Extended Stay America’s New CEO Looks to Business Model Changes to Drive Growth

Just before the holidays set in, Extended Stay America made some news about a major leadership change: CEO Gerry Lopez would be succeeded by chief financial officer Jonathan S. Halkyard, effective January 1.

The hospitality industry’s extended stay sector is doing very well, with demand increasing and average daily rates staying steady or rising despite an influx ofsupply. And because it’s doing so well, other brands are also expressing more interest in the space, and competition is heating up.

In addition to the CEO change, Extended Stay America is undergoing a lot of changes as well as it pursues its ESA 2.0 strategy of becoming a more asset-light company. And like its peers, the company is embracing improvements in the guest experience.

With so much happening in this space, Skift spoke to Halkyard to get a better understanding of where he plans to take Extended Stay America, and where the sector is headed over the next few years. Here’s what he had to say.

On the CEO Change

When asked if he had been expecting to be named the new CEO, Halkyard said, “I, certainly, wasn’t expecting it, although when I joined the company four years ago as chief operating officer, and then as chief financial officer about two years ago, I was certainly, doing my best to prepare myself to be in a position to take this position. The timing, in the end, was really up to Gerry Lopez, our CEO, and our board, but I was delighted with the way the timing worked out.”

He added that he appreciates the fact that current CEO Gerry Lopez will stay on as a senior advisor for a 10-week transition period through March.

On His Goals as CEO

In short, Halkyard’s goals for Extended Stay America relate to growth so the brand can remain as competitive as it can be in the increasingly crowded extended stay space.

“We have, I think, a terrific company with a business model that is very appealing to our shareholders and a product offering that’s very appealing to our customers,” he said. “And, my No. 1 objective is to really build this brand, build its consistency, build its reach, and improve the value that it gives to our customers.

“Our customers, who spend with us an average of two to four weeks at a time when they’re away from home working on projects, or relocating, or doing training programs — our product is perfect for those folks who stay with us. And, we believe that we can continue to improve the value that we’re providing, as well as grow the reach of this brand through new hotels in North America. So, my No. 1 goal is to build the brand and improve the product that we offer, and take advantage of business model that we think provides a great return for our shareholders.”

That business model, Halkyard said, is a “a self-service hotel offering that’s really appealing to people who are very practical and very deliberate about their use.”

He added, “So, they appreciate the fact that we have full kitchens, they don’t require, and necessarily want, to pay for daily housekeeping. They often will cook in their rooms, so they don’t really require, nor do they want to pay for things like room service, or a food-and-beverage offering. So, it really starts with that, a product that really makes a lot of sense and is relevant to our customers.”

This type of hotel model, he said, gives Extended Stay America “a very lean operating model.”

“So, our hotels, really, will only have about a dozen employees, and because we own and operate our hotels, our performance, and our operating margins in the business, are very strong while we’re able to offer our customers an extremely competitive rate and a real value for that. So, it’s this symbiotic relationship between the product that we offer, which is very relevant to our customers, and then the economic model that we offer to our shareholders. And, we’ve made a lot of progress over the past several years in improving the financial shape of our company. And so, financially, our company is very strong, and it’s really turned out to be a very good situation for our shareholders, as well as our customers.”

On Going More Asset Light

But that owner-operator model that Extended Stay America has had for so long is beginning to change. With ESA 2.0, the company introduced the ability to franchise the brand for the first time in the company’s history. That asset-light trajectory is one that a number of companies have followed and continue to pursue.

When asked if he sees the company being more asset light going forward, Halkyard said, “We absolutely do, and you’re certainly correct in that that’s the way that the hotel industry has evolved over the past 10 years or so, and we’re evolving our company in that way as well.”

He said the brand was opening itself up to franchising “for two reasons. One, is to really just accelerate the growth of this brand. We intend to build new extended stay hotels — we have the financial capacity to do that — but we also think that developers, and ultimately, franchisees, can build new extended stay hotels as well, and really turbocharge our unit growth. The second reason is, that in so doing, we’re going to create, what over time will become a significant stream of franchise revenue. And, you’re right, investors value that more highly, and as you know, capital is not free, and yet franchise fees can grow, really, as others invest their capital to build hotels.”

In three or four years, he said, “this is going to be a company that, financially, looks a bit different than it does now. Although, if you’re a customer staying in one of our hotels, whether it be a franchise hotel or an owned and operated hotel, one thing I can be sure of is that there will be more Extended Stay Americas, we’ll have greater brand presence in the US.”

Halkyard said that the company, which has 625 hotels that it primarily owns and operates, hopes to have approximately 700 hotels by 2021. It has another 100 properties in the pipeline, with a mix of both owned-and-operated hotels and franchised ones. He estimates that mix will be 70 percent owned and 30 percent franchised, but added, “I do believe that we will be, over time, more franchised than owned. But, it takes a while to get there.”

On the Progress of an asset-light strategy

Halkyard described the ESA 2.0 growth strategy as part of current CEO Gerry Lopez’s legacy, and that strategy is “really just beginning.”

“I think Gerry’s legacy will be having established and begun this growth strategy that we’ve been talking about. I’ve worked closely with Gerry since he started here two-and-a-half years ago. He’s been a terrific CEO, a lot of fun to work with. Very bright, really welcoming of debate and discussion amongst the senior team, engages with employees. But, I think his legacy will be having launched this growth strategy.”

As for the strategy’s progress, Halkyard said, “We’ve articulated it, we’ve put in place some of the early leadership of it. You might have noticed, in our release [on December 18], we announced the sale of a hotel in Denver. This is an element of the strategy, which is to sell and monetize certain hotels in the system, for one reason or another, that are not strategic for us going forward. We have announced, recently, that we are working on the sale of, roughly, 25 hotel properties, which will be re-franchised. We’ve acquired several pieces of real estate and are close on others that will be where our new owned hotels are located. So, we’ve made progress on every front, but it’s still a relatively early. But, I think we’re making good progress. And, I expect that we’ll pick up the pace on all of those fronts as we begin 2018.”

the vision

Relevancy is something Halkyard wants Extended Stay America to have as a differentiating factor in an increasingly crowded extended stay market.

“We want to be a hotel company that is directly relevant to what our guests want and need,” he said. “Business history is replete with examples of companies, who having hit the mark with their customers perfectly, for a variety of reasons, expand beyond that, or overshoot it, or get lazy and undershoot it. And, we understand our customers very well. They’re unique in terms of what they’re looking for, versus, say a person who’s just staying a night or two at a Hilton Garden Inn, or pick the other hotels [to stay in].”

He continued, “Our customers have a specific reason they’re using our hotels. They’re traveling, generally, for business purposes, and they’re looking for value and they know value. And, I want to be a company where, whether they’re guests, or they’re investors, look at it and say, ‘That company knows what they are, they know who their customers are, and when it comes to meeting those desires they, absolutely, nail it.'”

Halkyard added, “Our core customer is someone who is needs to stay at a hotel for longer than a week. We serve customers who stay with us only a night or two, but that’s not what we’re built for. We’re built for the customer who’s staying with us longer than a week. And, the number of people in this country who are looking for that kind of accommodation is astonishing.”

And when it comes to innovation, he said, “And, that’s not to say we won’t innovate. We, certainly, will, but we have to remain focused on our type of customer, and then realize the implications of that focus, the positive implications for our shareholders, and our employees, and that’s, really, what it’s about.”

Why Extended Stay is hot

Why is there so much demand for extended stay? And why are so many companies interested in growing in this part of the lodging market? Halkyard said he thinks it boils down to how we work today.

“I think it comes down to a question of mobility,” he said. “Companies are requiring mobility of their workers. Independent business people require mobility in order to do their business. At the same time, people don’t like to move, or aren’t as willing to move as they once were, and that’s the flip side of mobility. So, you have this intersection of an economy that requires workers to be in different locations, and a workforce that is unwilling to pick up and move to those locations. It could be driven by family, dual careers, aging parents, or simply the fact that you can, now, live in one place and work in another. And, that is, while it’s always been a part of this economy, it’s an increasing part of this economy. And, it’s not just at our level of our customers, the number of executives who are, essentially, super commuters living in LA and working in Dallas, or working in New York and living in Chicago.”

He continued, “It’s astonishing, and one of the things we’re going to be doing this year is offering some data in this regard. We have some and we’ve talked about it, but this is a trend, which, pick any of the residential lodging offerings, or, certainly, Extended Stay America, we’re right at the intersection of it. And, it’s a big issue, and it’s one of the reasons why there is so much demand for this product.”

And with more companies wanting to grow in the space, Halkyard also sees opportunity.

“I think, certainly, the fact that Choice is acquiring the WoodSpring Suites brand, I think, is further validation of the appeal of the segment. We don’t see a tremendous amount of supply growth amongst extended stay hotels, and the fact of the matter is, over the past few years, and looking into the next few years, there is some growth in extended stay hotels.

“It, typically, is at the higher end, meaning a Residence Inn, or a Home2Suites, or that kind of hotel, as opposed to, say, our price point, or WoodSpring Suite’s. So, new competition, real competition, meaning another extended stay hotel within our trade area of one of our existing hotels, has not been a big factor over the past couple of years, and we don’t think it’s a big factor going forward.”

He explained, “On the higher end, folks aren’t staying in Residence Inns for six weeks at a time. That’s a pretty expensive proposition, and you, probably, might as well just get an apartment or something. On the other hand, on the real economy end, companies aren’t putting their people there. So, we think we’re in that sweet spot where we’re affordable for an extended stay, but we’re of a quality that corporate customers are going to put their folks there. And, we like that place, and we don’t want much company there.”

And when asked if the popularity of homesharing has had any impact or influence on the extended stay market, Halkyard said he didn’t see any, nor is it much of a threat.

“No, we haven’t. Not that I can think of. We don’t think so,” he said. “Believe me, we look for it, we’ve done work analyzing it, we talked to our customers to understand what alternatives they’re reviewing. I think the data show that this is much more prevalent in Europe than it is in The United States, but, obviously, it’s a real factor here, as well. Those options tend to be concentrated more in urban areas than suburban areas where our hotels, typically, are and where the brand generators for our hotels, typically, are. So, we have not really seen an impact, I think that’s borne out by our financial performance. But, I don’t take it lightly, and we’re constantly on the lookout for that. And, we think we have ways to defend against that.

On Future Plans

Would Extended Stay America ever consider going international or launching another brand?

Halkyard said, “At this point, the answer to both of those questions is no. This brand is well-known. We have permission to open another two or three hundred of these units in the U.S., and we don’t think we need to go outside the U.S., nor introduce a sister brand in order to capture that economic opportunity.”

What about growing via mergers or acquisitions? Would the company consider doing that at some point down the line?

Halkyard said, “Again, I think that building our own hotels, or returning our capital to shareholders, are two very productive uses of capital, right now. I won’t say never, but an acquisition, with the potential confusion in integration risk, that that will bring, not to mention asset prices, right now, don’t make that option appealing to me.”

The consolidation that we’ve seen in hospitality hasn’t had much of an impact on Extended Stay America, he added.

“No, it really hasn’t,” Halkyard said. “I can’t think of how it’s affected, outside here, on the supplier side, or the competitive side. If anything, the consolidation amongst these larger brands have the potential to shift focus away from the extended stay brands in these larger portfolios. I haven’t seen any evidence of that, but there’s always that potential. But, no, I would say that the consolidation hasn’t really affected us, we just continue to try to execute, here, in our segment, and we think it’s a terrific segment.”

As for innovation and improving the overall guest experience, Halkyard said we can expect the brand to focus on how guests book, check-in, and check out.

“The way in which our customers access our reservation system, and access our hotels during check-in and check-out, is, certainly, an opportunity for us to innovate,” he said. “Ours are not highly transactional lobbies. Within the room, probably, the greatest opportunity, for us, is enabling our guests, increasingly, to cast from their personal devices onto the televisions in the rooms. Our customers are using our free Wi-Fi, increasingly, to stream video. And, so we’re just going to work to make it easier, and a better experience to do that, and also drive revenue at the same time.”