Extended Stay Hotels' brands find a home

Hotel & Motel Management, June 21, 2004 by Jeff Higley

Spartanburg, S.C. -- The extended-stay segment's new 300-pound gorilla is busy settling into its position as the sector's largest supplier.

Extended Stay Hotels, a company formed after The Blackstone Group acquired the assets of Extended Stay America, has no plans to divest any of its brands or enter the franchising arena, according to Gary DeLapp, president and c.e.o. ESH will manage the 599 hotels with 66,300 guest units open--about 27.6 percent of all of the 240,100 extended-stay rooms open in the United States. Its brands are Homestead Studio Suites Hotels, Extended StayAmerica Efficiency Studios, StudioPLUS Deluxe Studios and Crossland Economy Studios. The latter three were part of the $3.3-billion ESA deal. Homestead was acquired by Blackstone in November 2001 from Security Capital for $740 million.

"One of the driving factors in the transaction was that we anticipated some of the advantages of scale," said Jonathan Gray, senior managing director for Blackstone. "We would not have been able to do the deal had we not already owned Homestead."

"It's been very satisfying," DeLapp said. "There's a euphoria about the whole thing."

"It's been an extremely smooth transition," Gray said. "A lot of credit goes to the Extended Stay management team led by George Johnson and Corry Oakes. They were complete gentlemen and during the 60 days between when the deal was announced and when it was final, they allowed us to get intimately involved in the business. That was extremely helpful."

DeLapp said the timing is perfect for the new company, which was formed in May after ESA shareholders approved the sale for $19.625 per share in cash.

"We're getting the lift from the economy and efficiencies of combining the two companies," he said.

Gray said there were four reasons why he pursued Extended Stay America.

* Blackstone already had Homestead and saw significant synergies between the two companies.

"Plus, we loved our management team," Gray said. "Our confidence level in Gary and the rest of the executive team was very high that they could integrate the entire package."

Other key ESH executives include: Steve Woolridge, executive v.p. of operations; Tim Groves, executive v.p. of sales and marketing; David Weiss, v.p. of revenue management; and Marshall Dildy, v.p. of human resources.

* Blackstone understands the extended-stay business.

"It's a different model than traditional lodging, and there is a learning curve," Gray said. "We went through 35 months of negative [revenue per available room] and it was still performing at high margins. If it could perform well in a tough environment, we know it can perform well in a positive environment."

* It's the right time in the economic cycle.

* The aggressiveness of the financial markets allowed financing to be readily available.

Blackstone refinanced $660 million for Homestead at the end of 2003. Gray called Johnson in late January to begin acquisition talks, and a deal was struck by the end of February.

"A large number of bond holders and [mezzanine] investors now are exposed to it and understand the business," Gray said. "That could be good long-term for the sector."

The deal is the largest transaction in Blackstone's history--and one of the quickest.

"It was a month, soup to nuts," Gray said.

Growth plans

DeLapp said the combined company will have a limited expansion plan. It will focus on improving operating efficiencies at the property level.

"Both companies were similar in how we operate the business model," DeLapp said. "They were a terrific developer and construction company. We're very much an operating business."

The first decision for the company's leadership was to base the new company in Extended Stay America's former headquarters in Spartanburg, S.C. It's closing the former Homestead offices in Atlanta and El Paso, Texas.

About 15 people will move to Spartanburg from Atlanta, and the Spartanburg office will house about 150 employees.

As of early June, the company had no intentions of combining or selling any brands because executives like having multiple price points in their portfolio. In many cases, there is more than one of the company's brands in the same market, which creates opportunities, DeLapp said.

"Because of the different price points, when you have strong demand in one [of the brands], you can feed the others," he said.

The company has 10 Extended Stay America-branded properties scheduled to open by the end of the year. No other expansion has been determined.

"There will be limited new growth," DeLapp said. "I don't figure us to be in the construction business. We'll focus more on the operating business.

"We'll always keep our eyes open [for potential acquisitions]," he added. "But we've got to get our arms around what we have today."

The company plans to remain privately held for the time being and will continue to own its assets. Gray acknowledged that one of the biggest risks Blackstone has as a result of the deal is that its exit strategy will be more difficult because of the size of Extended Stay Hotels. Because of the that, there is a greater likelihood that a merger with a public company could happen as part of the exit strategy, he said. He stressed that no such scenario is imminent.