ESA reviewing renovation strategy as asset sales pause
 
ESA reviewing renovation strategy as asset sales pause
07 NOVEMBER 2019 10:49 AM

Extended Stay America reported RevPAR declined in the third quarter as the company has temporarily stopped its asset sales and is considering simplifying its renovation tiers.

CHARLOTTE, North Carolina—Now past the halfway point in its initial franchise timeline, Extended Stay America is re-evaluating its renovation strategy as the economic conditions for the hotel industry continue to tighten.

During Thursday’s conference call to discuss third-quarter 2019 earnings, CFO Brian Nicholson said ESA officials are considering reducing the company’s four renovation tiers to better drive bookings.

“We’re at a pause-and-evaluate stage,” Nicholson said. “Some guests are a little confused at what the tiers are; especially when making booking decisions, they might not notice the differences in the tiers. We’re looking at simplifying that and making our sales team more efficient.”

Nicholson also said ESA executives are evaluating whether to separate the company’s hotels with longer-stay guests from hotels that drive more transient extended-stay business, which might include some sort of rebranding.

“Some hotels are well-suited to a business-driven, extended-stay demand mix,” he said. “Other hotels—due to the market they’re in or the specifics of the property—are better geared to serving residential guests. … There could be 100 hotels that are better for residential versus residential and transient extended stay. You probably won’t have them completely full of business-driven demand.”

Development and franchising efforts
Extended Stay America reported 77 hotels with a total of about 9,400 rooms in its pipeline as of the end of the third quarter, which is up 35% year to date in 2019, according to its earnings release. That total includes 19 hotels with 2,388 rooms owned by ESA and 58 hotels with 7,057 rooms owned by franchisees.

President and CEO Jonathan Halkyard said Extended Stay America’s first purpose-built owned hotel will open in Q4, and the company will open about one hotel on average per month through September 2020. He added he expects franchise openings and conversions to outpace ESA’s owned hotel openings next year.

Asked to define the “critical mass” of ESA’s franchising potential, Halkyard said the company’s momentum is a significant factor to measure franchising success.

“Folks are bringing up deals as much as we are going out and proposing them to our franchisees,” he said. “That’s a tipping point I feel we’ve achieved already. In order to have a franchise services organization with some scale and a QA system that makes sense, we’d need about double the franchised hotels we have now. A growing, more asset-light company does need to have some scale among its franchised income stream, and clearly we’re not there yet, but I think we’ve got a line of sight to that.”

Although ESA didn’t sell any hotels in the third quarter, Halkyard said asset sales remain a key part of the company’s strategy.

“A few years ago, we outlined we’d sell 150 hotels in a five year-period, and we’re now three years in and we’ve sold 75 hotels,” he said. “Despite the fact we haven’t executed asset sales this year … our board has asked us to evaluate the pool of assets we’re going to sell. We’re still evaluating that plan … (it’s) close to 75 to 80 hotels, it could grow from that number, and whether we execute all of that in 2020, time will tell. It’s still an important part of the company’s strategy.”

Q3 earnings and outlook
During the quarter, Extended Stay America reported systemwide revenue per available room decreased 1.3% to $54.81 as average daily rate declined 2% to $67.87. Occupancy, however, rose 0.9% to 80.8%. Halkyard and Nicholson pointed to declines in business transient demand for stays between seven and 29 days, especially in September. ESA’s adjusted earnings before interest, taxes, depreciation and amortization declined 10% to $156.3 million in the quarter, and net income fell 29.7% to $53.2 million.

Extended Stay America revised its outlook for full-year 2019 RevPAR to between a 1.75% decrease and a 1.25% decrease. Executives expect a weaker fourth quarter, where RevPAR is expected to decline between 2% and 4.5%.

As of press time, Extended Stay America’s stock price was at $14.35, down 7.4% year to date. The Baird/STR Hotel Stock Index was up 12.9% for the same period.

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