CHARLOTTE, NC—Not known for franchising, Extended Stay America (ESA) is looking to change that. The operator is pushing forward with its franchising efforts by pitching its extended-stay format to developers, investors and owners. Even though there’s a learning curve for some at first, ESA is seeing its efforts paying off—but there’s still a lot more work to be done.
“A lower-cost prototype will allow expansion into a larger number of markets and provide improved financial returns to our franchise partners and ourselves,” said Jonathan S. Halkyard, ESA’s CEO, during a February 2018 earnings call with investors. “That work is already underway, and we expect to complete it in the next couple of months. I do not expect any delay in construction activity as a result of this project.”
Halkyard, who succeeded Gerry Lopez as CEO in January 2018, tasked Jim Alderman, EVP and chief asset merchant, and his team with leading efforts to review construction costs of ESA’s new prototype. ESA’s top executive also instructed Alderman to “determine ways to reduce this cost, while delivering a product that is relevant to, and anticipatory of, the needs of our core customer,” Halkyard said during the earnings call.
The CEO also discussed ESA’s renewed focus on franchising. The operator has been targeting smaller franchisees and investors, and larger targets—in addition to a lower build-out cost—to pick up its franchising pace.
ESA is already seeing results from its plan, welcoming its first franchisees—25 in total—in February. As its franchise expansion strategy broadens and picks up pace, ESA plans to expand its franchise team.
“We expect to execute between 10 and 20 franchise deals in 2018, in addition to the commitments from asset buyers for additional franchise deals codified in their development agreements with us,” Halkyard said.
ESA’s traditional growth strategy was to buy up competition. “They did a great job of doing that,” Alderman told Hotel Business. “We are the happy beneficiaries of this amazing $6 billion worth of real estate that ESA developed across the country.” The operator’s approach to franchising now opens ESA up to developer contact.
ESA doesn’t believe there’s much competition in the extended-stay segment (the brand rules out brands with suites). “We’re so dominant; we’re kind of the gorilla in the space,” said Stephen Miller, managing director of real estate and development at ESA. “I think we’re waking up people to that.”
With regard to developers, the brand wants to be able to sell “markets, not individual hotels”—but why stop there? ESA would rather give entire territories to developer partners if possible. Obviously, the brand would expect a set growth number in return.
“When you announce that kind of strategy in a market where there’s not a ton of stuff available—what I keep hearing from the brokers out there is that there’s not a ton of supply—it becomes one of those things where everyone really does say, ‘Okay, but I want in on this, too.’ We can only do so many, right?” Alderman said.
When it comes to investors, ESA needs to do a bit of educating, but once the format is explained and the vision is outlined, the bankers tend to open up. The brand pitches its 20 years of operation experience in the industry, and demonstrates how the typical ESA property can operate with 12 full-time employees and validate the flow-through.
“There’s only a few items on the P&L, right?” he said. “The simplicity of it is what we believe will really resonate in the franchise community, and that’s where we’re really looking forward to opening that up.”
This new strategy will be a three-year process for ESA. “Just because someone maybe doesn’t get a portfolio now—maybe it’s next time around,” he said. The operator is in search of “strategic growth partners and people who are committed to the segment.” While this approach is new, it’s important to note there’s no shift; it’s just an expansion.
“With Jonathan coming in—with so much ESA heritage through the previous positions—he really wants to refocus on that guest—on the long-term-stay guest—and on this developer to be able to get to those growth numbers that we announced at the investor day in 2016,” Alderman said.
According to what was announced during the investor day conference call, ESA is on the right track. The expected timeline that had been released in 2016 outlines the following for 2018: identify and purchase prototype, ramp own development, ramp franchise development and repurpose hotels (including dispositions with franchise agreements).
Also in the presentation slides, ESA gave an overview of how it would like its portfolio to transform over the years. In 2016, the brand owned 100% of its 629 properties. For 2021, the goal for ESA: own 73% of its properties. As for owned hotel average property EBITDA, ESA projected an increase from $1.1 million in 2015 to $1.6 million in 2021.
Ultimately, ESA’s customers are in a transition point. The typical ESA customer isn’t moving city to city, market to market, trying to collect points. “This is very localized,” Miller said, noting the average stay for an ESA guest is 24 days. “These people’s lives are in transition. They’re relocating. They’re traveling salespeople.”
Although, that’s not always the case for ESA guests: Some stay longer than the typical guest—sometimes a lot longer—for other reasons. “I walked into one of our hotels,” Alderman said. “One of our guests came down—a gentleman in shorts and a briefcase—looked like he was ready to head off to work. ‘Nice to meet you,’ he goes. ‘I’ve lived here for 10 years.’”
Unlike some in the industry, ESA welcomes OTAs, but is careful about its guest mix. “You’ve got to be cautious not to take too much of the transient business because it does change the labor model slightly if you’re planning to clean it once a week, but it’s that filling in around the edges to where we utilize the OTAs,” Alderman said. ESA also uses the OTAs in its marketing efforts.
It all comes down to ESA’s confidence in its format, however. This is why the brand is confident in its plans to move forward with franchising and expand on this business plan.
“The numbers prove out that the operating model makes sense,” he said. “It’s time proven. It’s time tested.”
And that’s important, especially with the nationwide labor crisis. “There are markets that are just growing so fast that it’s just tough to get people. It’s tougher to get 27 people than it is 12,” he said. HB