Q3 2019 Earnings Call
Thank you for standing by this is the conference operator, welcome to the extended stay Americas third quarter 2019 earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question Q You May Press Star then one on your telephone keypad.
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I would now like to turn the conference over to Rob Balu, Vice President Investor Relations. Please go ahead, good morning, and welcome to extend the Americas third quarter 2019 copper coal.
The third quarter earnings release, and accompanying presentation are available on the Investor Relations portion of our website at <unk> Dot com once you get back the directly at Www Dot about state Dot com.
Joining me on the call or Donovan House, <unk>, Chief Executive Officer, and Brian Nicholson, Chief Financial Officer after prepared remarks by Jonathan brine there'll be a question answer session.
Again, I would like to remind you saw our discussion today will contain forward looking statements, including a discussion of our 2019 outlook actual results may differ materially from as indicated the forward looking statements forward looking statements made today speak only as of today.
Factors that could cause actual results to differ from those implied by the forward looking statements articles and our Form 10-K filed with the FCC on February 27th 2019.
In addition on today's call will reference certain non-GAAP measures more information regarding these non-GAAP measures, including reconciliations somewhat comparable GAAP measures are included in the earnings release importance MPT filed yesterday evening with the FCC with that I'll turn it over to John .
Thanks, Rob and good morning, everyone. Thank you for joining us this morning to discuss our third quarter 2019 results.
Before we begin I'd like to thank Mike 8000 colleagues out in the field for their hard work this quarter.
When you run at greater than 80% occupancy like we do and high season.
So many of your guess so your business like a home away from home as ours do it takes a special team to make each hotel work.
That our associates can do that day in day out and our so engage that they give our company a 4.0 rating on glass door among the highest in the industry. It's one of the things that makes me so proud to work here with my colleagues.
We accomplished a lot this quarter during the third quarter. This team managed through a challenging top line environment by fortifying our relationships with our core extended stay guests.
We have built on our recent momentum with the franchise community now boasting a pipeline equaled to 14% of our room base nearly double the level a year ago.
Our own hotel development is that full steam with our first hotel opening next month and then about one per month through most of 2020.
We've strengthened our balance sheet with a highly successful bond offering in September and just increased our capital return guidance to return more than 10% of our market capitalization to our shareholders. This year.
I'd like to spend a few minutes on each of these items in turn.
As we all know the third quarter saw a continuation of the softness that the industry began experiencing in June and in fact, the decline accelerated in September even after adjusting for holiday shift.
Comparable system wide revpar growth during the third quarter for yesterday declined 1.3%, including a 2.7% decline during the month of September .
Now after adjusting for unusual items in the third quarter, such as cycling Hurricane business in Houston in Florida, and renovation disruption revpar during the third quarter decline 0.5 per cent for yesterday.
We remain focused on driving demand from our core extended stay gas.
Business travelers with stays ranging from a week to a couple of months, which we believe is a bit more consistent been transient business and for whom we have a clear value proposition.
It was because of these efforts that we achieved record occupancy for the company this quarter and the strength of our 30 plus day length of stay customers will help us as we go into the shoulder season.
Brian will provide more color on the revpar challenges that we and our chain scale has seen in recent months.
Our adjusted EBITDA during the quarter finished at 156.3 million.
Hotel operating margins remain challenging with labor cost property taxes and property insurance rising at this stage with the cycle, although the pace of that growth was lower this quarter than we saw in the first half of 2019.
We remain committed to controlling expense growth, including investments to reduce utility costs.
Well, it's keeping tight controls on overtime hours and always working to reduce turnover historically low unemployment rates are a sign of the healthy economy in our Republic, but it also makes it difficult for businesses to attract and retain great employees. This is why we have invested so much time and effort and building our company.
Is recruiting programs and culture, our turnover among general managers and district manager is down eight to 10 point in the last year and still coming down.
This is a lean operating model.
All of our hotel direct costs other than the labor total less than $16 per occupied room.
And those were up about 2% versus the third quarter of 2018, one reason our hotel adjusted EBITDA margins lead the industry at nearly 54%.
And along those lines, our adjusted corporate overhead expense for the first nine months of 2019 is down more than 3%.
Despite continuing to build out a development and franchise team.
But holding the line on costs is not enough in times like these not for me at least nor is beating our comp that as we did this past quarter and we have for all of 19 I.
Hi in yesterday's management team are committed to improving the company's performance continually the good news is that when you own and operate it system as large as ours in every major market in the U.S. you don't have to look very far for the keys to success.
We understand what a great extended stay hotel looks like and we segment the performance of our hotels, we purposely against one another when our hotels are fully staffed when they follow our revolutionary but simple Kai Esa workflow and have a solid base of core extended stay business. They operate Revpar index.
Level 15 points above our company average.
Doesn't do that in every market.
And that's our sole operational objectives to bring every hotel owned and franchised to this standard of performance.
Our hotels must deliver on that or they can bear our flag, it's simply a matter of getting the fundamentals right every time and we believe that starts with culture and stable leadership and our hotel.
Demand generation is also critical in times like these.
Our corporate sales team is wholly dedicated to our core gas and the company's they worked for.
In recognition of that effort business travel news 2019 survey of corporate travel managers gave our sales team their highest score on record with a total rating up 19% from just two years ago.
Our overall brand score improved as well and we finished second among corporate travel manager survey. This year for overall brand perception in the mid priced extended stay category outpacing competitors with much higher average nightly rate.
Supporting our corporate sales stream, we recently opened a new call center in Bogota, Colombia to increase our bandwidth and making and extending reservations over the phone, which we believe will provide a better experience forgets calling to make reservation and ultimately lead to higher sales generation.
[noise], our franchising efforts continue to move forward during the third quarter. We grew our franchise pipeline by 12% to approximately 7100 rooms combined with the Esa own pipeline. Our total pipeline is approximately 14% of our existing base roughly 75% of our pipeline.
Comes from more than 15 current and future franchisees are total pipeline has grown 35% so far this year.
Our company on pipeline has remained steady as we believe we have enough land and construction to account for our target growth for 2019 and 20.
We expect to open our first purpose built Esa hotel this quarter importantly, our construction costs.
Ladies first few projects are coming in line or below our expectation of $75000 per key.
This is critical for both our own development as well as franchisee development as we continue to prove out the economics to a wider audience.
We have assured our shareholders that we would be opportunistic and only opportunistic with acquisitions and conversions. Accordingly next week, we will close on and convert a hotel in a growing Florida market that we had already targeted the acquisition price for this hotel is less than it is to build a new site and is.
Already near stabilization, meaning there will not be a long lead time to begin generating a nice return for our shareholders.
We are not alone in this next week one of our franchisees will convert another hotel, that's one and Katy, Texas, there will be more conversions by our franchisees in 2020.
We do not have asset sale to announced this quarter, but as we mentioned on our last quarterly call. We're completing an updated review of our portfolio and our disposition strategy as requested by our board.
And we have made substantial progress we look forward to executing on that strategy and outlining the strategy to our investors soon.
We note that interest from prospective buyers remains high and that financing conditions for buyers remain strong.
We continue to evaluate the size and scope of our renovation program in conjunction with our yesterday brand review and other capital investment options, we expect to provide a fulsome update on our renovation program on our fourth quarter 2019 call in late February .
And finally as I mentioned on our last call. This has been a year of technology and abuse innovation for yesterday.
We have install our new property management system, and 96% of our hotels and we will be complete by the end of this month.
86% of our hotels have had their TDK billing upgraded this year and the rest will be complete this month and next.
We've upgraded Wi Fi bandwidth in every one of our hotels, a critical advantage and revenue generator for our core gap.
Next up is a complete revamp of our B to C and b to B CRM system technology, which I'm, particularly excited about in that will drastically improved the sophistication with which we market to our core gap.
The good news is that the lions share of the capital investment for New technology investments are behind us and we and our customers are poised to benefit from them in 2020 and beyond we will continue to update you periodically on these efforts.
Our financial position is in the best shape. This company has been since I joined in 2013.
With our recent refinancing in the third quarter, we have approximately $500 million and cash on the balance sheet no maturities for roughly six years and a weighted average cost of that well below our current dividend yield combine that with what we believe our strong opportunities to sell assets at attractive free cash flow multiples in the coming quarters, and our industry leading margin.
And we know we're very well positioned going forward.
We repurchased 6 million paired shares since our last earnings call retiring more than 3% of our float in just three months and reduced our share count by 11% since 2016.
We still have nearly $180 million an authorization left as of this morning, and we continue to be active repurchases of our stock at these levels.
For the second time as many quarters Weve increased our capital returns outlet for 2019, despite having only four and a half months to repurchase shares this year.
Counting our dividend yield of more than 6%. We're on track to return in excess of 10% of our current market cap to shareholders. This year I'll now turn over the call to Brian to discuss our third quarter financial results in detail and our updated 2019 outlook Brian .
Thank you Jonathan.
Before getting into our operating results I think it's important to review briefly our financial policy and some of our recent recent accomplishments.
In recent years, our goal has been to strengthen our financial position on several key fronts.
Operationally, we continue to look for ways to defend and grow revenue control costs and grow our asset light revenue streams.
On the balance sheet, we've tried to delever the company, while maintaining a flexible capital structure extending maturities at attractive rates and continuing to fixed rates opportunistically.
Capital allocation priorities focus on pruning the portfolio of lower ROI see the free cash flow hotels to provide capital to be recycled into aggressive share buybacks and capital investments with strong returns all while paying a healthy dividends.
We're proud of the progress we've made on all of these fronts.
Since our IPO six years ago, we've reduced our leverage by more than a term.
We sold more than a 100 hotels at attractive multiples and have returned roughly 50% of our current market cap to our shareholders through dividends and share repurchases.
We've extended maturities and transition from a covenant heavy CMBS based capital structure to a more flexible bank and bond debt structure.
Looking to our quarterly results, our third quarter revenue environment was challenging within especially weak September .
Comparable system wide revpar decreased 1.3% in the third quarter, but we'd beat our comp set by 30 basis points.
The economy in mid priced chain scales as well as our comp set all the saw declines in revpar of more than 3% during September .
Comparable system wide Revpar decline was driven by a 2% decline in average daily rate or HDR, partially offset by a 70 basis point increase in our occupancy rate.
The decline was most pronounced among business transient and mid length extended stays from property walk in business and a decline in global distribution system business.
Partially offsetting this was a 1% increase in 30, plus night business and a slight increase in leisure travel.
Excluding the impacts of Hurricanes and renovation disruption our comparable system wide Revpar would have declined approximately 0.5% in the third quarter.
Absolute company owned Revpar increased to 1.1% in the third quarter, reflecting the improved portfolio quality from asset dispositions.
For the first nine months of 2019 comparable system wide Revpar decline, 0.9%, which was impacted by approximately 2.0% from hurricane displacement business in 2018 as well as renovation activity in 2019.
Hotel operating margin declined 170 basis points in the third quarter to 53.8%.
The decrease in hotel operating margin was driven by increased prop payroll expenses property taxes property insurance and folio charge off expense as well as a decline in comparable revpar.
Excluding the aforementioned expense items same store property expense increased a modest 1.5% as we focused on controlling costs throughout the organization.
Our overall rate of cost growth decelerated from the pace in the first half of 2019.
For the first nine months of 2019 hotel operating margin declined 190 basis points due primarily to a 1.2% decline and comparable company on Revpar and increased payroll expenses.
Corporate overhead expense, excluding share based compensation and transaction costs increased 4.2% to $20.4 million during the third quarter due to $1.2 million and severance costs incurred during the quarter.
For the first nine months of 2019 corporate overhead expense, excluding share based comp and transaction costs declined 40.4% to $61.4 million. Despite a 2 million dollar increase in severance expense.
The year to date decrease in corporate overhead expense reflect cost synergies realized in the third and fourth quarters of 2018.
Adjusted EBITDA in the third quarter was $156.3 million.
Adjusted EBITDA during the quarter was impacted by the loss contribution of approximately $6.8 million from hotel dispositions in 2018.
And then comparable system wide revpar at an increase in comparable hotel operating expenses as well as the aforementioned $1.2 million than on anticipated severance expense during the quarter.
Adjusted EBITDA for the first nine months of 2019 was $426.3 million, reflecting loss contribution of approximately 20.5 million from hotel dispositions in 2018.
Increase in comparable hotel operating expenses and a decline in comparable system wide revpar.
Interest expense during the quarter increased by $5.5 million.
$36.5 million due to approximately $6.7 million and debt extinguishment costs related to our refinancing completed during the third quarter.
Excluding this cost interest expense to quoted declined by 1.2 million.
During the third quarter, we issued eight year notes at very attractive fixed rates and pay down a portion as well as extended the maturity for our term loan by three years.
For the first nine months of 2019 interest expense increased by zero point $8 million to $95.9 million.
Excluding transaction costs in the current and prior year quarter interest expense year to date declined by 4.3 million.
Income taxes during the quarter declined $4.5 million to $10.5 million driven by lower pre tax income income taxes for the first nine months of 2019 declined by $7.4 billion to $27.8 million.
Even by a decrease in pre tax income and a slight decrease in our effective tax rate.
Adjusted FFO per diluted paired share declined 11.5% in the third quarter to 54 cents per compared to 61 cents in the same period in 2018.
The decline was driven by an increase in comparable hotel operating expenses and a decline in comparable company owned Revpar, partially offset by a decline in income tax expense.
Adjusted FFO per diluted paired share for the first nine months of 2019 decreased 10.6% to $1.43 cents driven by an increase in comparable hotel operating expenses and a 1.2% decline in comparable company owned hotel Revpar, partially offset by a decrease in income tax expense.
Yes.
Net income during the third quarter decreased 29.7% to $53.2 million.
The decline in net income during the quarter was driven by a decline in comparable system wide revpar.
Increase in comparable hotel operating expenses.
Point $7 million and interest expense related to the third quarter financing transactions as well as noncash impairment expenses of $2.7 million, partially offset by a decrease in depreciation and income tax expense.
Net income for the first nine months of 2019 declined 18% driven by a decline in comparable system wide Revpar, an increase in comparable hotel operating expense.
Cycling a gain on asset sales in 2018, and partially offset by lower impairment expense and lower income tax expense.
Adjusted paired share income per diluted paired share in the third quarter decreased to 33 cents per diluted per share from 39 cents in the same period as last year.
The decrease was due primarily to an increase in comparable hotel operating expenses and a decline in comparable system wide revpar, partially offset by a decrease in depreciation expense and income tax expense.
For the first nine months of 2019 adjusted paired share income per diluted paired share decreased to 81 cents compared to 94 cents and the same period of 2018.
We ended the third quarter with our net debt to trailing 12 month adjusted EBITDA on a pro forma 554 hotel basis.
At 4.0 times, a slight increase due to the decline in adjusted EBITDA and heavy pace appeared share repurchases.
After these latest debt transactions, we have no maturities until 2025 and more than 80% of our debt. This fixed at attractive rates with a weighted average cost of debt at 4.75%.
Our total cash balance was just above $500 million at the ended the quarter.
Gross debt outstanding was $2.69 billion.
Capital expenditures in the third quarter were $65.1 million, including $10.2 million for renovation capital $20.2 billion for development land acquisitions, and other Esa 2.0 costs.
And $10.9 million that IP capital.
Capital expenditures for the first nine months of 2019 totaled $178 million, including $69.9 million for maintenance capital when insurable event of $9.3 million as well as $34.3 million for renovations.
We completed 12 hotel renovations in the first nine months of 2019.
Back to complete for more during the fourth quarter.
Our own balance sheet development pipeline at the end of the third quarter stood at 19 hotels, all our franchise pipeline grew during the quarter to 58 hotels.
We expect to purchase and convert one extended stay hotel during the fourth quarter and expect a handful of franchise conversions over the next few months.
As Jonathan mentioned earlier, our total pipeline has grown 35% so far in 2019.
Yesterday, the board of directors of extended stay America incorporated and the Sage hospitality incorporated declared a combined cash dividend of 23 cents per paired share payable on December 4th 2019 to shareholders of record as of November Twentyth 2019.
Our dividend yield is now approximately 6.4% of recent trading prices, which is significantly higher than our weighted average and our marginal cost of debt.
During the third quarter, we repurchased 4 million paired shares for approximately $57.5 million.
Since the end of the quarter, we have repurchased an additional 2 million paired shares for an approximately $28.7 million, meaning we have retired more than 3% of our diluted share count in the last 90 days.
Our current total outstanding.
The remaining availability for paired share repurchase is approximately $177 million. We expect to remained very active repurchasers at current trading levels.
Looking to the fourth quarter of 2019, we expect comparable system wide revpar growth will be between negative 4.5% to negative 2%, reflecting the recent revpar trends in our chain scale and upset.
This includes a 75 to 100 negative basis point impact from renovations as well as cycling a similar level of impact from the Boston area as we cycle over gas explosion business in the fourth quarter of 2018.
We expect adjusted EBITDA between 109 and $119 million during the fourth quarter.
For the full year 2019, we update our guidance as follows.
Comparable system wide revpar growth of minus 1.75% to minus 1.25% and adjusted EBITDA between 35, 535, and $545 million, reflecting the lower than expected industry and chain scale Revpar in 2019.
The adjusted EBITDA totals include lost contribution of approximately $21 million from assets sold in 2018.
We are lowering our expectation for capital expenditures in 2019 at the midpoint by an additional $40 million and expect to be between 235 in $275 million.
Which is an $80 million decrease from our initial guidance back in February .
The decrease in expected capital expenditures from our August guidance is driven by lower capital expenditures for renovations as we continue to review the size scope and returns associated with this program compared to other capital investment options, including capital returns to shareholders.
We expect to provide an update on our renovation program in our fourth quarter earnings call.
We expect our annual interest expense to be approximately $129 million an increase from our prior guidance due primarily to transaction costs incurred during the third quarter.
We expect adjusted paired share income per diluted paired share between 93 cents on one dollar on one cents per paired share.
So our dividend and paired share repurchases, we now expect to return between 285 million.
$815 million this year to our shareholders, reflecting higher share repurchase activity and lower capital expenditures, representing roughly 11% to 12% of our recent market capitalization among the highest capital returns as a percentage of market cap in the lodging and adjacent spaces.
Operator, let's now go to questions.
Thank you.
Before we begin the question and answer session. Please limit yourselves to one question and one follow up question to allow everyone in the Q a chance to ask.
To join the question Q you May Press Star then one on your telephone keypad, you will hear atone acknowledging your request if you're using a speakerphone. Please pick up your handset before pressing any Keith.
With Jive. Your question. Please press Star then to once again to join the question Q. Please press Star then one now.
Our first question comes from Harry Curtis.
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Good morning, everyone. Two quick questions. Please the first is if you look at the hotels that have been renovated in the last six to 12 months, how are they performing relative to the comp set and you and your expectations.
Hi, Gary Hi, Good morning, this is Brian .
It sounds that have been renovated.
Sure this week.
As we referenced in the call I hesitate to express too much enthusiasm or are we report.
Anything on the performance because the number of hotels that have reached stabilization at this point or really limited.
We're really limited number of observations.
Yes, I would say on the renovation program.
We are sort of in a pleasant evaluate stage part of that is driven frankly.
Active we have.
Ben renovating took for two years and we're getting feedback that some of our guests that'd be a little confused as to what the differences between the tiers are especially when you're making booking decisions based on relatively small pictures on the website.
Yes, you might not notice all the differences between the tiers and so we.
We're looking at how we might be able to consolidate simplified.
So guess decision, making and frankly to make our sales process more efficient.
Yes, where I was going with this obviously is when we look ahead to 2020.
Is there.
I'm trying to get a sense of how much renovation capex use.
You are likely to spend in 2020 versus 2019 as it as as we look look ahead to further cash available for repurchases.
Harry we guided to about a seventh of the portfolio getting a renovation per year over about a seven year period.
While we are not in the place to issue guidance on 2020, yet I would note that we're going to be a niche evaluation mode until probably late first quarter next year and then there's a permitting process.
Best I think we would get too about half of a normal number of years or ignore the number of hotels within the renovation cycle in 2020.
Okay very good and then.
Moving onto the second question, which is.
The group of hotels that you have yet to sell.
Is that number still Russ is it sort of still 65 to 75.
And.
Again, as we look into 2000 and.
And 20.
Might that number increase, particularly given the huge gap between what you're able to sell hotels for versus the nine multiple that your stock trades out today.
Harry its Jonathan Good morning, we you know few years ago. When we introduced our growth strategy. We did outline that we we could we saw a pathway to selling 150 hotels over a five year period.
We're now just over three years into that five year period, and we've sold about 75 hotels. So so despite the fact that we we havent.
Executed asset so there's this year for a few reasons earlier be because of the process, we have begun going through and more recently.
Our board has asked us to to evaluate that pool of assets. We're looking to sell I think we're still basically on track with that initial.
That initial plan.
That being said, we as we noted in our our prepared remarks, the we believe the market for purchasing our hotels remains very strong.
Some of that market is represented by our existing franchisees all of whom we believe were they are performing very well are very happy with their their acquisition that extended stay America asset. So we're very confident that we can continue to sell our assets it.
At valuations similar to the ones we have in the past I think.
The makeup of that remaining group 60, you said 65, it's probably closer to 70 580 hotels is a bit in flux right now as we go through this process but.
It certainly could grow.
From that number now whether or not we would execute all that in 2020, I think time will tell but.
But we're still very comfortable about about the market for these assets and it's an important part of the company strategy.
Yes, I guess, so where I was going is.
Is what is your sense of the board's sense of not necessarily urgency, but priority in recognizing this this arbitrage between the value of your stock and and the value of your hotels and.
And today share the same center sense of urgency that many of your shareholders too. Thank you.
Hi.
I really can't speak for the board on this point, but I would add that that our repurchase activity. This year has and I expect to the next several months you will not be constrained by our by our asset sales activities, we had $500 million the cash in our balance sheet.
By the at the ended the third quarter, we've repurchased 6 million shares as of yesterday, we have another we have another it at today's prices, we have outstanding authority to purchase an additional 12 million shares. So this is without.
This is without any additional asset sales so while the two or related as you note in terms of the nice arbitrage that's available for our shareholders. They are not related.
In the sense that our ability to repurchase shares right now is not constrained by the Companys liquidity, we don't require additional asset sales to be active in the market.
Thank you John Alright, Thanks, Harry.
Our next question comes from Chad Beynon of Macquarie.
Good morning, Thanks for taking my question.
I know you guys are still going through the 2020 budgeting process and Brian you mentioned.
The number renovations are still under review. So this this may be tough to answer but as you look forward to 2020 at least right now with kind of the current renovations and.
All the puts and takes could you give us a sense of both of what.
You will be facing just in terms of potential headwinds in 2020 versus the industry and I believe most prognosticators have have projected a sub 1% revpar for.
2020, so not that you're you're willing to give us something now just trying to figure out.
How you could you could share against that thanks.
Hi.
Thanks, Chad I appreciate the question the yes.
Again, you're right. This is tricky to kind of put on because.
We it is our preference to.
Provide so some guidance it looks first quarter when it's when it's basically already for prime time.
But to your point.
Yes, and sort of as I alluded to earlier, we do have a number of hotels that has on undergoing renovation or will undergo renovation or the process of renovation right now.
Yes, it's not the number of hotels that we would expect to get to on a run rate basis. Each year in the renovation program is sort of fully vetted out.
But there are still dozens of hotels that either have recently been renovated or renovation must be completed.
And we would expect renovation activity at least for the first half of next year.
We'll be.
Virtually nonexistent, so we will get the tailwind.
Renovated hotels without the headwind.
Displacement at least in the first half was 2020.
And then beyond that I think I would say.
We'll be able to gauge the scope of all those factors.
More effectively for you when we provide our guidance for 2012.
Okay. Thank you and then regarding the September weakness you said it was mainly in the business transition in mid length of stay was this a consistent theme across the country in your portfolio or was it in.
Certain pockets of the country that could maybe give you the confidence that it's more transitory and in a couple of markets. Thanks.
Yes.
It's a good question I would say that it was fairly broad based.
Looking at the segments that contributed to the decline, especially in the.
The middle lengths of stay the seven to 29 night guests.
Certainly there were.
Some segments that are higher represented in some markets than others, but generally speaking I think the.
The underlying drivers that we saw a more broad based geographically restricted.
Yes, I would also comment here you know, we we mentioned that.
September .
Was weaker than the quarter as a whole.
Yes October has been a rough month for economy and for mid scale.
The STR data for the month of October has not yet been made available to us, but we do get daily data and so just looking at our comparable comp set.
And then accumulating the days October 1st to the 31 this year versus last year.
Yes. It was a tough month, we were down 3.8%, but we'd beat our comp set by about 70 basis points.
And the our ability to beat our concept is strengthening as we continue to.
Below the 30, plus based book of business.
And continue to migrate hotels more toward that true extended stay business that we are really uniquely positioned to serves.
Looking to our guidance for the quarter.
I know that that was probably a.
A little bit of a shock to some folks.
Given what's going on externally.
Yes.
All of that is conservatism on our part.
Yes, we missed our guidance slightly this quarter I have no intention to do that again, but I don't like it a bit and so want to de risk the guidance somewhat.
And frankly is even looking at October November so far.
We have reason to believe that were three the worst of it the first few weeks of October .
Was tougher than these last week about over the first week of November .
Our booking pace and the way that the booking pace is evolving as we go through time.
Our all still not rosy that certainly improving as we move through time week to week day to day.
Appreciate the color thank very much.
Our next question comes from Michael Bellisario of Baird.
Good morning, everyone.
Good morning, Mike.
And go back to your comments on the.
The asset sales in the lower tier hotels, I think you laid out three options last call.
And comments you made are you still evaluating all three options or have you decided on one and now you're digging deeper into that one option and looking to pursue that that one or are you still in the early stages of looking at all three.
Well certainly not I'll make a couple of comments, Mike and then and bye.
Invite a Brian to comment as well, we're certainly not in the early stages. We're in the latter stages of that.
And and by the the three options I, I think you're talking about selling and refranchising and selling unencumbered or.
Or retaining these hotels and so we.
We're doing the work on that and as I as I.
And have hinted at this in response to two Harry's question.
At the top of our culinary session, which is that.
It's the makeup of these assets that were selling.
Which I would say is more it's going to be more informed by brands considerations at this stage in the game.
Than necessarily by market considerations.
And so we're we're we're close to the end of but we still need to cover.
Covers some of these conclusions in.
Internally and with our board of directors.
Okay. That's helpful.
The.
Decision is not necessarily.
I don't know what the analog to its three relative to buy an area is trying to Larry.
We we don't necessarily have to pick one strategy.
For each of these four this set of hotels there may be some hotels that we sell and franchise back as the assays there may be hotels that we sell some other way.
Potentially unencumbered so.
Yes, again, it's as Jonathan mentioned, it's related to brand considerations and.
It's really about positioning our portfolio for optimal success going forward and getting optimal value for shareholders.
In the transaction process.
Got it.
Fair to assume stood still fluid, but but making process progress correct.
Absolutely yes.
Got it and then just second question can you maybe update us on the franchise sales hiring process.
How many people have been hired so far and have you seen any change in pace assigning since the board concluded its strategic review plus or minus 90 days ago.
We have begun expanding.
The franchise team at it wasn't just in franchise sales, but but actually more importantly at this stage in the game franchise services as we build up that internal team to serve a growing franchisee base.
And the.
Paces as we described it in our prepared remarks that.
That we we've grown that pipeline I think nicely and we would expect that to continue and accelerate as we get into 2020.
Our next question comes from Stephen Grambling of Goldman Sachs.
Thanks for taking the question I guess couple of quick follow ups.
First just sticking with the asset sales are there any.
Gating factors on selling assets quicker or expanding the base that you're targeting either as it relates to tax basis or a need to keep.
I manage your franchise agreements.
No.
Great and then from your commentary on medium like stays what is driving that pressure in your view and are you seeing any change in the competitive environment that might be affecting your properties.
No we don't see any change in the competitive environment you know this this business.
This is very good business for us that it is it is priced well and yet because it's greater than a week.
It.
We only incur the weekly housekeeping expense and not as much.
Check in and check out as you wouldn't transit business. So we really like this segment, but it does tend to be very project driven and so.
They did this requires.
Our sales force in the field, knowing what projects are going on which ones are coming and it's really.
It's really scrappy sales at the field level, we do that very well, but there is.
There is.
Some ups and downs to it.
There's no sign that I see that we're losing market share in this area.
As as Brian noted there are there's really no geographic concentration to it but there are certain you know there are certain areas that get impacted or got impacted a little bit more in this quarter than in the future. But this is an important business were.
For US. This this length of stay segment, we're very focused on it.
And I'm not concerned about any you know any sustained weakness in edits.
It's a customer that.
For whom our product is ideally suited and where we don't see a lot of supply coming into our margins.
Fair enough from one last one does.
Reaction to the stock following last quarter and whats continued.
Make.
Either you or the board reconsider any alternatives that were previously on the table and maybe holistically as there are there other things that you're thinking about to unlock value.
Corporate standpoint.
Well, that's certainly that's certainly a a board question and then and you know I know the.
I know the board well consider any and all options as they always have floor.
For the creation of shareholder value.
You know as far as the management team.
Last last quarter, when we announced.
Our earnings and the conclusion that process, we announced at the same time, an increase in our share repurchase authorization, which the board supported enthusiastically and we've been hard at work.
Working down that authorization as we noted this morning so.
I would also note that.
No that each of the three of US talking on the call. This morning, I'll purchased stock in this company during the third quarter.
And so we're we're we're committed and we are.
We're confident in this company's ability to continue to perform.
And and I think our actions repurchasing.
Shares for the company in for our own personal account speak to that.
Thanks, so much.
Our next question comes from Chris Woronka of Deutsche Bank.
Hey, good morning, guys.
Wanted to dive back into the.
Yes, the different buckets of customers for a second.
So understanding that the longer term stays have lower HDR, but higher margins I guess, if if that strategy were to continue if you.
Continue to kind of bulk up on the longer term stays that ultimately going to going to reduce some of the margin pressure, even though the rates are a little bit lower.
Hi, Chris Thanks for the question.
Yes to some extent re mixing 230, plus business will release relieve some of the margin pressure.
As Jonathan alluded to longer stays mean less frequent.
Housekeeping, a little bit less activity chicken checkout activity at the desk.
In terms of the desk because for a lot of properties were basically in a station Phil sort of environment, where.
You can add a little or take away a little bit that doesn't mean that you're going to leave the desk.
And.
Lead the desk alone for.
Our half hours a day you have to have that that station fill that especially on housekeeping.
As you remix the hotel you don't necessarily users many housekeeping hours and that does relieve some of that pressure.
Some of these items property tax property insurance.
Yes.
The mix of the hotel and the way you operate the hotel it really doesn't matter or at least in the short term.
But I think there's good news at least on the property insurance from that there has not been.
Significant claims in our markets here over the last couple of years, and we would expect to see some of that pressure abate as we move forward.
Okay. That's a that's helpful. And then one of the kind of revisit the I know last quarter, you had talked about the potential for.
Almost oh, I guess qualified residential brand and whether whether that might be for some of your own hotels to kind of rebrand or for you to kind of cell hotels on encumbered and re franchised.
And more of a residential format can you give us maybe an update on that how many hotels might might fall into that.
Broader bucket of going more strictly residential.
Yes, Chris I'll give you an idea, but you don't want to caveat this with the as John noted that.
While we are toward the end of this evaluation process Theres still some some work to be done internally and some work to be down at the board level.
Basically the and and Jonathan alluded to this earlier as well.
Protecting our brand is important and we have a number of hotels.
Frankly that are well suited to serving a business driven extended stay demand mix, we have other hotels due to their situation within the market are due to some physical characteristics of the hotels themselves.
Our likely.
And are geared toward serving a more residential guest.
And so this evaluation process is really about.
Making sure that hotels are.
Serving a brand mission.
We believe there could be.
Hundreds maybe more hotels that are really better for residential over the time dead.
A mix of residential and business driven extended stay.
Again, because of physical characteristics are where they are in the market.
You're probably not going to have them completely full of business driven demand.
So.
That's kind of where we are that's kind of what we're thinking.
Yes, so yes, it's a not insignificant number of hotels that today, our operating really more serving a residential guest but we're sort of in.
In something of a no man's land trying to support these hotels with corporate sales trying to hold a.
A brand standard that's the same as for other extended stay hotels, and we think we may be more efficient more profitable.
If we draw brighter light between the.
The missions of these different assets.
Great.
Thanks, Brian .
Would you maybe be willing to share the relative performance of those hotels, it's not a specific number just just the relative.
Forms of how they're doing versus the rest of the portfolio.
Yeah, really hesitate to comment there because again on an asset by asset basis.
I think there's still some.
Some final work to be done and I would say at a higher level.
The hotels that we have identified.
As these hotels that are potentially more residential in nature.
Tend to receive lower social media and other scores.
Especially from a shorter term guests who tend to be there.
For more business reasons.
I would add I mean financially they perform well you know they tend to run at slightly lower.
80, ours, because they're longer term gas with the margins the margins are quite high and.
You know and in many cases, the capital investment required is lower because they don't get the.
They got don't just get that frequent turn that are that are more.
The hotels that have more balanced book of business well artisan yeah. That's that's absolutely true to so.
Great. Thanks hotels performed very well financially.
Okay. The.
The concern here or the aim here is just to make sure that they're meeting the needs of the attended guests mix optimally and are best suited for growth going forward.
Thanks, guys.
Thanks.
Our next question comes from Thomas Allen of Morgan Stanley .
Hey, good morning, Keith just remind us how you're thinking about hotel openings and 2020, both on an owned and franchised basis. I think you said you expect to own approximately so just trying to open an approximate one owned hotel them on.
Next year, but I just tried to make sure I was hearing that and then on the franchise side. Thank you.
Yes, you you did hear that correctly will open in one in December and then.
We have.
Seven or eight under construction right now and and we might have to that that opened in one month and then we missed a month, but generally as we look at the schedule right now starting in December we're opening one every month through August or September and that just counts the ones that are currently under.
Construction right now as it relates to the.
Franchisees.
We have one hotel that that we expect to open in the February timeframe.
The others are largely unit I expect to come from conversions and the timing is a bit uncertain. At this point I mentioned one on the prepared remarks, that's going to be converted shortly by one of our franchisees and and so.
Those will continue but really on the timeline of our franchisees, but they could comment a little bit more chunky faction fashion over the year.
So do you think there will be similar ballpark of about <unk>.
Eight nine next year or do you think it could or just you don't know I think it's going to be higher than that our franchisee open itll be higher than that.
Okay.
And then again here.
I was just going to say, we just approved.
Five additional conversions by one of our franchisees yesterday, so those will be done in the in the next several months. So I think it'll be a higher than our own openings.
Okay, and then and your 10-Q s showed that.
There was one franchise hotel room moved in July to another an August what happened there.
Yes.
Yes.
Couple of different things.
One was a hotel that was in Austin.
We sold that for higher better use it continued to be to operate for awhile.
But now it's closed so that it can be raised the construction could start.
And then.
The other was a similar situation in Denver, the Denver Tech property.
That had been operating but now is being redeveloped into multifamily.
Okay. So as the properties you guys. That's all that good cap rates and we knew about a from a couple of quarters ago makes sense. Okay.
Thank you.
Thanks.
Our next question comes from David Katz of Jefferies.
Hi, good morning covered quite a bit of territory, but I just wanted to follow up on <unk>.
You know the franchise system, you know, we spend time thinking about what critical mass free franchise system really is a and this maybe a point of open debate that it sounds like you're you might be having but where do you consider.
Critical mass to be for a system of franchised hotels is it you know hundred 200 500 300.
No I.
I think of it a bit differently, which is.
Around momentum and at what point does the performance of these franchised hotels amongst a larger.
Diverse franchise the community.
Begin to win the day.
And the argument begins to carry itself so that franchisees begin to come to us and say Hey, we've got these five hotels, we'd like to convert to extended stay America and so on and in that sense I believe we've already reached that momentum point.
Ben that folks are bringing us deals.
As much as we are going out and and proposing them to do.
To our franchisees.
So you know that that's one that's one cents a critical mass that tens of a tipping point, which I feel we've achieved already but as it relates to the your question is still a very good one because there you know in order to have a franchise services organization with some scale.
The way function, you know that make sense I think we probably need about double the number of franchisee hotels that we have right now.
I also think that there's a you know there as a a capital markets question here and that the company in order to be.
To be a growing more asset light company does need to have some real scale amongst its.
Memps its franchise income stream and clearly weren't you know we're not there yet, but I think that we've got a line of sight to that and that's probably at least.
150, or 200 or 300 hotels.
So so that's a couple of ways I bet I think about it David and.
But but like you mentioned at the beginning your question that's kind of a you know I think there could be different perspectives on that question.
Yes.
All right.
I do have a slightly different perspective on that question in that.
Yeah, Yeah, Sage hospitality is essentially a franchisee a 554 units right now so.
Unlike some other franchise systems that are getting off the ground. We do has decades of history of performance. We do have demonstrated the ability to work in every market in this country.
So I think that there are advantages, especially as it comes to franchise sales that other franchise systems. The size of our franchise system just don't have.
All right and if I may just fall got off or are there you know interim strategies between.
You know something more absolute of selling to a much larger system and you know fighting the good fight, which you. Obviously you know are doing quite well are there interim steps, where you know you could have an affiliation arrangement of some kind with a larger system.
Just to establish a little more deal flow loyalty system. That's a little larger you know derive some of the benefits from scale, obviously you have to pay for it.
But are there any strategies in that range that could be discussed standpoint.
Well, we certainly appreciate you.
Your your recognition of of our company, citing that good bye and we and we certainly think we are it's and it's an interesting point that I think.
In terms of affiliations it it.
Could conceive of certain of partnerships around loyalty.
That could that could make sense at some point for the company I think with respect to.
Brand and management.
We we believed that our brand is sufficiently.
Unique and that the management required.
Is it is also.
Differentiated it's hard for me to so think of as you describe interim strategies, but but perhaps on loyalty and adding value to our loyalty program that but I think there there are possibilities there.
Just one follow up comment about it because it's been so prevalent and frankly, we had some discussions.
This morning around you know loyalty and you know <unk> Dot Com you know bookings on how the impact that that's having on the O.G.A. side of the business.
Oil to use is kind of off an off the charts.
It sounds like some loyalty affiliation is something that you could consider at some point under the right circumstances correct.
Under that you know kind of the menu of things you listed and as I think about the you know that our business our advantages as well as.
Some of our competitive challenges.
It's you know.
Loyalty and adding value to our loyalty program. There are number of ways to do this which other you know other operators not just in lodging, but in and other spaces have done. This routinely I can conceive of certain partnerships that might help us increase the value of our loyalty program sure.
Perfect. Thank you very much okay. Thanks.
Our next question comes from Shaun Kelley of Bank of America.
Hi, guys. Good morning, Thanks for squeezing me in so just on two things for me I mean, one obviously it seems like a lot of what you're doing is citing down some of the renovation program redeploying some of that capital into into the share buyback on but overall you know because the numbers are coming down a little bit it does seem like.
<unk> leverage is.
Going to tick up a bit.
Jonathan or what do you.
Fine sort of your medium term leverage target just given sort of the operating challenges that that are somewhat beyond your control on the on the topline.
[noise], but hey, Sean it's Brian the.
Yes, I think as Jonathan mentioned, there's a there might be a temptation to link a lot of these things that don't necessarily need to be linked the yes. The slowdown in renovation spend is.
Not necessarily a function of all related to the accelerated share buybacks.
Et cetera, the yes, we do have the resources available to.
Pursue these various objectives.
Without success in one determining whether or not we can be successful in another.
Yeah that said I think you correctly note that.
If we.
Yes continue to see this environment, where revpar is sluggish and where there.
Is.
Some growth in some pretty important expenses.
Yes that contribute to somewhat higher leverage.
Yes, our interest coverage is very comfortable.
Yeah I.
In terms of of medium term versus long term leverage targets is certainly the company has gotten itself in a place where we are far removed from what has caused trouble for this company and for others and.
Past downturns in past situations.
I would add one other thoughts on which is that the financial risk that a company is willing to is able to bear as is directly related to the business risk that it faces and.
And our company has 550.
Owned hotels across the country.
No no hotel generates more than 1% up our revenue every hotel is cash flow positive. So while we are we're always doing our best to drive revenue and control cost across the enterprise and in each hotel individually the business risk in this company is quite low and so as a result.
You know, we believed that it but that we can put financial leverage on this business.
And Brian Brian and his team did a fantastic job and placing debt for the company back in September and I think that demonstrates the.
As this nice.
Situation, we have with respect to the company's leveraging its business risk. So when we see opportunities like this to repurchase our shares capture dividend yield in excess of our marginal cost of that you know.
Corporate finance one on ones as you go and you continue to do that.
And we can stay on interim interim pickup and financial leverage to accomplish that.
Got it great. Thank you for the color and then the other question sort of it you know it again I appreciate your sort in the middle of the budgeting side, but I think last quarter you referred to Capex on the on on the new build possibly also being a little lower maybe over the medium term then you kind of headaches that add planned previously just.
And then.
How goods in the our eyes are turning out and how much traction you had on the franchisee side.
Is that still the case and can you just give us sort of a broad sense of kind of the cadence over into the next two years on adult Capex.
[noise].
Sure Sean the certainly over the next year as Jonathan mentioned, we have yeah, let's call. It 10 hotels teed up to opened over the next.
10 11 months.
After we get past sort of that it would be.
And going back to 2016, we had outlined something like 10 to 15 on balance sheet builds per year.
As we move beyond say the next year over year or two where we've already acquired the land and have some of these projects in flight I think we do see that it is likely that the pace of our on balance sheet development is somewhat lower than that 10 to 15, but that you would see that beginning in may be 2021. So these hotels that.
Approximately $12 million all in capital cost or that you know that pace annually is $120 million to $150 million, but as we get into 2021 that could come down a little bit that's right.
Thank you very much.
Sure.
Our next question comes from Smedes Rose City.
Hi, I'm just for fast for me. It's the first question is can you talk about what you've seen on the supply side for your properties and do you have a sense of what that looks like in 2020.
Hi, good morning, and the economy change Yeah, we're looking at supply growth of about 40 to 50 basis points, but this year in next year in what we have visibility to 2021 as well.
The mid feels a little bit higher just over 8%.
The new a true supply by the oldest coming online. So you kind of average those two together, we're looking at roughly 70 to 80 basis points to supply growth over the next couple of years.
We will supply growth is kind of hitting at upper mid scale and above speaking in terms of chain scales.
Upper mid scale is much more robust.
Yeah.
Great and then just another one on capital spending program are you scaling back on their scope of the perky renovations are not grades or is it more of a timing issue.
Yeah, again, maybe a little premature to.
Just speak to what that might be that yeah. As we mentioned that we may go from for renovation tiers to a.
A lower number of tiers that made me that on the bottom end hotels get a little more on the top and.
Some hotels that are slated for a lot are going to get a little less.
But in terms of the overall cost of the Oh, the enterprise endeavor.
I don't know that.
I'm really in a position to say that it's going to be materially different at this point.
Yeah.
Great. Thanks.
Thank you.
Our final question comes from Anthony Powell of Barclays.
Hi, Good morning, guys just a.
A follow up on the supply growth question could some of these copper midscale hotels that are kind of higher quality, then and then the pass product in that segment and connect to the brand for they really.
Impacting your ability to get some short term business in your hotels. When you Cat you don't have the long terms that.
If you're talking about the.
Hotels.
And Matt price point, I would say no I mean the upper.
Did you say mid scale Anthony.
Okay also I'd say, it's true that may be able to price at $80 a.
For transit customer or a customer may have in the past.
We'll take your hotels occasionally, but now they're staying in these newer.
Newer brands that are opening up and the lower price points cross country.
Yeah, I don't I don't think so I mean, when when I think about some of the upper mid scale competitors. They tend to be more kind of in that hundred 10 to $150 range and that's in.
You know.
That is going to be against 70 $580 for 80 ours it in our system.
You know maybe 90 generally so I don't think so.
And as we go around our system and speak with our operators and we're talking about the business. It's it's rare that a new competitive opening is affecting our you know our business. It happens, but it's very rare compared with other businesses I've been in that I've been involved with competitive entry.
Is rarely a reason for what we're seeing in terms of any impact on our business.
Got it facts and you've talked a let's call them last call about shifting some properties to more of a residential model.
Have you changed your overall August Tam or pension system size expectations over the past couple of quarters, you still expect to be able to growth the same size eventually.
As you in franchisees mail build hotels.
Yes, I do I Ah Ah I, certainly, we certainly see the same market opportunity.
That we have for the past couple of years I think the only area where.
My thinking is changed a little bit on that is that the opportunity for conversion is greater than we expected it to be.
We really we looked at a few conversions in the past and chose not to proceed with them, but as we look at them now as we as our franchisees look at them. That's a that's a whole category of.
Growth that we did not really assigned much value to which were very enthusiastic about and on on the premise of the question. Anthony I would I would just suggest that were not moving this business towards any kind of residential model or or or or customers that but there are certain of our hotels that have a bit.
But more of that customer segment than others and as we consider.
Branding implications and the rest where we're trying to take that into account.
In a way that it that's positive for shareholders.
Thanks, and just one follow up in that conversion margins are great and then there. They are in place cash flow. They can create against them brand confusing depending on how the hotels are configured how do you manage that and when do you think you can see more.
Franchise in new construction starts picking up across the system.
You are certainly correct that that it say that we have to be cautious about that brand confusion, but all of the conversions that the few that we've done the others that we have approved they're all.
They are all quite similar to our existing.
Boxes, they all have kitchens and all the rooms, they don't have restaurants and there are approximately the same size.
Some of them even have already taken our.
Our color scheme. So you know that's that's in our experience. So far is that's not a I'm not a larger as one that we've had to turn down.
Turned down opportunities for 'em, we have a brand standards committee, which works with our franchisees to make sure that we are true to our to our brand.
Got it and on the franchise and new construction side. When do you think it'd be a bit more minutes momentum there.
This coming year in 2020.
Yeah.
But but we're you know we'd like to see our.
Our franchisees of course continue with their new development.
But we also we like the conversion business as well as you noted as faster in place cash flow, but we'll have more in 2020 on the franchise Newbuilds side.
Great. Thank you.
Thanks Anthony.
This concludes the question and answer session I would like to turn the conference back over to Mr. health cared for any closing remarks.
Thank you I'd just like to thank everybody for joining us This morning, and your for your support of our company I enjoy the rest of your week in we'll look forward to speaking you in the coming weeks. If we have meetings with you and if not a during our fourth quarter 2019 call in February thanks, everybody.
This concludes today's conference call you may disconnect your lines, thanks for participating and have a pleasant day.
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