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The past year has been a devastating one for the hotel industry, but Extended Stay America weathered the storm.
North America’s largest integrated hotel owner/operator kept all 560 of its hotels open through the worst months of the pandemic, while the portfolio’s occupancy dipped just slightly from 77 to 73 percent in 2020, according to a recent rating report from Moody’s Investors Service.
It helped that the average length of stay at Extended Stay’s properties is, well, extended. While guests spend an average of just two nights at a typical hotel, stays at ESA properties last for 30 nights on average.
“Longer stay guests result in more stable occupancy with lower customer acquisition and operating costs, resulting in higher margins than traditional hospitality properties,” Moody’s analysts wrote.
The operator’s solid finances, and the promise of a post-pandemic rebound, made ESA an attractive target for Blackstone Group and Starwood Capital, who dished out $6.3 billion to acquire the 62,257-key portfolio last month — one of the biggest Covid-era real estate deals.
“Travel and leisure is one of Blackstone’s highest conviction investment themes, and we have confidence in the extended stay model,” Blackstone U.S. acquisitions head Tyler Henritze said at the time.
The acquisition — which took the country’s largest lodging REIT private at a price of $20.50 per share — was financed with a $4.65 billion CMBS loan from JPMorgan, Citi and Deutsche Bank. Documents associated with that securitization, like the Moody’s report, provide an inside look at the properties’ finances.
As of April, occupancy in the extended stay portfolio had recovered to 79 percent, after bottoming out at 60 percent in April 2020.
The geographically diversified portfolio is spread across 40 states. By property value, the portfolio is most concentrated in California (mainly Los Angeles and the Bay Area), Florida (mainly Orlando, Tampa, and Miami), and Virginia (almost entirely in the D.C. metropolitan area).
Room rates vary significantly by market. At the high end, Extended Stay’s four New York City-area properties charge an average of $115 per night, according to underwriting. Bay Area markets also command triple-digit rates. On the cheaper side, room rates in markets like Dallas, Detroit and Atlanta are in the low-$50s.
Guests at ESA properties “are typically working on projects, corporate clients, residents needing temporary housing and other transient guests,” according to Moody’s. More than half of the portfolio’s 2019 revenue came from three sectors: construction, manufacturing/trade and utilities, and waste management industries.
While the portfolio’s occupancy rate only declined by a few percentage points, it combined with a 12 percent decline in daily rates to produce a 16 percent drop in revenue per room, and a 28 percent drop in net cash flow for 2020.
The size of hotels in the portfolio varies from 59 to 198 guestrooms, and the vast majority of them were built between 1995 and 2002 — with some outliers from as early as 1988 or as late as this year.
Over the past decade, ESA has spent an average of $140 million on maintenance and renovations per year, or $2,261 per room.
Rooms tend to be pet-friendly and come with fully equipped kitchens, while the buildings also provide laundry facilities, free breakfast, shuttle service and fitness centers.
Blackstone has a long history with Extended Stay, having bought it for $3.1 billion in 2004 before selling it to Lightstone Group for $8.2 billion three years later. Blackstone and partners bought the firm out of bankruptcy for $3.93 billion in 2013, and then took it public.
The ESA portfolio was somewhat larger in 2013 with 680 hotels, some of which were under less profitable brands like Homestead Studio Suites, StudioPlus Deluxe Suites, and Crossland Economy. The company pursued a brand consolidation and asset divestment strategy over the next several years.
At the depth of the pandemic last April, both Blackstone and Starwood picked up stakes in the REIT when its stock was still trading at single-digit prices. Last month, the companies had to increase their bid from $19.50 to $20.50 in the face of resistance from some shareholders.