THE SECOND QUARTER of 2017 put Extended Stay America in a good position for its planned expansion, company officials said. Now ESA has filed its franchise disclosure document and is in talks with at least eight prospective franchisees to buy or rebrand close to 90 existing hotels.
ESA is being highly selective in choosing its first franchisees, said the company’s Chief Executive Officer Gerry Lopez. “We’ll have focus, as promised, only on sophisticated and experienced owner-operators and developers who have access to their own capital, are already in the business and know how to run a hotel,” Lopez said during the company’s quarterly earnings call in late July. Besides the eight prospective franchisees, Lopez said, “We have additional earlier stage discussions with several more firms, all following the same pattern of experienced, well-capitalized operators.”
ESA franchisees can expect to invest between $9.4 million and $12 million for a new-build ESA hotel, according to the company’s FDD. New builds will be designed according to the ESA 2.0 prototype the company revealed in June 2016. Startup costs include a $75,000 pre-opening-services fee; a $10,000 application fee; $50,000 due upon approval of the application; and $15,000 no later than 120 days before opening.
Royalty fees are 5 percent of operating revenue. Other monthly costs include a 5 percent system services fee, which covers a range of services, including marketing, ESA website maintenance and developing and maintaining the reservation system.
ESA passes through to the franchisee booking charges from third-party intermediaries, such as OTAs. Franchisees may be required to make between $6 million to $9 million in improvements to their properties before they can open under the ESA flag.
Lopez said the company hopes to build 85 or more new ESA 2.0 hotels over the next few years, including franchised as well as owned and operated new builds. “[We] are currently in negotiations with a significant number of parties for both hotel block sales as well as deals to build a significant number of new franchised ESA hotels,” Lopez said. “We are also pressing forward with ESA-owned development, with four signed purchase agreements for land for owned balance sheet development in 2018 and 2019.”
During the second quarter, ESA’s RevPAR grew 2.4 percent to $53.04; for the first half of the year it rose 2.3 percent to $49.44. Occupancy increased 2.2 percent, ESA’s Chief Financial Officer Jonathan Halkyard said at the earnings call, aided somewhat by a .5 percent decline in ADR and a decrease in rooms under renovation compared to 2016’s second quarter.
“With respect to ADR, this quarter we had significantly more net bookings from our OTA partners compared to last year, which reduced our ADR and RevPAR growth rates for the quarter by about 130 basis points,” Halkyard said. “When a guest pays an OTA partner directly for his stay at ESA rather than paying at the hotel, the ADR and expense is the net amount rather than the gross amount, which has a dilutive effect on our ADR growth.”