Q3 2016: ESA still finalizing franchising structure
Q3 2016: ESA still finalizing franchising structure
26 OCTOBER 2016 8:09 AM

Extended Stay America announced positive performance in the third quarter of 2016, and during an earnings conference call, executives discussed how close the company is to franchising.

CHARLOTTE, North Carolina—CEO Gerry Lopez called the third quarter Extended Stay America’s best quarter of 2016 as the company announced sales of four properties, confirmed the final push to complete its renovation plan and moved closer toward signing franchising agreements.

In the third quarter, Extended Stay America reported comparable hotel total revenue increased 3.9% to $354.5 million over the same quarter in 2015. Comparable hotel revenue per available room grew 3.7% to $54.65 and comparable adjusted earnings before interest, taxes, depreciation and amortization increased 7.4% to $185.7 million.

During an earnings conference call with analysts Tuesday, Lopez said ESA’s third-quarter performance was a confirmation of how the company expects to endure the slowdown of the cycle. Extended Stay America, Lopez added, is “on very solid footing moving forward.”

“From our perspective and specific to our segment, the bright growth expectations have not changed materially as the year has progressed,” he said. “According to (industry projections), over 90% of expected industry supply growth in 2016, 2017 and 2018 is forecasted to come at price points above our closest chain scale—economy and midscale—meaning we are seeing very little supply growth. … And our RevPAR growth continues to outpace economy and midscale with the third quarter of 2016, marking the fifth straight quarter our RevPAR grew faster than both of those chain scales.”

Lopez admitted that corporate business growth has slowed—only up 1.2% from Q3 2015—but transient sales carried the load during the third quarter in 2016. “This weakness in corporate sales during the quarter was more than offset by strong leisure demand,” he said.

As of Tuesday afternoon, Extended Stay America’s stock price was trading at $13.87 per share, but the company’s stock has fallen 12.8% year to date. The Baird/STR Hotel Stock Index is up 1% year to date.

Preparing for ‘ESA 2.0’
Extended Stay America also announced Tuesday the sale of a hotel in Austin, Texas, for $44.75 million, as well as deals for its three Canadian properties—in Ottawa; St. John’s, Newfoundland and Labrador; and Toronto—which the company sold for a combined price of 76 million Canadian dollars ($56.9 million).

Lopez said the deals fit with “where we think we need to go as a company” and benefit Extended Stay America in the launch of its “ESA 2.0” initiative, which includes considering further asset sales, finalizing the company’s franchise structure, developing a new hotel prototype to be unveiled in 2017 and planning renovations.

“With 629 hotels in the portfolio, and as many opportunities as we see to expand into some markets where we are not even represented today, we think that recycling this merchant idea makes better sense in the world for us and our guests,” Lopez said.

Extended Stay America also is close to signing its first franchise agreements. Lopez said he expects the contract language to be completed by the end of 2016.

“We are looking to position ourselves as a complement to a portfolio of other hotels in any given owner’s existing business,” Lopez said. “So, if we were to be like this fixed income part of anyone’s personal security portfolio, that’s kind of where we want to be: steady, somewhat countercyclical, high operating margin, simple to operate and simple contracts to understand and work with.”

On Monday, the company announced the hiring of Jim Alderman—former chief development officer at Kimpton Hotels & Restaurants—as ESA’s EVP and chief asset merchant. Alderman will oversee the company’s 2.0 initiatives, Lopez said, and will join the company on 7 November.

In the third quarter, Extended Stay America completed 17 hotel renovations, bringing the total number of renovated properties to 547. CFO Jonathan Halkyard said during the conference call the company is still on track to complete its renovation program in early 2017.

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