Extended Stay America sold and franchised 72 hotels in 2018, and President and CEO Jonathan Halkyard discussed on Thursday’s earnings call how the company might tweak its franchising strategy.
CHARLOTTE, North Carolina—For Extended Stay America, 2018 was a big year for asset sales and further progress on molding its franchising model.
The company sold 72 hotels for gross proceeds of about $322 million for the full year, including 14 hotels for $37.7 million during the fourth quarter. ESA President and CEO Jonathan Halkyard said he expects in 2019 the company will continue toward its goal of selling 150 hotels by 2021, although he cautioned against expecting the same quantity of asset dispositions as 2018.
“We’re very happy not only with the results of our efforts back in 2018, but the partners that we’ve brought on who are now franchisees of ours,” Halkyard said on a conference call to discuss Q4 and full-year 2018 earnings.
“We’re enthusiastic about what’s happened so far; we’re about halfway toward our goal that we laid out in terms of asset sales and refranchising, so I would fully expect we’d continue this year. I think it’s unlikely that we would sell the number of hotels we sold in 2018, but I think it’s quite likely that we’ll do the kinds of transactions we did in 2018—meaning portfolios of somewhere between 10 and 20 hotels—and I would certainly be enthusiastic about doing that with partners, including some who have already acquired our hotels, who have really become experienced in operating them and I think are dedicated to growing the portfolio.”
With the success of Extended Stay America’s asset strategy so far, Halkyard was asked if the company would sell more hotels beyond its 150-hotel goal, and possibly become purely a franchising company.
“This company will continue to own and operate a substantial number of hotels well into the foreseeable future. … We did lay out a target of 150 hotels that we would sell and refranchise by 2021,” Halkyard said. “That’s not necessarily an endpoint, but it was a stake in the ground we thought was important to put when we introduced it over a five-year time period. But there’s certainly potential that we’d go beyond that number.
“And as we’ve done our work internally, we’ve got a group of around 175 to 185 hotels that we believe are candidates for disposition and refranchising, and their candidacy is informed by the markets that they’re in, their concentration or lack of concentration in our system, and some other considerations, so it is certainly possible that we’d go beyond that 150-hotel number, perhaps even by the end of 2021, and perhaps up to that higher bound I just described.”
The franchisees that have partnered with Extended Stay America have brought new ideas to the company’s franchising strategy, such as the potential for more ESA hotels to be converted.
“We’ve looked at conversions in our own system over the past several years, and it’s something we’ve not done much of; we’ve just done two in the last year,” Halkyard said. “But our franchisees have brought some initial ideas that we think are very promising. They’re certainly enthusiastic about doing it. It does have the advantage of speed and I think some key learnings for our franchisees.
“So if you had asked me a year ago, I might not have said as much about conversions being a part of the unit growth story, but I do think now that is over the next couple of years going to be a part of that growth strategy. An important thing to note is that a conversion candidate really needs to already have kitchens in them; otherwise, I would expect the cost of conversion would be unattractive. But there are quite a few hotels that have that format that I think are going to be strong candidates for conversions, and we’re encouraging our franchisees to look at that.”
Halkyard said ESA tweaked the design of its new-build prototype to eliminate “the frills that our core guests don’t value,” for a cost savings of approximately $20,000 per key. The company finished 2018 with 57 hotels comprising approximately 7,000 rooms in its pipeline.
Performance highlights and 2019 outlook
In the fourth quarter, Extended Stay America reported total revenue decreased 4.2% to $289.7 million, net income fell 1.9% to $39.4 million, and adjusted earnings before interest, taxes, depreciation and amortization decreased 9.7% to $126.6 million. Systemwide occupancy increased 4.4% in the quarter to 72.9%, while average daily rate decreased 3.4% to $65.01 and RevPAR rose 0.9% to $47.38, according to the company’s earnings release.
For the full year, ESA’s total revenue dipped 0.6% to $1.3 billion, net income rose 23% to $211.8 million and adjusted EBITDA decreased 3.7% to $599.7 million. Full-year systemwide occupancy increased 0.8% to 75.2%, ADR increased 1.1% to $67.90 and RevPAR increased 2% to $51.09.
CFO Brian Nicholson shared Extended Stay America’s 2019 outlook, which he said takes into consideration the tougher demand comparison in early 2018 that carried over from Hurricane Harvey and Hurricane Irma in late 2017. The company has also begun its next seven-year renovation cycle, during which the company will renovate between 60 and 70 hotels per year, Halkyard said.
For 2019, Extended Stay America forecasts comparable systemwide RevPAR to be flat or grow as high as 2%. The company also expects full-year net income between $188 million and $212 million and adjusted EBITDA between $560 million and $580 million.
Extended Stay America’s stock was trading at $18.36 at press time, up 17.7% year to date. The Baird/STR Hotel Stock Index is up 13.3% year to date.