Extended Stay America, Inc.

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Extended Stay America, Inc.

450 E. Las Olas Boulevard, Suite 1100
Fort Lauderdale, Florida 33301
U.S.A.
Telephone: (954)713-1600
Fax: (954)713-1660
Web site: http://www.exstay.com

Public Company
Incorporated: 1995
Employees: 6,100
Sales: $518 million (2000)
Stock Exchanges: New York
Ticker Symbol: ESA
NAIC: 721110 Hotels (Except Casino Hotels) and Motels

Established in 1995, Extended Stay America, Inc. (ESA) operates some 400 extended-stay hotels in 38 states. The facilities, which are a cross between a hotel room and an apartment, cater to business travelers on assignment as well as people who simply need long-term accommodations for other reasons. ESA has three brands of lodging that are generally priced by the week but are also available on a nightly basis. Crossland Economy Studios range in price from $169 to $199 per week, offering a double bed, limited kitchen facilities and utensils, cable television, a table and chairs, voice mail with free local calls, and a computer data port. Extended Stay America Efficiency Studios, priced between $199 and $299 per week, offer larger rooms and a recliner. StudioPLUS Deluxe Studios, which cost as much as $399 per week, offers such amenities as a fitness center and an outdoor pool or spa, and features a separate living area and kitchen. Based in Fort Lauderdale, Florida, ESA is chaired by businessman Wayne Huizenga, best known for his success in building Blockbuster Video and his ownership of the Miami Dolphins, Florida Panthers, and Florida Marlins professional sports teams. Huizenga turned to ESA and several other ventures after the 1995 merger of Blockbuster Video and Viacom left him without active control of his former business.

The Extended-Stay Concept: Dating Back to 1975

The explosive growth in the mid-1990s in the extended-stay segment of the lodging industry hearkened back to the 1950s when Kemmon Wilson took advantage of the post-World War II interstate highway system to create the Holiday Inn chain, resulting in a vast number of motor lodges springing up across the country. In that same period, another man who would have a tremendous influence on lodging got his start in the business. Kansas native David L. Brock cofounded a hotel company in 1956. He and Wichita developer Jack DeBoer coined the term “extended stay” and opened the first extended-stay hotel for business travelers in 1975. They called it Residence Inn, which grew into a chain of 96 hotels before being purchased and expanded upon by Marriott International. An Atlanta company named Suburban Lodge developed the economy segment in the extended-stay business in 1987, and other local developers also built similar facilities, but no one was in a position to attract the necessary capital to attempt a national rollout of an economy version of Residence Inn. Moreover, the lodging business in general was overbuilt in the 1980s, further dampening investor interest in the concept.

By the mid-1990s, however, a number of factors changed the viability of the extended-stay economy segment. Looking to cut costs, businesses were more receptive now to the idea of cheaper extended-stay lodgings, and the increasing dependence on high technology required many employees to travel for long-term training. Businesses also saved money by downsizing staff in favor of bringing in contractors on a project basis, people who would also need affordable accommodations for weeks at a time. Added to this rising tide of business customers were other potential guests that could help keep vacancy rates low: military personnel; construction workers; people relocating or looking for a new apartment or home; and people looking for long-term lodging for personal reasons, such as divorce, or simply to visit family members. Industry statistics also made a compelling case for investing in extended-stay hotels. Out of America’s 3.1 million hotel rooms, less than 10,000 were in the economy end of the extended-stay market. Extended-stay hotels in general enjoyed a higher occupancy rate than standard hotels and with much less turnover. Expensive frills were not expected by guests, saving both on construction and the cost of paying personnel to provide services. Moreover, developers could choose secondary sites. There was no real need to acquire expensive property near highways to attract an ever-changing supply of overnight guests. Less expensive land located near industrial parks was actually more desirable. As a result of all these factors, extended-stay hotels were much cheaper to build and operate and generated a high profit margin. Because the demand for such accommodations far exceeded the available supply of rooms, the stage was set for economy extended-stay hotel chains to finally roll out on a national basis.

Wayne Huizenga had never been involved in the hotel business, but he had experience in consolidating a fragmented industry and taking a concept nationwide—and his name attached to any venture was certain to attract a great deal of attention. Huizenga started out in waste management. After his father’s construction business failed, Huizenga ran a family friend’s garbage business until 1962 when at the age of 25 he borrowed $5,000 from his father-in-law to buy a truck and a garbage route. The business, Southern Sanitation Service, would evolve into Waste Management Inc. With $2 billion in sales it would become the world’s largest waste handler. Huizenga left Waste Management in 1983 and became involved with several other businesses before buying into Blockbuster Video. As he had done in waste management, Huizenga quickly bought up smaller operations and opened new outlets at a breakneck pace until he had created yet another financial behemoth. In just seven years the Blockbuster chain grew from a $7 million business with 19 stores to a $4 billion business with more than 3,700 stores in 11 countries. Blockbuster merged with media giant Viacom Inc. in 1994 and Huizenga ceded control to Viacom’s chairman of the board, Sumner Redstone. Huizenga was still the owner of three south Florida professional sports teams, but soon after the Viacom merger he and his longtime lieutenants were looking at a number of business opportunities.

Establishing Extended Stay America in 1995

Huizenga had several guidelines for selecting a new venture: it had to be able to be run from south Florida; it should be a service business as well as a repeatable business, like renting videotapes or leasing garbage containers; and it had to be a concept that could be rolled out nationwide. Longtime friend and executive at both Waste Management and Blockbuster, George Johnson, Jr., approached Huizenga with an idea in early 1995. As a business traveler himself, Johnson recognized the need for moderately priced hotels for stays of a week or longer. Extended-stay hotel rooms were growing at only 3.3 percent a year, with very few rooms in the economy price range, thus leaving an open niche in the business that could be exploited. Huizenga was persuaded, and in January 1995 he and Johnson invested $56 million to start Extended Stay America, which they incorporated in Delaware. Johnson would serve as president and chief executive officer, with Huizenga as chairman of the board. In August of that year, ESA opened its first Extended Stay America Efficiency Studios property in Spartanburg, South Carolina, Johnson’s home state, where in the early 1970s he served in the House of Representatives. In that same month, ESA would acquire an existing extended-stay property in Marietta, Georgia.

With just two hotels in operation and nine others under construction, ESA made an initial public offering of its stock in December 1995. On the strength of Huizenga’s name, ESA stock more than doubled in price on the first day, opening at $13 per share and closing at $27.50. Vowing to become the Wal-Mart of lodging, Huizenga and Johnson quickly moved to justify investor confidence in ESA. They opened newly constructed hotels and acquired existing facilities in Georgia, Kansas, and Las Vegas, and a traditional hotel in Colorado that was converted to an extended-stay format. By the end of 1996 ESA would be operating 40 Extended Stay America Efficiency Studio brand hotels, far more than originally projected, with 50 additional properties under construction and the land for another 106 under option. For the year, ESA would generate $38.9 million and post $7.7 million in earnings.

ESA was not alone, however, in recognizing the potential in extended-stay lodging. Studio Plus Hotels went public a year before ESA and was expanding quickly, as was Sierra Suites by Summerfield Hotel Corporation. Traditional hotel chains also looked to enter the market. Doubletree launched Candlewood Hotels. Choice Hotels International—which boasted such brands as Comfort, Quality, Econo Lodge, and Rodeway—introduced MainStay Suites, and Marriott International broke ground on its first TownePlace Suites property. Furthermore, Prime Hospitality announced plans for a chain of AmeriSuites and Wyndham was developing a concept.

In January 1997 ESA opened its first Crossland Economy Studios brand hotel in Independence, Missouri. Crossland was ESA’s entry in the “budget” category of extended-stay lodging. Also in January, ESA acquired Studio Plus Hotels in a stock swap worth approximately $290 million. Studio Plus had 35 hotels in operation and another 11 facilities under construction. By May, ESA would open its 100th hotel, and in June it would move its stock from the Nasdaq to the New York Stock Exchange. The company negotiated a $500 million line of credit to fuel its continued growth. By the end of 1997 ESA would have 185 hotels in operation under its three brands, with another 84 properties under construction and 146 sites under option. Management was now projecting that by 2000 it would have 540 hotels in operation. Revenues for 1997 increased to $130 million, although rapid expansion resulted in lower earnings, which fell to $2.6 million.

Company Perspectives:

Three brands, one mission: deliver the finest in extended-stay lodging at the best possible price.

Slowing the Pace in 1999

In 1998 ESA opened its 200th property, prompting management to boast that it was the fastest-growing hotel chain in American history. According to Bear, Stearns & Co., Best Western required 29 years to reach the 200 mark, La Quinta Inns 21 years, and Holiday Inns nine years. Sluggish stock prices in the hotel industry, however, would curtail ESA’s rapid growth. Investors were concerned that overbuilding would lead to lower profits. Although continued expansion could increase revenues to the point where its stock would follow suit, by the end of 1998 ESA decided to cut back on the number of hotels it would roll out in 1999. Instead of 120 new properties it decided to open between 50 and 70. Despite tepid support from Wall Street, ESA posted healthy results for 1998: earnings of $28 million on revenues of $283 million.

Aside from investor caution, the economy extended-stay lodging business was becoming the object of social criticism. In addition to business travelers, economy hotels were attracting families but lacked the recreational areas necessary for children. Zoning laws that would require such facilities were skirted by building in commercial areas. Furthermore, the low-end segment of extended-stay hotels were hardly selective in clientele and saw a high incidence of crime. Add these factors to the cheap construction of the buildings, and critics warned that some extended-stay hotels were simply slums in waiting. On the other hand, extended-stay hotels were not intended for families and communities themselves would have to bear responsibility for not providing adequate low-cost housing for its residents.

As ESA scaled back construction in 1999, it concentrated on sites where there was an opening in the market while giving up options in areas that already had strong competition in extended-stay lodging. Overall, the industry experienced a slowdown in construction despite no real evidence that demand had fallen. While the stock market, enamored with tech stocks, rose significantly in 1998, lodging stocks actually lost value. Publicly trade companies now shied away from rapid expansion, fearing that earnings would be hurt. ESA faced a further problem in 1999 when some of Huizenga’s other business ventures stumbled, in particular AutoNation, a “cradle-to-grave” business that was intended to combine new and used car dealerships with car rental agencies and repair shops, as well as auto financing and insurance operations. In the four companies he chaired, Huizenga saw the value of his stock fall from an earlier peak of $3.2 billion to less than $700 million. ESA continued to generate cash, earning more than $47 million on revenues of $417 million in 1999, but just as the company’s stock initially had benefited by its association with Huizenga it now suffered when his magic touch was being questioned by investors. ESA now planned to build just 30 hotels in 2000, compared with 57 the company opened in 1999 and 120 in 1998.

ESA stock rebounded somewhat in the first few months of 2000, but because of the company’s large amount of free-cash flow it was in a position to continue to grow without resorting excessively to the capital markets. Only Marriott among ESA’s competitors was able to continue opening new extended-stay hotels. ESA ended 2000 with 392 hotels in operation, 19 properties under construction, and another 58 sites under option. Overall in 2001 it looked to open 28 additional hotels. Financially, the company again showed significant gains over the previous year, posting $518 million in revenues and more than $70 million in earnings. Its stock also showed marked improvement, more than tripling during the period of March 2000 to February 2001. Nevertheless, ESA had its share of skeptics who questioned if it could continue to fill rooms at a high rate given a slowing national economy and the price cutting of competing chains. There were also concerns about how well older ESA properties were performing. Company policy, unlike others in the industry, was not to report results of hotels open more than one year. Management insisted that properties showed tremendous growth when they first opened and that comparing numbers to subsequent years would give a false impression of weakness. Critics countered that the only way to determine a company’s long-term prospects was to gauge how established properties were performing. The fear was that older properties had declining revenues and that the hot flash of profits derived from newly opened hotels were simply masking the reality of ESA’s situation. Only time would reveal the truth, as was the case for the extended-stay hotel business in general. With economic conditions far less rosy than those of the late 1990s when the segment show such dramatic gains, it remained to be seen if consumers would continue to spend their money on extended-stay hotels or simply choose to sleep on a friend’s couch.

Principal Operating Units

Crossland Economy Studios; Extended Stay America Efficiency Studios; StudioPLUS Deluxe Studios.

Principal Competitors

Candlewood Hotel Company, Inc.; Choice Hotels International Inc.; Equity Inns; Marriott International, Inc.; Suburban Lodges of America.

Key Dates:

1995:: Extended Stay (ESA) is incorporated and makes initial public offering of stock.
1997:: ESA acquires Studio Plus Hotel, Inc.
1998:: ESA opens its 200th hotel.
2000:: Company reaches $500 million in annual revenues.