-daily-rate growth and despite a 0.3% decline in occupancy to 70.3%, which was attributed to the Easter calendar shift, according to the earnings release.
While first-quarter results were promising, ESA kept its RevPAR guidance range at 1% to 3%. Halkyard told analysts the guidance range might be a bit conservative, but the company kept it that way because it’s still early in the year.
“It’s typically been our practice, unless something really unusual has happened, to begin to look at the annual RevPAR guidance in our second-quarter results,” he said. “And that’s because while we do have larger customers where we have visibility several months out, much of our business does book in the last 30 or 60 days.
“I do believe in the third quarter, the comp is probably a little bit easier for us,” Halkyard said. “In the fourth quarter, it’s probably a bit more difficult, mainly because we had a very strong fourth quarter, aided in part by the storms that occurred and the business we generated as a result of that. … The main reason is it’s just still early in the year, but hopefully our shareholders understand that we do feel confident about the operating environment for the remainder of the year.”
As of press time, ESA’s stocks were trading at $19.51 per share, up 2.7% year to date. The Baird/STR Hotel Stock Index was down 2% for the same period.