03/23/2017 | by
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ESH Hospitality, Inc. (NYSE: STAY), the owner of more than 620 hotels in North America, is looking to build its presence in the extended-stay hotel business by taking a “deliberative” approach to growth in the coming years.

ESH is the REIT subsidiary of Extended Stay America (ESA), Inc. ESH and ESA shares trade as a single unit.

The company’s brand, Extended Stay America, serves the mid-priced, extended-stay hotel segment. The average length of stay for one of the company’s customers is around 26 days.

In an interview with REIT.com, ESH President and CEO Gerry Lopez said the company expects to expand its market share by focusing on individual assets and markets, rather than acting on a portfolio-wide basis, he explains.

The five-year plan, dubbed ESA 2.0, involves the selling, building and franchising of assets. It reflects a return to an earlier, successful strategy of unit growth, according to Lopez. In contrast, ESA 1.0, which ran from 2011 to 2016, involved renovating the entire portfolio, installing a revenue management system and organizing a sales force to target the extended-stay market.

Return to Unit Growth

During the last 14 months, ESH has sold or placed under contract 57 hotels. Lopez says the process of shedding what it views as non-strategic assets is just getting started. The list includes ESH’s hotels in Canada. Located in three separate provinces, the hotels don’t make sense from an efficiency perspective because of the great distances between them, he says.  

Going forward, ESH will look to develop new hotels in those markets where it already has a presence and anticipates continued growth. Lately, the markets that most appeal to ESH are those located in the Southeast that have benefitted from a surge in auto manufacturing and the related business travel.

“We see those markets doing really well into the future; that will be a prime area for us,” according to Lopez.

Looking ahead, the company expects to build 70 to 80 new hotels by 2021, with an even split between assets owned and franchised. “Our unsolicited franchise inquiries, driven by our brand equity, [signal] a pent-up demand for this brand. However we want to initially concentrate on owners who will commit to multiple locations,” Lopez says.

Chad Beynon, analyst at Macquarie Capital (USA) Inc., says the ESA 2.0 plan “is gaining traction” and should result in unit growth starting in 2019.

“With 70 percent of profits from the coasts and 75 percent of properties in suburban markets, we believe STAY is well positioned, given current industry trends,” Beynon adds.

Michael Bellisario, analyst at Robert W. Baird & Co., says the Extended Stay America portfolio should produce revenue per available room (RevPAR) growth above its peer competitors throughout 2017 as it continues to reap the benefits from its extensive renovation and repositioning program.

Business Versus Leisure

Business travelers account for about 60 percent of ESH’s revenues. Lopez points out that growth in business travel hasn’t been as dramatic in the last couple of quarters as it was a year ago, when growth was in the double-digits. Nowadays, double-digit growth is coming from the leisure segment, according to Lopez.

For ESH, online travel agencies (OTAs) are key to attracting leisure travelers and unofficially serve as a marketing and distribution channel for the company.

“Even after paying the OTA commission, the rate we get is higher than our average daily rate,” Lopez explains. OTA guests, who typically stay two to three nights, fill ESH’s schedule when there is not enough extended-stay demand, Lopez says. “It allows us to control demand at each hotel much more effectively than we otherwise could.”

Restrained Supply

As it undertakes its strategy of deliberative growth, Lopez points out that new hotel supply does not pose a threat at this time.

He explains that the vast majority of announced new supply consists of upscale and upper-upscale chain properties. “In the economy segment, there are virtually no projects announced, certainly none by the majors,” Lopez says.

Revenue per available room (RevPAR) in 2016 was just under 4 percent, and ESH’s most recent guidance calls for RevPAR growth of 1 percent to 3 percent in 2017. “It’s not that we’re any less confident about the business, it’s just that there is more uncertainty,” Lopez says.

Lopez adds that he is cautiously optimistic about the overall macroeconomic environment for the next few years, due in part to the potential for lower corporate taxes. If President Donald J. Trump’s infrastructure spending program comes to fruition, “that would be great. All those guys will be staying with us.”