Extended Stay America, Inc. (NYSE:ESA) today unveils a new analysis of extended stay lodging demand performed for the Company by PricewaterhouseCoopers that estimates total U.S. demand for extended stay properties at approximately 300,000 rooms—compared to supply of less than 100,000 such rooms. Based on this analysis and the strong performance of its existing properties, the Company also announces it expects to continue rapid development of its products using internally generated cash flow and moderate debt facility increases.
The PricewaterhouseCoopers study is the most comprehensive study of demand for extended stay rooms by age, income, and occupation of guest population. It is also the first to estimate future demand for extended stay rooms based on demographic projections.
PricewaterhouseCoopers found dedicated per capita use of extended stay hotels has been increasing steadily over the last several years, from five room nights per 100 persons in 1992 to nine room nights per 100 persons in 1997. And the firm reports steady growth in the demographic groups that have the greatest propensity to use extended stay hotels: 35 to 49 year-olds, those earning $50,000 and more annually and those in managerial and professional specialty occupations.
In the first half of 1998, upper-tier extended stay properties enjoyed occupancy rates 10.0 percentage points higher than those of U.S. upscale hotels, the comparable chain scale segment, according to PricewaterhouseCoopers, Bear Stearns & Co., Inc. and Smith Travel Research. Lower-tier extended stay properties had occupancy rates 11.3 percentage points and 6.9 percentage points higher than standard economy and budget hotels respectively, comparable chain scale segments, PricewaterhouseCoopers, Bear Stearns & Co., Inc. and Smith Travel Research report.
Today, extended stay rooms comprise less than three percent of the room inventory in a majority of the 173 lodging markets tracked by Smith Travel Research, PricewaterhouseCoopers says. And the U.S. markets in which extended stay hotel construction is most active have been growing faster than the U.S. economy overall, according to the firm. Examples are Atlanta, Dallas and Denver.
“The extended stay lodging concept offers some of the most compelling economics in the industry,” observes Bjorn Hanson, Ph. D., New York-based chairman of the PricewaterhouseCoopers lodging and gaming group. “It is a category with the potential for substantial future growth.”
Based on the findings of the PricewaterhouseCoopers study, Extended Stay America, Inc. believes conditions are favorable for continued development of its products. The Company expects to exceed its original plan of 300 properties by the end of the year 2000 in December of this year. The Company currently has 257 operating properties and expects to open more than 100 additional properties by December 31,1999. The Company anticipates that, beginning in 1999, internally generated cash flows and moderate increases in its debt facilities will allow it to open 50 to 70 properties annually with total development costs of approximately $350 million. Based on current development plans, the Company anticipates that the debt required to complete the development of properties opening through December 31, 2000 will not exceed 50 percent of their cost.
George D. Johnson Jr., President and CEO, of Extended Stay America, Inc. commented: ” Our existing properties continue to exceed expected returns, with properties open for more than one year producing property level EBITDA of 17 percent of their cost. The PricewaterhouseCoopers study along with our outstanding Gallup guest satisfaction scores further validate the significant demand for our products. We believe that we have an opportunity to build on our strong base to increase market share by opening more properties than any of our competitors over the next two years.”
The Company also reported that the results of its operations through August 31, 1998 have been consistent with that of the first two quarters of 1998, which exceeded analysts estimates, and that it is comfortable with analysts estimates of income for the third quarter of 1998, before the non-recurring expenses discussed below.
The Company currently holds options to acquire approximately 120 sites for development. Based on the Company`s current assessment of the capital markets, it does not expect that all of these sites will be developed within their current option periods. The Company expects to negotiate revisions, extensions, or other outcomes with respect to many of the existing options. If these negotiations are not successful, the Company may not be able to recover all of the costs that have been incurred to acquire the options and perform various levels of due diligence. Due to the uncertainty regarding the outcome of such negotiations, the Company expects to establish a valuation allowance for these costs which will result in a non-recurring expense of approximately $8 million, net of tax, for the period ended September 30, 1998. The Company expects to maintain as many options on sites in the future as is financially prudent so that development can be accelerated in the event that the capital markets become more favorable.
George D. Johnson Jr. commented: “We are fortunate to have the largest equity base in the extended stay segment which will allow us to continue to grow faster than any lodging company in history. As a result of the two year development time frame for our products, we must commit to a development strategy for the next two years based on current capital market conditions. While we are positioned to open properties at an even faster pace, we do not believe that it is prudent to dilute the holdings of our existing stockholders by issuing equity at current market prices. Nor do we believe that it is prudent to increase debt beyond the reasonable levels that we established as a part of our initial business plan. Further, we believe that by maintaining our leadership position in the industry, along with a strong financial position, we will enhance the possibilities of various strategic opportunities in the future.”
Certain statements and information included in this release constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied in such forward-looking statements. Additional discussion of factors that could cause actual results to differ materially from management`s projections, forecasts, estimates and expectations is contained in the Company`s SEC filings.