Developers have noticed Extended Stay America’s renovation overhaul and its consistent positive performance, and CEO Gerry Lopez confirmed franchising discussions are taking place.
CHARLOTTE, North Carolina—As Extended Stay America enters the final stages of its portfolio renovation, investors and developers interested in franchises have reached out to the extended-stay company.
CEO Gerry Lopez confirmed some suspicions that Extended Stay America—which owns and operates all of the 629 hotels in its portfolio—has broached the subject of franchising with potential investors. During a Tuesday conference call to discuss first-quarter earnings, the CEO described the talks as preliminary and “very exploratory.”
“We’re encouraged, to be quite candid,” he said. “People are eager, and to be honest more (investors) have approached us than we have approached.”
Lopez added that Extended Stay America’s commitment to renovation and continued positive performance are attractive to possible franchisees.
“The fact is that our margins are above 60%, and not a lot of these developers and operators are used to seeing that from other companies out there. They see it as a way to bring some diversity and balance to their portfolio properties,” he said. “Even though we have not formally announced anything … the fact is folks are calling, and we’re answering.
“As to what may come, we’ll have to see, but we’re encouraged by the possibilities and frankly the enthusiasm some have demonstrated even in this very early stage of things.”
When pressed for specifics on what a franchise agreement could cost and return to developers, Lopez declined to comment but promised more details would be announced at the company’s investor day on 2 June in New York.
“It’s way too early, to be honest,” Lopez said. “Anything I tell you now would be guessing and speculation, and that’s not the way we like to operate.”
Extended Stay America started 2016 strong. In the first quarter, the company saw comparable hotel revenue per available room increase 5% to $44.83 over the same period in 2015, while comparable hotel total revenue increased 6.3% to $287.6 million. Comparable hotel adjusted earnings before interest, taxes, depreciation and amortization increased 6.1% to $122.8 million during the quarter, according to its earnings release.
Lopez said the results indicated the company can perform well “in any part of the business cycle.” He also pointed to low U.S. supply growth in the economy and midscale brands—when compared to the pipelines of higher chain scales—as proof that Extended Stay America can weather the coming economy downturn.
“Whether we are looking at potential organic growth or when we return to unit expansion in the coming years, Extended Stay has room to grow,” he said.
As of press time, Extended Stay America’s stock price was up 1.2% year to date. By comparison, the Baird/STR Hotel Stock Index was up 1.9% during the same period.
Figuring out OTAs
Online travel agencies are an increasing blip on Extended Stay America’s radar, as OTAs accounted for 18% of the company’s channel mix during the first quarter, compared to 15% a year ago. But Chief Marketing Officer Tom Seddon said during the call that there’s no cause for concern, and in fact a healthy relationship with OTAs actually benefits Extended Stay America by bringing in a different type of guest.
“One of the reasons why for us these OTA distribution shelves are not as cannibalistic of our regular business is we aren’t necessarily the first place someone thinks of for a short-stay leisure/business,” he said.
“Although as we’re seeing, we can actually merchandise and sell ourselves quite well for that business when we’re on the shelves,” he said. “There’s probably a certain amount of an increase in short-stay leisure customers that we always may want to access on those shelves, because that’s just where they’re going to find us and they’re otherwise not going to think of us top of mind.”
During the call, CFO Jonathan Halkyard said approximately 120 of Extended Stay America’s 629 properties are still in line for the company-wide renovation initiative. He predicted that the renovations for 80 of those 120 properties would be completed by the end of this year, and the entire renovation project is still on track to finish in the first quarter of 2017.
Extended Stay America saw occupancy decline 1% in the first quarter of 2016 when compared to the prior year’s quarter, but Halkyard said most renovated properties have followed a pattern in occupancy and RevPAR recovery.
“Having done this now 500 times, we know what it needs to look like when a hotel has to go through renovation,” he said. “And I’m pleased to say what we call ‘Phase 9’ internally is performing well against that curve.”
Lopez added that the renovations also affect Extended Stay America’s clientele more so than when other hotel companies upgrade their properties. The renovations, however, have helped the company’s corporate business and short-stay business, he said.
“Our renovations are usually accompanied by a moving out of some of our longer-tenured guests where their rates have been significantly lower than those we aspire to on the other side of the renovation,” he said. “You are not just changing the appearance of the building itself, but in fact the occupancy moves not just in the numbers but it moves in the rate and the clientele that is housed there.”