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Extended Stay: A Good Strategy that failed

This is a strategy paper from MBA

Extended Stay America filed for bankruptcy on June 15th 2009. This chain was another casualty of the current economic recession. The 680-property chain began having trouble repaying the debt late last summer as credit markets began melting down. Extended Stay began protracted negotiations in December with lenders to restructure $3.3 billion in mezzanine debt. But that effort broke down early last month when two junior debt holders filed a lawsuit to block the possible foreclosure of the chain after Wachovia, lender and servicer of the mezzanine and first mortgage debt, declared a default when Extended Stay failed to make a $3.5 million payment.

Although the chain’s inability to service the massive debt was the main problem, declining hotel fundamentals didn’t help the situation. From January through May, revenue per available room (RevPAR) fell by more than 23.2% at Extended Stay properties compared with the same period in 2008, the firm disclosed in its bankruptcy filing.

"Extended Stay is in a liquidity crisis that is directly attributable to the impact of the deteriorating condition and instability of the financial markets on the expected performance of the entire hospitality industry," said Joseph Teichman, Extended Stay's secretary and general counsel. "Since the acquisition closed in June 2007, Extended Stay has operated in a difficult financial environment driven by reduced consumer and commercial spending and high fuel prices, resulting in a devastating impact on occupancy rates at Extended Stay hotels."

"There’s simply no fat for these hotels to absorb any more. Nobody reasonably thought that we would dip this quickly and this deeply, with such a prolonged decrease in demand."
HVM LLC, which manages the chain’s hotels, said in a statement that the filing should have no impact on hotel operations. The court granted Extended Stay immediate use of cash collateral from continuing operations instead of requiring debtor-in-possession financing to fund HVM’s operations. Gary DeLapp, president and CEO of HVM, said the chain has no plans to close or sell any of the hotels or lay off employees.

Extended Stay describes itself as the largest mid-price extended-stay hotel company in the United States, with about 76,000 rooms in 44 states and Canada. The company operates
under the Extended Stay Deluxe, Extended Stay America, Homestead Studio Suites, StudioPlus and Crossland brands. JLL’s Al Calhoun described Extended Stay as "one of the most impressive organizations in the industry," in the middle of the extended-stay market, with uniform management, excellent geographic distribution and good organic growth.

The strategy of the chain is to provide budget studios for business travel, relocation, temporary housing or vacations as well as suites for daily, weekly and monthly rentals. It offers freedom from the confines of the average hotel room. Every suite has a kitchen to cook and eat on your own schedule. It allows customers to spend more time relaxing and less money on the trip whether its business or leisure. It offers a variety of amenities including a fully-equipped kitchen, appliances and linens, unlimited local phone use, a computer data port and personalized voice mail, housekeeping and guest laundry facilities exercise centers and pools and Wi-Fi high speed Internet access available in every room.
The strategy of the extended stay hotel is to make long-term hotel living affordable and to provide hotel accommodations that create a home-like experience. There is more space to live and work, as well as amenities specifically designed with long-term business, leisure or relocation travelers in mind – two of these conveniences include a kitchen and 24 hour guest laundry facilities. Instead of simply getting a room, you get a studio suite that is larger than most typical rooms and can be more economical when compared to corporate apartments or other extended stay lodging options. Extended Stay Hotel is a space to call your own while away from home or between places to live during a corporate relocation, business assignment or vacation.

Extended Stay Hotel provides both space and affordability all in one place. Located near most metro areas for added convenience, Extended Stay Hotel has convenient locations in most major markets including Chicago, Los Angeles, Atlanta, Philadelphia, Boston, Washington D.C., San Francisco, and Dallas. Extended Stay Hotel is a good choice for travel needs, a week or longer in length. It is an ideal option for families on vacation because it offers an affordable place to stay with extra room and even a kitchen that can reduce food costs and help a great family vacation fall within budget. For business travel, the long-term hotel option is also beneficial because each studio suite contains vital business amenities.
Guests at Extended Stay's hotels lodge an average of 18 to 20 nights, compared with two to three nights at other hotels, HMV said, in a statement released last month.
This service offering at reasonable prices was a good and successful strategy for the chain till 2006 and made other hotel chains venture into the extended stay sector. Extended Stay had been so successful that it continued expansion through acquisitions well into 2006, and even opened ventured into Ottawa and Alaska which do not have much extended stay.
Due to the economic downturn, by last summer, hotel occupancy was softening, and it declined sharply after September. Led by a drop in corporate travel, that decline has accelerated as businesses have cut their staff and their spending. To quote the company, "The tightening credit markets, the reduction in construction activity and increased unemployment have decreased the demand for extended-stay accommodations, as fewer construction sites, consulting opportunities and travel plans are coming to fruition."

The main reason of the failure of the chain is its high debt to earnings ratio. The chain borrowed heavily and was not able to pay it back. The economic downturn resulted in corporations spending less on travel and laying off employees. This resulted in fewer customers for the hotel industry and Extended stay, which has a high number of corporate guests suffered heavily. The strategy was good but the management should have had the foresight to analyze the economic situation forecasts and should have gone easy in the expansion plans and taken some steps to manage debt.
Talent wasn’t directly responsible for the downfall of the hotel chain. High debt was the main factor for the bankruptcy. Extended Stay has a good customer service and one of my past employers used the chain for corporate travel. We never had any complaints with them.
One would think that Extended Stay would be a safe recessionary play as investors trade down in a weakening economy from higher end hotel and resort properties. So, it is a disappointment that such an effective chain had to file for bankruptcy. The good news is that the chain is continuing to function as usual and is not planning to lay off employees in the near future.
“Extended Stay Inc. has turned an important page in restructuring its debt and recapitalizing its business,” said Gary DeLapp, president and CEO of HVM L.L.C., “but for hotel guests, the story is the same: the same great service, the same convenient locations, same comfortable, value-priced hotel rooms.
“All hotels are open and welcoming guests as usual,” Mr. DeLapp said. “Our aim is to provide guests with a comfortable, convenient and affordable experience whether they stay for a night, a week, a month or longer.” He added that value-oriented business travelers, employees on temporary assignments, consultants, relocation professionals and leisure travelers who rely on the chain will notice no change in the hotels’ service or amenities.











References:

http://www.costar.com/News/Article.aspx?id=2F594CF664882296A3409B8193BBC15A

http://www.extendedstayhotels.com

posted by HappinessFactors @ 6:59 PM