Franchise prospects shield ESA from end-of-cycle storm
 
Franchise prospects shield ESA from end-of-cycle storm
29 JULY 2016 7:14 AM

While comparable hotel RevPAR growth slowed to 3.3% in the second quarter, Extended Stay America officials were upbeat about rebounding summer performance and the opportunities presented by owners interested in franchising with the company.

CHARLOTTE, North Carolina—Despite the contracting economy and slower growth performance that major hotel brands have encountered in the second quarter, Extended Stay America officials said they are confident the company can weather the end of the cycle.

During an earnings call with analysts and shareholders Thursday, CEO Gerry Lopez acknowledged that Extended Stay America’s performance in the second quarter—especially revenue and adjusted earnings before interest, taxes, depreciation and amortization—“came in at the low end of our guidance range.” Comparable hotel revenue grew 3.4% to $332.8 million while comparable hotel adjusted EBITDA increased 0.9% to $164.7 million.

Lopez said company officials saw the slowdown begin in April and continue into May, but he added that a strong month of performance in June was a positive sign.

“Despite the softness, … in Q2 we did manage our company’s highest ever total (revenue-per-available-room) performance as evidence that our strategic direction remains true, even as we endure the ebbs and flows of the business cycle,” Lopez said. “Our strategic direction has served us well for the first six months of the year.”

Much like Hilton Worldwide Holdings observed in its second quarter, Extended Stay America also saw its properties hit by a decline in corporate transient demand. Lopez said corporate sales grew by just 4% in the second quarter over the same period in 2015, but the Q2 2016 performance was still less than the 13% growth in corporate sales reported in the first quarter.

“The corporate market has slowed down significantly,” Lopez said. “We had a fantastic first quarter in the corporate market well above 10%, 13%, and that number is now running closer to the industry level of 4%.”

Near the close of business Thursday, Extended Stay America’s stock price was down 9.9% year to date. The Baird/STR Hotel Stock Index was up 6.3% over the same period.

The market for franchising
After first hinting at plans to begin franchising during the first quarter, Extended Stay America rolled out its franchise model in June during the company’s investor day. On Thursday, Lopez said company officials have had positive discussions with owners about franchising.

“We’ve had several inbound calls and auto communications with various interested parties both domestic and foreign,” Lopez said. “Many potential franchisees are excited about our product offering and we are very encouraged by our initial conversations.”

Lopez said Extended Stay America is looking for franchisee candidates that own between half a dozen and three dozen hotels. He added that ESA could have a role in continuing to manage some of its franchised properties.

“We're going for people who know how to develop a plot of land, who already have expertise in putting up a building and certainly in managing the building where there is some management infrastructure that can quickly move in,” Lopez said. “There's also been a number of conversations with folks who are quite candidly looking to put money to work in the U.S. and are interested in owning the real estate that we of course own, 629 patches of land, and letting us operate. Where they provide the owner and then we will be the management company for them.”

Renovations progress
As Extended Stay America makes its last push to complete its renovations by early 2017, the company completed 35 hotel renovations during the second quarter, bringing its total number of renovated properties to 530. Lopez acknowledged the renovations contributed to negative performance in the second quarter.

“We had literally twice as many roomnights lost in the second quarter this year versus last,” Lopez said. “So that is kind of a little bit of a perfect storm there that didn't help us at all. That reverses itself now in the third quarter … the renovation headwind now becomes a tailwind.”

Lopez also said renovations won’t stop a property from being sold, but added the upgrades are necessary.

“Some of the properties are indeed 18, 17 years old,” Lopez said. “The renovation needs to happen just to remain even basically competitive. The impact that we've seen in the RevPAR performance is really all driven by the geography. … We don't see ourselves backing off from finishing the job.”

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