NEW YORK CITY—Extended Stay America will franchise hotels for the first time as part of a five-year plan to expand, upgrade and repurpose the product, executives announced Thursday at the company’s investor day.

CFO Jonathan Halkyard said a move into franchising will have long-term benefits for the company.

“We are becoming asset-lighter with an improved quality of owned hotels,” Halkyard said. “Our cash-flow generation enables significant return on capital and deleveraging while also investing in the business and growing (earnings before interest, taxes, depreciation and amortization). We will be spending $1.4 billion over five years on new hotels and renovations, and will retire $500 million in debt while returning $1.9 billion to investors.”

Company officials plan to grow over the next five years from 629 hotels to more than 700 hotels with a mix of 75% owned and 25% franchised. All additional hotels will be new builds with projected costs of $85,000 to $95,000 per key and land costs between $1 million and $2 million.

CMO Tom Seddon said he anticipates owners will be interested in franchising Extended Stay America properties.

“We have all been in this industry a long time and think there will be interest,” Seddon said. “We are excited about attending (the NYU International Hospitality Industry Investment Conference) as the first opportunity to talk to a lot of people.”

Franchise fees will be “competitive,” Seddon said, because ESA has lower costs due to efficiencies such as not having a points-based loyalty program and by having staffing of only 12 or 13 employees per hotel.

Using data from HNN’s parent company STR, ESA has determined that it has hotels in only about half of the census tracts in the United States. Seddon said that means there is room for growth.

“We could double our total number of locations in the U.S. alone,” he said. “We do see the potential for 450 to 650 additional hotels over time.”

Company officials expect to see seven to 13 owned and built hotels and five to 10 franchise deals in the next year, with momentum building so that over five years there will be between 166 and 218 new hotels. Projections are for 514 owned and 190 franchisees to be open by 2021.

Franchises will be awarded in locations that are not strategic for ESA, Seddon said. The company typically concentrates on coastal sites, leaving other areas available for franchisees.

Seddon said ESA is seeking “sophisticated, multi-unit operators rather than one-off entrepreneurs” as franchisees. He said the preference is for a franchisee to have a cluster of locations in one area because ESA prefers multiple properties in a concentrated area.

“We are interested in giving people the opportunity to dominate markets with a cluster of hotels,” he said. “Our model is resilient with low break-even occupancies. We are extended-stay experts and are not dabbling in this segment. It is often difficult for a franchisee in Kansas to see why they should be part of a company that has 5-star hotels in Dubai.”

Seddon said ESA is working on new prototypes that will focus on clean-looking, functional designs.

“The hotel will act as a billboard for itself,” Seddon said. “The building screams what it’s all about.”

He said there will be more communal space, taking areas previously used for things such as laundry and vending and transforming them into multi-functional public space with life and energy.

Design changes include: shifting the orientation of the bed so guests are not staring at the kitchen while in bed; more storage space; and more efficient kitchen layouts that retain full-sized refrigerators.

New hotels are expected to average roughly the same number of rooms, about 110, as existing properties. Average daily rate is expected to climb slightly higher at the new property, averaging between $65 and $85. Revenue per available room is expected to be between $49 and $64. Seddon said that there is a price gap of about $25 to the closest extended-stay competitors, Candlewood Suites and TownePlace Suites.

He noted that ESA’s growth rate is twice the speed of those two brands.

CEO Gerry Lopez said ESA streamlined from five brands to a single brand after emerging from Chapter 11 bankruptcy five years ago.

ESA structured as a publicly traded company with three major equity investors—Blackstone, Paulson & Company, and Centerbridge Partners—which collectively hold about 60% interest in the company.
Lopez believes ESA has seen “consistent, initiative-driven organic revenue and RevPAR growth with best-in-class margins that deliver strong financial results” since the company’s bankruptcy.

He said that all hotels are profitable with average operating margins in the mid-50s and with a near doubling of EBIDTA over the five-year period, and $560 million returned to shareholders or authorized for return.

Lopez said the next step in the company’s growth is to focus on guest-centric new services, innovations and prototypes.

“We will become active in managing our real estate and will buy, sell transact and improve properties,” Lopez said.

Lopez said the company’s goals for the next five years are based on leading performance in the extended-stay segment and returning capital to shareholders by improving on their core competencies.

“There will be no new brands and no resorts, and we won’t become an urban company,” Lopez said. “We will do what we do in more places with new partners but will remain true to our brand heritage.”

He said that will remain true on the pricing side as well.

“We won’t swim outside of our lane,” Lopez said. “We will remain value and extended-stay oriented. We will not add brands or go international, although those options remain, and we are not dismissing them forever.”