After a strong 2020 that saw extended stay properties outperform their hotel peers, international groups are racing to balance their brand portfolios.
Investors, too, are keen on the sector, with a major vote of confidence in the US as Blackstone and Starwood Capital agreed a jointly backed USD6bn take-private deal for Extended Stay America.
The latest to join the fray, in both Europe and Asia, is Louvre Hotels. The company has announced it will launch the first properties under its new Tulip Residences brand this year. A first site in Joinville-le-Pont, France will act as a testbed for the concept, opening in the first half of the year, and will be followed by the first franchised property in Warsaw, Poland – ahead of a planned rollout to get to 30 properties. Louvre will also work with parent company Jin Jiang to customise the brand for the Chinese market, and expects to launch there later in 2021, with a similar growth aspiration of signing 25 sites by the end of 2022.
Radisson is developing a “brand extension” with Radisson Residences, and has said it will more than double its serviced apartment presence within the next five years. A 227–suite aparthotel under the Radisson brand will open shortly in south Amsterdam. Developed by ECHO Partners, the 10–storey block will operate under a lease signed by operator Cycas.
Also extending its brands into extended stay and beyond the group’s most profitable brand per sq m and largest aparthotel operator in Europe, Adagio Aparthotels, is Accor. The group recently signed a 124 room Novotel Living hotel in Tallinn, Estonia, which will be open by late 2022, adding to a previous commitment at Brussels airport. It also recently signed two European sites for Movenpick Living, with an Istanbul project opening this year and offering a mix of different sized apartments. This will be followed by an opening in the Swiss ski resort of Disentis, where a dual branded development featuring a Movenpick hotel and aparthotel is due to launch in 2024.
The Extended Stay takeover sees private equity investors – and often bidding rivals – Blackstone and Starwood Capital agree a 50/50 ownership, making an all–cash offer. However, the bid has not met universal approval, with 3.9% stakeholder Tarsadia Capital insisting the offer undervalues ESA.
Barry Sternlicht, CEO of Starwood Capital, commented: “Extended stay has demonstrated resilience over the past year despite persistent challenges due to government lockdowns and travel restrictions. We are excited about the company’s growth opportunity as restrictions ease and we’re confident that, in partnership with Blackstone and the company, our team has the right experience to drive continued success.”
For Blackstone, the deal sees it touch the company for a third time. It bought ESA in 2004 for USD3.1bn, growing it before sale for USD8bn in 2007. It co-invested to buy the company out of bankruptcy in 2010, taking it public in 2013. More recently, in April 2020, both Blackstone and Starwood Capital started amassing a shareholding.
Another group that has seen a strong performance from its extended stay brands over the last year is Choice. The predominantly US-oriented company is taking advantage of strong developer interest to grow its three brands, WoodSpring, MainStay and Suburban Extended Stay. From mid-March to the year end, Choice says the brands achieved an average occupancy above 70%, and achieved RevPAR index share gains of 14% against local competitors.
“It’s a really exciting time for extended stay,” said Richard Dawes, director of hotel capital markets at Savills. “Covid has drawn Europe’s attention to the niche – and the investor appetite has grown.” The broker recently advised operator Room2 on a sale and leaseback of its Southampton aparthotel, which saw Aberdeen Standard Investments agree to purchase the property on a sub 5% yield.
Dawes says the market is still undersupplied in key territories such as London, and with growth on the agenda, there is potential for m&a activity. “It’s still quite a fragmented market, but the challenge is, you are dealing with smaller operating companies.” In the post-covid landscape, he predicts there will be challenges around handling rent arrears, but “for capital coming in, it’s really interesting,” with attractive pricing. “I do think there’s lots of potential to go further.”
Colleague James Bradley, director of hotel valuation, added that extended stay has proven performance above an equivalent hotel: “You can see it as 13-15% more profitable at a GOP level.” He points to the strong financial backing provided to strong operators such as Staycity, which recently drew in new equity and debt to support its ongoing pipeline of European expansion.
Stephen McCall, CEO of serviced apartment player Edyn, told Hotel Analyst that his business is now poised to grow, as post-Covid opportunities start to appear. “For the brave and the financially strong, now is the time.” He said prices have moderated, and there are now both acquisition and asset-light rebranding opportunities appearing. Edyn already has a strong pipeline of openings, with Munich and Dublin due to launch this year.
McCall said the niche has enjoyed a curious benefit from the pandemic. “It shone a huge light on the extended stay sector – we’re certainly seeing a broader base of guests and we’ve managed to build up layers of business.”
At Cycas Hospitality, which has established itself as Europe’s leading third-party operator of extended-stay brands, chief development officer Asli Kutlucan told Hotel Analyst: “We saw our overall portfolio outperform the market by more than 50% in 2020 revenues, with our extended-stay hotels achieving GOP break-even through the lockdown periods.”
And Cycas is seeing this feeding through into the investment market: “Investors’ interest in extended stay has never been greater and there is more interest in this segment on the back of the last year’s performance.” And off the back of that performance, she added: “We don’t expect to see the same level of distressed sales as there are around traditional hotels, in the extended-stay market.”
Cycas will open at least 11 hotels in 2021, five of which are extended-stay. These include Radisson’s first Radisson Suites hotel in western Europe, which Cycas partnered to develop, plus the Residence Inn Slough as part of Marriott’s first dual-brand hotel in the UK.
HA Perspective [by Andrew Sangster]: It has been a good pandemic for serviced apartments / extended stay, relative to hotels. The sector has outperformed hotels; it has been highlighted as an emerging sector by one of the hottest listings in the past 12 months, the Airbnb IPO; and now two of the most storied PE firms active in hospitality, Starwood Capital and Blackstone, have made a big (USD6bn, roughly double the market value of the company prior to the bid) bet on the sector.
Last summer, Savills published the report European Serviced Apartment Market. It highlighted how serviced apartments had proved more resilient during the early stages of lockdowns at the start of the pandemic and it was predicted that the outperformance “could become more pronounced once recovery starts to emerge”.
The size of the sector remains small but is growing rapidly. Savills put the share of available bednights by accommodation type in the top 10 European gateway cities as 7.9% serviced apartments, compared to 84.9% for hotels. The remaining share of 7.3% was Airbnb.
Investment volumes are growing. For 2019, Savills put the figure at EUR551m, up 17% on the five-year average.
The outlook is encouraging but the sector is not clearly defined and is squeezed between two more established verticals in hotels and residential. This should help bigger players with a distinct offer.
Smaller providers of a less clear-cut proposition are likely to struggle in a market where capital while plentiful, remains cautious. The asymmetric access to capital will make life particularly difficult for small incumbents that, even with the relative outperformance to hotels, have endured more than a year of difficult trading.
Extended Stay showed the attraction of the sector in an investor presentation in late February given as part of its full-year results. EBITDA for 2020 was down just 30% and net income fell 42%. Normally, this would be appalling but relative to the company’s peers in the hotel sector, it was remarkably robust.
The company showed how revpar had grown during the economic cycle between 2009 and 2019 by 69%. The best performing segment in hotels, upper-midscale, achieved a growth of 53%. But when looking at 2020 compared to 2019, revpar for Extended Stay was down 15% against a drop of 43% for upper-midscale.
The justifiable conclusion was that the company had “now shown strong performance in a growth economy and to be more defensive in a downturn”.
The company is switching from a single brand into a two branded offer with the more upmarket Extended Stay America Premier Suites launch. This development indicates a growing maturity of the segment in the US, something likely to be replicated as serviced apartments gain more traction in Europe.
In another sign of maturity, the company is switching to franchising to drive net unit growth. It has set a goal for NUG of 5% to 7%. There may be change of strategic direction under the new owners but early signs are that it will be a case of doing the same only faster (as always with PE).
For the broader segment there remains a need to educate the market about what it is. It is tempting to align with residential where the yields are tighter than hotels. But what makes serviced apartments / extended stay special is its short-let opportunity and ability to blend the best of both worlds.
Whether the segment pushes towards being a special part of residential or a sub-sector of hotels, the outcome is probably going to be similar. Investors seeking a straightforward punt on the private rental sector are unlikely to be that tempted to jump into the wider operational demands of extended stay / serviced apartments, especially as the regulatory environment tightens due to Airbnb and similar platforms.
It is tempting to extrapolate from the US and argue that Europe will get the same level of supply of extended stay / serviced apartments when compared to hotels. But that is by no means a given – it could be a lot smaller proportion or even a higher one. What we do know is that right now the segment is set for a strong period of growth with fears of any over supply not relevant for a number of years.