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Extended Stay Ends 1st Franchise Conversion, Eyes Unit Growth

Zacks Equity Research

Extended Stay America, Inc. STAY announced that it opened Extended Stay America Houston IAH Airport in Houston, TX, an all-suite property owned by an affiliate of Provident Realty Advisors, Inc. The affiliate recently purchased 16 Extended Stay hotels. With the addition of this, all 17 hotels will be managed by Aimbridge Hospitality.

Notably, this marks Extended Stay’s first of the five franchise conversion, wherein, Provident is committed to build or convert hotels as part of the acquisition of the initial portfolio.

The move is in line with Extended Stay’s efforts to build a solid line-up of franchise and expand brand presence. Notably, the company’s shares have gained 17.4% so far this year, slightly underperforming the industry’s 18.8% rally.

 

Continual Expansion Through Franchise Bodes Well

In a bid to drive growth in the long run, Extended Stay is banking on numerous efforts. The company is refocusing on core customers in lieu of focusing on fleeting customers. It is banking on increasing unit growth. Extended Stay has been increasingly focusing on strengthening franchise relations of late. The move underscores its aim to take the franchised hotel count to 150.

By 2021, the company’s portfolio will have 700 Extended Stay branded properties, out of which nearly 70% will be owned or operated and 30% franchised.

In September, it closed the deal to sell 32 hotels for $125 million. However, Extended Stay will continue to manage all 32 hotels. This brings the total number of franchised or managed hotels to 70 at the end of the fourth quarter. Meanwhile, during 2018, the company’s total pipeline grew by over 60%.

Bottom Line

We believe that the disposition of assets and franchise conversion will help the company to lower general and administrative expenses, which in turn should boost net income. Further, for 2019, Extended Stay expects total revenues (including franchise and management revenues, and asset dispositions) of $1,230-$1,250 million.

Also, the company can navigate intense competition from the likes of Marriott MAR, Hilton HLT and Hyatt H by continuously focusing on unit expansion through franchise development.

Extended Stay currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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