Transactions, franchising headline ESA’s third quarter
Transactions, franchising headline ESA’s third quarter
08 NOVEMBER 2017 8:34 AM

Extended Stay America confirmed its first major asset sale is in the works as the Charlotte, North Carolina-based company looks to its future as a franchisor.

CHARLOTTE, North Carolina—The third quarter brought Extended Stay America one step closer to its first major property sale and its goal of shifting focus to its franchise business.

During Tuesday’s conference call with analysts to discuss Q3 2017 earnings, Extended Stay America CEO Gerry Lopez revealed the company has engaged in talks to sell 25 hotels to one buyer in a deal that could close “in the next few months.” Lopez described the hotels as located in secondary and tertiary markets with revenue-per-available-room levels 20% lower than the company’s portfolio average.

In the deal, Extended Stay America would continue to manage all but one of the 25 properties, and the buyer would “agree to develop 15 additional franchised hotels, potentially bringing its ESA total properties up to 40,” Lopez said.

As such, these types of asset sales will lead to more franchising opportunities, Lopez said.

“This approach is consistent with what we said at our investor day, where we sell a group of hotels and then have the buyer continue to grow with the brand,” Lopez said. “We’re excited to kick off our franchising program in this fashion.”

Extended Stay America also is negotiating a deal to sell a single hotel for around $16 million, or at 12X multiple adjusted earnings before interest, taxes, depreciation and amortization. Lopez said this deal should also close in the upcoming few months.

The level of buyer interest in Extended Stay America properties is so high, Lopez said, that the company might even sell its target of between 125 to 150 properties sooner than executives first anticipated.

“Those numbers go back to the plan we announced in June of 2016. That target hasn’t changed. If anything, we thought it might take four or five years, but it may only take a couple,” Lopez said. “The timeline may be accelerated, but the target, the number of hotels, remains about the same.”

Lopez said ESA executives are negotiating with buyers “across the spectrum” that have different objectives and asset targets in mind.

“We are pleased in the negotiations that frankly the number of hotels range from just about a half a dozen to in this case a couple dozen, and there are some deals in the queue that are even beyond that,” he said. “People have latched onto the idea of owning a market and owning a flag in the market, or two or three, and then having the development rights for those markets, which was one of the basic tenets for the way we were going about things.”

The company has also garnered interest in conversions of existing properties to Extended Stay America hotels.

“While we originally didn’t envision (conversions) as an option to grow our footprint, the truth is attractive opportunities do exist, and we intend to capitalize on them both with franchisees and as owned and operated hotels,” Lopez said.

In terms of new-build development, ESA has three owned and operated hotels in its pipeline along with another seven signed letters of intent, Lopez said.

Q3 performance and outlook
Extended Stay America reported comparable hotel RevPAR growth was flat during the third quarter at $54.55, compared to the same quarter in 2016. Occupancy decreased 0.1% to 79%, and average daily rate increased 0.4% to $69.01. Total revenue decreased 1% during the quarter to $350.9 million, and adjusted EBITDA decreased 2.9% to $180.3 million. Net income, however, rose 16.1% to $66.3 million.

Lopez said calendar shifts—the Jewish holidays from October to September, and the Fourth of July falling on a Tuesday—as well as the tougher comps with the national political conventions in Q3 2016 contributed to the “mixed bag” of performance during the quarter. But Hurricane Harvey and Hurricane Irma provided a modest performance lift, he added.

“Our teams performed very well in the face of two devastating storms in Texas and Florida, and we’re very proud of and grateful for them,” he said. “They executed a quick turnaround (to get) all of our about 60 Houston and Florida storm-affected hotels open and ready for business. Occupancy has increased in these markets as we’ve filled these hotels with people displaced by the storms and others rushing in to help.”

But the subpar performance of West Coast markets, namely in California, resulted in Extended Stay America reducing its full-year 2017 RevPAR guidance range from 1.5% to 3.5% growth to 1% to 1.5% growth. In Q4, the company projects RevPAR growth between 0% and 2%.

“Our results out in the West Coast particularly, which really weren’t affected by calendar issues so much such as the conventions … were unacceptable this quarter,” said CFO Jonathan Halkyard. “We’ve taken immediate action to address those results, both in terms of management as well as sales employment. We expect those efforts to have an effect on our results, but it’s going to take a little bit of time to turn around.

“We’re encouraged by what we’re seeing in October and early November, but because these hotels out there run at ADRs that are at such a premium to our system average, shortfalls there are really difficult to recover with growth elsewhere in the portfolio.”

As of Wednesday morning, Extended Stay America’s stock price was trading at $17.23, up 6.7% year to date. The Baird/STR Hotel Stock Index was up 33.6% for the same period.

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