ESA: Renovations almost done; franchising deals near
 
ESA: Renovations almost done; franchising deals near
27 APRIL 2017 3:22 PM

Extended Stay America officials pointed to a strong first quarter as a sign of good things to come in 2017 as the company completes its portfolio renovation program and lines up its first franchise agreements.

CHARLOTTE, North Carolina—Extended Stay America executives are hopeful that strong first-quarter earnings will propel the brand through the home stretch of its multiyear renovation program and into further franchising discussions in the second half of 2017.

The company completed 24 hotel renovations in Q1 2017 and closed the quarter with 608 total properties renovated. During an earnings conference call with investors, Extended Stay America CFO Jonathan Halkyard said the final renovations in the company’s portfolio will be completed “in the next few weeks.”

Extended Stay America’s overhaul of its portfolio will cost the company $628 million, about $15 million under budget, Halkyard said. The total cost averages to $1 million per property and $9,000 per key.

On the franchising front, CEO Gerry Lopez said discussions with interested owners are heating up after Extended Stay America first confirmed franchise possibilities to shareholders a year ago and outlined a franchise plan at its investor day last June. ESA’s first franchise sales could happen as early as Q2 2017, Lopez added during the earnings call.

“We expect to begin franchise sales in the second quarter of this year,” Lopez said. “As I’ve said before, we believe our franchise and program fees to be very competitive.”

Lopez also said the company has signed five letters of intent for land-purchase agreements to build ESA’s next prototype hotel, and construction on the first sites could begin by the fourth quarter of 2017.

New competition?
During the earnings call, analysts asked Lopez for his opinion on Starwood Capital’s new extended-stay brand Uptown Suites. Specifically, analysts questioned whether Extended Stay America could adapt to the new competition.

Lopez replied that ESA and its customers will benefit from having a new competitor in the extended-stay space.

“We welcome the competition,” he said. “Fair-and-square competition is always going to be good. It’s going to make us (better), it’s going to make them better, and guests are going to be served better.”

He added consumer demand is hungry for more supply in economy and midscale extended-stay product.

“New development and new players bring our end of the business more into the limelight and put it in the forefront,” Lopez said. “Let’s have at it; I think it’s all good. … I like the fact that these players entering lends an air of institutional validation to what we’re doing, and that I think serves us well.”

Q1 2017 earnings results
The company reported that revenue per available room increased by 2.1% year over year during Q1 to $45.76, while average daily rate grew 0.8% to $64.99 and occupancy grew 1.3% to 70.4%, according to an earnings release. Net income jumped 8.9% to $16.1 million and adjusted earnings before interest, taxes, depreciation and amortization rose 5.5% to $129.6 million.

Lopez admitted that the company saw corporate demand at its hotels start to slow in January, but a mix of business through online travel agencies and a strong March ended the first quarter on a high note. As a result, the company raised its full-year RevPAR guidance to between 1.5% and 3.5% (from 1% to 3%), and raised its 2017 adjusted EBITDA expectations to between $625 million and $640 million.

“The year started soft, which was somewhat more driven by the way the holidays fell and the corporate business not really waking up to the fact that it was a new year until the middle of the month,” Lopez said. “But by the end of the quarter, other than that one anomaly to start the year, there weren’t really any significant huge shifts that we noticed based on one month versus the other and one channel versus the other.”

Lopez added the company has really strengthened its relationship with its OTA partners.

“For us, as opposed to perhaps a lot of players in the industry, OTAs are our friends,” Lopez said. “The revenue management system and discipline that we’ve installed over the last year and a half now have allowed us to be very nimble. On a property-by-property (basis), we can allow the OTA business to fill in the blanks, including blocks of rooms that otherwise would have gone unused.

“The pricing of that OTA business—even after commissions paid and et cetera—ends up being net accretive to us to our P&L, particularly when you think of the OTA not just as a distribution channel but as a marketing channel as well.”

On Thursday afternoon, Extended Stay America’s stock price was trading at $17.85 per share and was up 10.5% year to date. The Baird/STR Hotel Stock Index was up 21.3% over the same period.

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