ESA approaches halfway point of asset strategy
ESA approaches halfway point of asset strategy
01 NOVEMBER 2018 3:57 PM

Extended Stay America announced its latest asset sales and franchise commitments as the company grew its pipeline by more than 50%.

Updated at 8:45 a.m. Eastern Daylight Time, 2 November 2018 with the locations of the properties acquired by Lodging Advisory Group and Provident Realty Advisors.

CHARLOTTE, North Carolina—Extended Stay America continues to realign its company to put more focus on its franchising business by unloading real estate.

On Wednesday, Extended Stay America announced it had closed on two portfolio sales during the third quarter, selling a total of 32 hotels, in deals with Lodging Advisory Group and Provident Realty Advisors. ESA sold 16 hotels in each transaction, and both deals include franchise agreements for the hotels sold as well as commitments from each buyer to build or convert five additional ESA hotels in the future.

In its purchase, Lodging Advisory Group acquired six properties in Kansas, four in Missouri, three in New Mexico, two in Arizona and one in Nebraska. Provident Realty Advisors acquired 11 hotels in Texas and five in Oklahoma.

During Thursday’s conference call with investors to present the company’s third-quarter earnings, Extended Stay America President and CEO Jonathan Halkyard said ESA received approximately $125 million in gross proceeds from the two sales.

“Both (buyers are) terrific partners with deep experience in the industry,” Halkyard said. “We could not have hoped for better franchise partners in our first year.”

In a news release announcing the sales, executives from both companies expressed enthusiasm in joining Extended Stay America’s list of franchisees.

“We are very excited to acquire a high-quality portfolio of extended-stay hotels,” said Dan Weber, partner and co-founder of Lodging Advisory Group, in the announcement. “Our team has extensive extended-stay hotel experience and we are pleased to become a franchise partner with the leader in the midpriced extended-stay segment.”

Dallas-based Provident Realty Advisors’ deal with ESA includes a proviso that Aimbridge Hospitality will manage the 16 hotels it acquired. Provident CEO and Owner Leon Backes said in the news release that his company’s development strategy “will leverage to grow the ESA brand” and “build a long and successful relationship with ESA.”

Extended Stay America closed the quarter with 567 owned hotels and 59 franchised or managed hotels in its portfolio. ESA grew its pipeline by more than 50% during Q3 to 52 hotels and 6,500 rooms.

“I’m very pleased that approximately two-thirds of the pipeline is franchised hotels, showing the growing demand for these hotels from third parties,” Halkyard said.

Halkyard hinted that another asset sale—involving the disposition of 14 hotels—is scheduled to close in November.

“This transaction, combined with expected progress on the other development fronts over the next eight weeks, will grow our total pipeline to 60 or more hotels by the end of 2018,” he said. “This represents nearly 10% of our total systemwide room count.”

The state of ESA’s asset strategy
Extended Stay America began selling off assets in February, when the company announced a 25-hotel, $114-million sale to an affiliate of Three Wall Capital. Counting that deal, the two portfolio sales with Lodging Advisory Group and Provident Realty Advisors, and the pending 14-hotel sale, Halkyard said the company is at the halfway point of its asset sale strategy.

“Having sold now roughly 70 hotels—and that includes of course the 14 that we expect to close in a couple of weeks, that’s about halfway to the goal that we established a couple of years ago, and we still feel that is the appropriate number of hotels—roughly 150—so that would leave about 80 left,” Halkyard said. “To put some parameters around it, the (earnings before interest, taxes, depreciation and amortization) of the hotels we’ve sold thus far are kind of between $300,000 and $700,000 a year. And if you take all of the hotels that we don’t plan on selling, they average around $1.3 million per year in EBITDA.”

But Halkyard said the sales of about 80 hotels to reach ESA’s target are unlikely to all happen next year.

“I would not expect that we’ll complete all of those during 2019, and they will be of the same general size in terms of revenue and earnings production of those that we have sold already, so in the $300,000 to $700,000 range,” he said. “I’ll just conclude by saying that the interest has been very high for the hotels that we’ve sold thus far. I’m very optimistic that we’ll be able to transact on similar terms and similar multiples with similar commitments to franchising and ongoing development that we’ve been able to accomplish with the first 70.”

CFO Brian Nicholson said there is enough extended-stay demand to absorb the segment’s new supply and keep ESA confident in its development strategy.

“There is an awful lot of extended-stay demand in transient hotels,” Nicholson said. “8% to 9% of supply in the country is purpose-built extended stay, and over 20% of the stays in this country or roomnights are represented by stays of five nights or more. And then even as new supply comes on, an advantage to having had a fleet of over 600 hotels in every market in the country for a couple of decades now means that we have locations that are simply not replicable. … Certainly there’s opportunity to grow especially in high-growth markets like our home here in the Carolinas, Florida, Arizona, Texas and Colorado. There is plenty of growth that provides new opportunities for us as well as for others.

“But in the core markets where we operate, while there’s supply coming on, we don’t think it’s a meaningful negative impact.”

Q3 performance, outlook
During the third quarter, Extended Stay America grew comparable systemwide revenue per available room by 1.9% to $55.57 year over year, according to its earnings release. Occupancy increased 1.4% to 80.1% and average daily rate rose 0.5% to $69.35 during the quarter.

Excluding the impact of July 4th occurring on a Wednesday and the tough September comps of the 2017 hurricane season, Nicholson said ESA’s Q3 comparable systemwide RevPAR growth would have been about 3%. He added that Hurricane Florence “didn’t have a significant impact on our business during the quarter” and that the company doesn’t expect “any meaningful impact” in the fourth quarter from Hurricane Florence or Hurricane Michael.

Extended Stay America updated its full-year 2018 RevPAR growth outlook to 1.75% to 2.25% from 1% to 2.75%.

As of close on Thursday, Extended Stay America’s stock price was $18.38, down 3.3% year to date. The Baird/STR Hotel Stock Index is down 10.7% for the same period.

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