Q4 2019 Earnings Call
Greetings and welcome to the extended stay America, its fourth quarter 2019 earnings call.
At this time all participants are no listen only mode. A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I'll now turn the conference over to your hosts Robert Balu, Vice President of Investor Relations. Please go ahead.
Good morning, Good Vulcan do extended stay America's fourth quarter 2019 conference call.
The fourth quarter earnings release, and accompanying presentation are available on the Investor Relations portion of our website at <unk> Dot Com, which you can access directly at www dot about stay dot com joining me on the goal of resources, Chief Executive Officer, and Brian Nicholson, Chief Financial Officer after prepared remarks by Bruce and Brian There will be a question and answer session.
Before we begin this morning, I'd like to remind you that some of our discussion today will contain forward looking statements, including the discussion of our 2020 outlook actual results may differ materially from those indicated in the forward looking statements forward looking statements made today speak only as of today the factors that could cause actual results to differ from those implied by the forward looking statements are discussing our.
Form 10-K filed the FCC on February 26, 2020.
In addition on today's call will reference certain non-GAAP measures more information regarding these non-GAAP measures, including reconciliations Ms. Comparable GAAP measures are included in the earnings release and form 10-K filed yesterday evening with the FCC with that I will turn it over to Bruce Thanks, Rob and good morning, everyone.
Thank you for joining us this morning to discuss our fourth quarter 2019 results. My first call since I became CEO in November.
Before I discuss our key priorities for extended stay America, and 2020 and beyond I'd first like to highlight a few financial highlights from our fourth quarter of 2019, and our full year.
First after a very soft October our revpar trends improved significantly in November and December of last year.
Revpar for the first for the fourth quarter finished down 0.8%, which was above our guidance.
Also significantly outperformed our competitive set by a strong 2.1% during the quarter.
And we're happy to report the recent stronger Revpar trends have continued into 2020.
For the full year 2019 comparable system wide revpar declined by 8.9%.
Excluding the impact from cycling hurricane related business in 2018.
And the renovation disruption in 2019 comparable system wide Revpar would have increased by approximately 1%.
Course capital returns an important part of our value proposition.
Facts through dividends and share repurchases, we've returned more than 300 million to paired share shareholders in 2019, where nearly 14% of our recent market capitalization.
That includes nearly 115 million in the fourth quarter alone.
Over the past five years, we've returned more than 55% of our recent market capitalization to shareholders.
Finally in late 2019, we transitioned to a new leadership team with deep experience in the extended stay segment.
In addition to my appointment as CEO Kelly tolling joint extended stay America, as our new Chief commercial officer.
Kelly is uniquely qualified to lead our commercial engine with deep marketing and distribution experience in the extended stay segment of the lodging industry.
Randy Fox also joined the company is the VP of property operations.
Randy is one of the few lodging operation professionals that has deep experience in managing extended stay assets on a national basis.
Kelly and Randy not only have significant extended stay experience, but the three of us at Pryor successful working relationships in the extended stay business.
Dressing performance goals similar to the ones that I will outline shortly for extended stay America.
Together with the continuity of service from our existing management team.
His team is going to hit the ground running.
Finally, we are focused like never before on the customer experience.
Mike heating and USA veteran was recently promoted lead a new function as our chief customer experience officer, I would now like to turn in our strategy to create shareholder value.
I believe we have significant untapped opportunity there company and our brand.
And my conversation with our leadership team.
Management, our franchisees and only serve to solidify my confidence in our future.
Our value creation strategy is focused around executing for key pillars.
First we are focused on improving the guest experience and property level financial performance.
Second we're going to more strategically cure rate and extract value from our read assets.
Third we are going to grow the say brand through an asset light franchising strategy.
And finally, we will continue to return significant capital to our shareholders, while maintaining a prudent balance sheet.
Let me elaborate a bit on each of these four pillars.
First we are re dedicated in this company to the execution of the basics of our high margin extended stay operating model.
I believe that our operating performance is not reflected full potential of our business.
Our property operations team is focused on delivering an improved guest experience and our commercial engines focused on delivering more extended stay guests to our properties that are good match for our product.
And our operating.
To ensure that we provide a great guest experience we've initiated multifaceted property operations improvement program.
We will be launching a rigorous quality assurance program across all CSC branded properties of April.
We're upgrading talent across our property operations staff.
Field, and we will be aligning our incentive compensation programs to the guest experience as well as financial performance.
We're also testing certain modifications to our labor model to ensure that we more consistently provide a favorable guest experience.
And while there is some incremental cost of these initiatives.
We believe the medium term revenue upside is significant.
As we strive to improve the on property guest experience our commercial team will be laser focused on driving the right customers through the right channels at the right price to our properties.
Extended stay America is unique as were the only lodging company solely focused on the extended stay segment and the only revenue generation system exclusively focused on delivering extended stay guests.
That means we can optimize our property distribution channels to focus on extended stay business delivering.
In 2020 focused on optimizing our proprietary distribution channels, the say dot com, our call center and our Salesforce to deliver more extended stay guests.
We will be re launching here say dot com in early 2021 with a new look in functionality that will be optimized for mobile devices.
And unlike our competitors, we can target all of our marketing efforts, our media spend and our social media programs on the extended stay segment.
And as we improve proprietary business delivered through our distribution channels, you'll be able to adjust our revenue management strategy to decreased our dependence on transient guests to deliver to the OTA days and through eight channels.
Decreasing our dependence on these transient guests that are not a good fit for our operating model.
Can alleviate stress in our lean labor model help limit cost increases in rising wage environment.
And improve our net promoter scores on social media.
Our core extended stay guests are generally very pleased with the experience and they lease significantly higher reviews and transient guests that are delivered through the OTA is.
And we've already begun this transition to our core guest with a 9% increase in room nights occupied from our core extended stay customers over the last two months alone.
Secondly, we are developing a more strategic and proactive curations strategy for our read assets.
The company is fortunate to have some extraordinary real estate.
Many of these sites were developed many years ago and are impossible to replicate today.
We have identified a number sites that may lend themselves to a higher and better use other than the midscale extended stay asset.
We are currently marketing several such sites.
And we are receiving very strong indications of interest at very robust multiples.
We are considering offers at multiples generally more than double our recent trading multiples.
We're currently evaluating our entire portfolio for other opportunities to create shareholder value in excess of that which we can create by improving the financial performance at our properties.
And this would include assets that lend themselves both to a higher and better use.
As well as certain assets that may no longer properly represent the extended stay brand.
We are targeting close some of these transactions later this year.
Third we will more aggressively grow Esa brand through franchising in the past the company focused on both on balance sheet corporate development as well as franchising.
And that's the franchisee community has warmly embraced our prototype we believe is no longer necessary to initiate additional on balance sheet development to jumpstart our franchise system.
Instead, we anticipate completing the on balance sheet development now underway, and then expected dramatically curtail and possibly eliminate on balance sheet corporate development going forward.
This company is taking franchising seriously.
We believe that we can grow the extended stay America brand dramatically through franchising.
And as the only franchise or exclusively focused on the extended stay segment. We believe we have a unique competitive advantage that cannot be replicated by the transient brand families.
We expect to invest additional resources in 2020 to take advantage of this opportunity.
Fourth pillar of our value creation strategy is strong capital returns to shareholders.
Company is committed to returning significant amounts of capital through dividends and share repurchases, all while maintaining strong financial discipline.
We have a well covered 8% dividend yield recent trading prices and we expect to repurchase shares with cash from operations as well as a portion of any asset sale proceeds that we expect to close during the year.
We will maintain a prudent balance sheet, while returning that capital to shareholders.
Brian will touch on that more detail later on in the call.
In terms of our capital commitments renovations, while we have a handful hotel renovations, we expect to complete this year in South Florida.
We expect to pause our renovation program the rest of 2020.
First we want to ensure that our renovation program is closely aligned with our asset management and Curations strategy I meant I mentioned earlier.
Secondly, we believe we have a significant opportunity improve the guest experience by focusing on basic operational improvements and.
And as we review guest feedback from Medallia and other social media sources. We believe we can improve the guest experience to our renewed focus on quality and condition of our property and many of these initiatives do not require significant renovation capital.
The summer we plan to host Analyst day in New York City, where we will lay out the company's plans for the next three years.
This analyst day will cover significantly more detail on these four key pillars, we will provide further information on this event in the near future.
There's been much discussion in the media and among the research community about the krona virus and the risk it may have on the lodging industry.
While we're not immune to a slowdown in aggregate demand. We believe our position is far better suited to withstand any dress syrups and from the virus than our lodging peers.
First we have no international hotel exposure, where most of the cases are currently located.
Second we do not have significant inbound international guests at our locations third we do not have any significant number of hotels in work urban core locations, where we one would expect any initial outbreaks to occur.
The vast majority of our hotels are in suburban locations.
We will continue to watch events and we are prepared to take precautions on this issue.
Finally, I'd like to conclude my prepared remarks by stating how enthusiastic I am to be at this company.
I strongly believe in the business model I strongly believe in our segment in the industry.
I strongly believe in our company and our associates.
We have the right team to execute on these initiatives and I'm really excited to be here with nearly 8000 associates and work with them to deliver a better guest experience and to deliver better financial performance to our shareholders.
I'll now turn the call over to Brian to discuss our fourth quarter financial results, our balance sheet and our 2020 outlets Brian.
Thank you Bruce.
We ended 2019 on a stronger revenue trend than most of 2019 as we increased our business from our core extended stay guest.
Comparable system wide revpar during the fourth quarter decline to 0.8% well above the midpoint of our guidance ranges and 2.1% better than our comp set.
After a very tough environment in October comparable system wide Revpar increased 0.1% in November and increased a solid 1.8% in December which was 4.3% better than our upset.
Decline in the quarter was driven by a 4% decline and HDR, partially offset by a 240 basis points increase in occupancy.
During the quarter, we saw increased revenue on our website at our call center at among our OTA partners, while we saw declines from property direct and GDS business.
Second Revpar this quarter was renovation disruption, which was an approximately 0.8% drag on results as well as cycling on Boston area gas leak business from the prior year also approximately 0.8% drag on revpar. Excluding these impacts comparable system wide revpar what has increased.
Approximately 0.8% in the fourth quarter.
The company owned hotel Revpar declined 1.7% during the fourth quarter.
For the full year 2019 comparable system wide revpar declined to 0.9%.
Excluding the impacts of cycling hurricane related business in 2018 and renovation disruption in 2019, Revpar would have increased approximately 1.0% for the year.
We grew our Revpar index by approximately 60 basis points for the full year 2019.
Hotel operating margin declined to 280 basis points in the fourth quarter to 48.3%.
The decrease in hotel operating margin was driven by increased payroll expenses property taxes property insurance of maintenance expense as well as decline in comparable company owned Revpar.
For the full year 2019 hotel operating margin declined 220 basis points due primarily to a 1.3% decline in comparable company on Revpar and increased property level payroll expenses.
Corporate overhead expense, excluding share based compensation and transaction costs increased 36% to $26.7 million during the fourth quarter. The increases in corporate overhead expense were driven by CEO and related transition costs and by legal settlement expenses, which combine.
And totaled approximately $8 million during the quarter.
For the full year 2019, corporate overhead expense, excluding share based comp and transaction costs increased 6% to $88.1 million.
Adjusted EBITDA in the fourth quarter was $108.8 million.
Adjusted EBITDA during the quarter was impacted by the aforementioned $8 million in expenses and corporate overhead a decline in comparable system wide revpar and an increase in comparable hotel operating expenses.
Excluding $10 million incremental costs from CEO and related transition costs and net legal settlement compared to our prior guidance adjusted EBITDA would've been near the top end of our guidance range from November of 2019.
Adjusted EBITDA for the full year 2019 was 535 million.
Reflecting whilst contribution of approximately $21.0 million from hotel dispositions in 2018, an increase in comparable hotel operating expenses and a decline in comparable system wide revpar.
Interest expense during the quarter increased by $2.1 million to $31.9 million.
Interest expense for 2019 totaled $127.8 million in 2019 compared to $124.9 million in the prior year.
Income taxes during the fourth quarter declined $5.4 million to $1.5 million driven by lower pre tax income and a lower effective tax rate.
Income taxes for the full year 2019 declined by $12.8 million to $29.3 million also driven by a decrease in pre tax income and a decrease in our effective tax rate.
Adjusted FFO per diluted paired share declined 9.8% in the fourth quarter to 37 cents compared to 41 cents in the same period in 2018.
Climb 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 full year 2019 decreased 10.4% to $1.91 cents driven by an increase in comparable hotel operating expenses and a 1.3% decline in comparable company owned Revpar, partially offset by a decrease in income tax expense.
Net income during the fourth quarter decreased 39.5% to 23.8 million.
The decrease in net income was driven by a decline in comparable system wide revpar, an increase in comparable hotel operating expenses and the aforementioned incremental $8.0 million, an overhead expense, partially offset by a decrease in income tax expense.
Net income for the full year 2019 declined to 22% driven by a decline in comparable system wide Revpar, an increase in comparable hotel operating expenses and cycling a gain on asset sales in 2018, partially offset by fewer impairment charges and lower income tax expense.
Adjusted paired share income per diluted paired share in the fourth quarter decreased to 14 cents per diluted paired share from 21 cents in the same period last year.
The decrease was due primarily to an increase in comparable hotel operating expenses, the aforementioned $8 million, an incremental corporate overhead expense and a decline in comparable system wide revpar, partially offset by a decrease in income tax expense.
The full year 2019, adjusted paired share income per diluted paired share decreased to 95 cents compared to $1.14 cents in the same period in 2018.
We ended the fourth quarter with our net debt to trailing 12 month adjusted EBITDA at 4.3 times, a slight increase over prior quarters due to the decline in adjusted EBITDA combined with investments we've made in our business and in our own shares.
As a reminder, we have no maturities until may 2025, and more than 80% of our debt is fixed at attractive rates with weighted average cost of debt of 4.7%.
Total cash balance was just above $360 million at the end of the quarter gross debt outstanding was 2.69 billion.
We are committed to bringing our leverage back down to under four times. However, due to expected timing of both capital investments and asset sales our leverage may increase a quarter Turner. So before beginning its decline back to under four times.
We do believe our shares remain an attractive use of our capital.
Given our leverage targets, we expect to continue repurchasing our shares but at a pace of repurchases that will be somewhat moderated going forward until we close on asset sales.
Over the medium term our asset dispositions reduced on balance sheet development activity more targeted renovation capital and growth in EBITDA will help to de lever our balance sheet.
Certainly keep you apprised of our progress on asset sales.
Capital expenditures in the fourth quarter were $83.3 million, including $13.4 million for renovation capital.
$35.3 million for New hotel development of land acquisition costs and $8.4 million in capital.
Capital expenditures for the full year 2019 totaled $261.3 million. This includes $40.6 million for investments $47.7 million for renovations at $77.2 million for hotel development Atlanta acquisition costs.
We completed 16 hotel renovations in the full year 2019.
Our owned balance sheet development pipeline at the end of the fourth quarter stood at 16 hotels, our franchise pipeline grew during the quarter to 59 hotels.
Total pipeline stood at 75 hotels at the end of 2019.
We opened two hotels on balance sheet, and also purchased and converted an extended stay hotel for approximately $10 million, representing a projected stabilized cap rate of approximately 14%.
Additionally, franchisees converted two hotels to the extended stay America banner in 2019.
Yesterday, the board of directors of extended stay America, and the via say hospitality incorporated declared a combined cash dividend of 23 cents per paired share payable on March 26 to 2020 to shareholders of record as of March 12 2020.
Our dividend yield is now approximately 8% everything recent trading prices, which is significantly higher than our weighted average and marginal cost of debt.
During the fourth quarter, we repurchased 5 million paired shares for approximately $73.1 million.
For 2019 and effectively beginning in August of 2019, we repurchased 9 million paired shares for an aggregate purchase of $130.5 million.
Since the end of the quarter, we've repurchased an additional 2.2 million paired shares for approximately $31 million, meaning we've retired more than 6% of our diluted paired share count in the last six months.
Our current total outstanding remaining availability for paired share repurchases is $101.1 million.
Looking to the first quarter of 2020, we expect comparable system wide revpar growth will be flat to plus 2%.
Our revpar growth quarter to date has been around 2%.
We expect adjusted EBITDA between 107 at $112 million during the first quarter.
For the full year 2020, we expect to comparable system wide revpar growth.
Of negative 0.5% to positive, 1.5% and adjusted EBITDA between 505, and $525 million, reflecting a challenging revpar environment as well as wage property tax and property insurance expense pressure together with some additional investments in our franchising business.
Which is Bruce indicated we're serious about growing aggressively.
Our adjusted EBITDA guidance includes $6 million to $8 million EBITDA contribution in 2020 from hotels opened were purchased in 2019 as well as hotels opened or expected to open in 2020.
Expect these new hotels will have stabilized contribution between 25 $30 million.
Our guidance for 2020 does not include any potential impact from cobot 19.
Which we believe it's too early to speculate on what impact may or not the in store for the industry and for ourselves in 2020, although as Bruce indicated we do believe extended stay America is relatively well insulated compared to other lodging operators from material covet 19 embedded.
Our capital expenditure guidance for 2020.
It's $210 million to $240 million down from our pace in 2019.
This includes $80 million to $90 million in hotel development $25 million to $30 million for renovation capital in $15 million to $20 million for corporate capital expenses.
We expect our annual interest expense to be approximately $135 million.
We expect adjusted paired share income per diluted paired share.
Between 78 cents and 90 cents per paired share and we expect adjusted FFO per diluted paired share of between $1.68 at $1.77.
These ranges do not include any additional share repurchases.
No our through our dividends and share repurchases, we expect to return between 215 and $235 million to our shareholders prior to funds from asset sales, representing roughly 10.5% to 11.5% of our recent market capitalization.
We also expect to use a portion of proceeds from any completed asset dispositions for incremental share repurchases with the remaining proceeds to be used to retire debt or to keep dry powder on our balance sheet.
Operator, let's now go to questions.
Thank you at this time, we will be conducting a question and answer session.
You would like to ask a question. Please press star one on your telephone keypad.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keith.
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You May press star too if you would like to remove yourself from the Q.
Before we begin the question and answer session I'd like to ask everyone to limit their questions to one question with one follow up question in order to try to accommodate everyone in the Q.
One moment, please while we call for questions.
Our first question come from the line of Chris Woronka of Deutsche Bank. Please proceed with your question.
Hey, good morning, guys.
Good.
Good morning, Bruce maybe just to clarify a little bit on the on the refocusing on the kind of the core.
Extended stay gas does that apply to the entire owned portfolio or or is that.
Are you gonna have different strategy for say 100, 250 hotels that had been discussed I guess previously.
You are talking about 100, 250 that were sort of at the lower end with the performance spectrum, Yes, Thats right Yep.
Well first of all I think.
The entire company needs to refocus on delivering more extended stay business Kelly in the commercial team are really focused on that.
Throughout the entire asset base.
Today transient business represents about 37% of our business. When we went public number of years ago networks in the mid Twentys and that level of transient business. As you know really creates a lot of habit in our property operations expense is to deliver the customers, we deliver or not necessarily good mix or a good match for our product and.
Our operating models of the really very focused on moving that transient business.
So were lower lower figure.
We're optimizing our distribution channels to do that and that's one advantage that we have.
Some of our transients competitors don't have is that we can optimize old our distribution channels around the extended say customers and that is really a strong focus and as you pointed out there are some assets in our portfolio better more suited to even longer term.
Customer mix.
And Thats something we continue to look at.
Okay.
Appreciate that and then.
A follow up to that is just.
As we think and I know, you'll probably give more details.
Analyst day, but.
In the context of you ran 77 for San at 68, Bucks and 52% margin in 2019, how does the basic.
Out of the basic economics work as you shift too.
Presumably higher occupancy lower rate.
How do we think about margin impact, yes, I mean, what weve.
What we've seen what are our franchisees that have purchase portfolios of assets have demonstrated.
There may be a.
A decrease in rate.
But there will be an increase in revpar due to occupancy so.
You got to be careful about that mix.
Honestly, if we deliver those customers through our proprietary channels were paying fees opaque fees.
So thats an important part of the margin story so.
That is something we have to.
It doesn't change overnight, we have to do it carefully we're not going to say dramatic actions to.
Cut all large portions of our of our our transient guests and that will change over time, but.
What we've seen our franchisees do that have adopted the approach that we are on the path of is higher occupancy a bit lower rate higher revpar.
It also translates into higher higher margins becomes a housekeeping churning the properties and lower royalty fees, we have seen some very dramatic.
Topline results from our franchisees have adopted this model.
We think.
A lot of that potential exists here.
Okay very good thanks.
Our next question comes from the line of Anthony Powell of Barclays. Please proceed with your question.
Hello, Good morning, everyone.
Hi, Good morning, Bruce you mentioned on a few times your advantage that you believe you have there versus your transient competitors at one of those competitors recently launched and Midscale extended stay brand could you maybe assess how that brand may impact your ability to grow franchisees over the next few years and heres Bobby overall kind of.
Landscape.
Yes happy to do so.
We don't we don't mind the competition I think that.
The fact that.
Number of competitors, including.
Yes, we have entered that market.
And strong brands is good it highlights the attractive nature of the business. It's a big niche is an underserved niche.
And that does not that does not scare us in terms of competition in fact.
I have a lot of respect for our competitors I want to respect for what they do they are very good at what they do.
But they don't do what we do and what we do is unique in the industry, we are completely aligned and completely.
Focused on the extended stay segment and delivery, we extended stay business and what any franchisee once we sign up with a brand obviously, we have a good prototype.
Proven but at the end of the day, what every franchise the once his business delivery from their brands and that's what we're really set up to do we're set up to deliver the right kind of business Thats a good mix.
For the prototype and the operating model, we're going to stay very true to the operating model because it's such a high margin.
Such a high margin products and.
We're going to be we're going to be incredibly successful that we have a low cost operating model below cost franchise offering.
And we have the best recognized brand in the industry. We've extended stay America means the segment through our throughout branding. So we're going to be really very optimistic they'll franchising.
Great value proposition, we have a great prototype that repreve and.
We're happy to happy to have others in the pound with us.
Thanks, and I've a follow up.
You noted the of improvement of Revpar growth from November I guess through now.
How much of that was through your efforts versus Havent overall industry for improvement and what kind of customers were kind of generating incremental.
Okay, you're saying.
Hi, Anthony this is Brian.
I'll say, we've talked about this on prior calls, but there has been a recognition that our business has been key transient.
And we did put some efforts into place.
Sometime ago that began to bear fruit.
In the fall this year.
To drive more extended stay business I'd say the difference now is that we are double down on that effort to continue to drive more extended stay business.
It's a singular focus of versus.
Kelly and Randy are absolutely supportive of that and it extends beyond.
Pricing and inventory management to channels to.
Just frankly, the way that we are prepared to.
Meat and serve the guest in the property on a daily basis.
Are these residential customers are they kind of core business travelers or what.
We are the Tennessee gas and I will tell for.
Right now Anthony it's a mix, although we do have at least in some hotels more kind of residential mix than we have had.
In recent years, our occupancy in January.
It was actually the highest it's been for any January since we've done a publicly traded company.
Some portion of that was because we have a more residential guest mix in some hotels.
Okay.
Great. Thank you.
Our next question has come from the line of Michael Bellisario Baird. Please proceed with your questions.
Good morning, everyone.
Right.
Just on your 2020 Revpar guidance.
Maybe give us a sense of what your baseline assumption is for the industry here or maybe better yet your segments broadly and then how much market share gain is incorporated into that guidance.
Yes, good question Mike.
Yes, our market share gains at least in recent months has been pretty phenomenal.
Yes, we at least relative to our own comps.
All we've had weeks, where we've been pushing 500 basis points in terms of outperformance.
We don't have that expectation set for ourselves for the remainder of the year.
Our expectation is actually significantly more modest.
As you know the outlook for the autonomy segment of the Midscale segments are not particularly Blake this year, but we do expect to outperform some of that assumption of the extended stay model some of that assumption of.
Some of the investment and the focus that we're bringing to bear.
With our new had a revenue on our do those operations.
Got it and then just one more follow up on the lower tier hotels on it.
Numbers, you sort of left that open ended and money or prior responses, but may to put a finer point on it I guess as a board made a formal decision yet about the best path forward for these assets or is it really.
The ultimate outcome really.
More fluid for these hotels as the year progress is how should we think about the potential for I know you guys have discussed before about.
Reviving a lower tier brand and would there be any cap.
I was getting what that Thats I'm trying to.
Thanks.
The short answer to your questions no the board hasn't.
Made any this is on that and we havent given the board.
A proposal yet so.
It is still get fluid.
You know, we're certainly looking at the opportunity to improve performance along with our properties and that would include so there's more to our assets.
Through more residential and longer stay Mark and we believe there is certainly some opportunity there.
However at the same time as I think we indicated we are looking at Curations with portfolio.
We're looking at Curations, both sort of at the high end of the portfolio in terms of.
Assets that maybe that we have that may be.
Higher and better use opportunities and we're also looking at the lower end of the portfolio in terms of some assets.
Maybe to exit the system.
In terms of.
In terms of rebranding.
We're going to be really careful and.
I have a lot of experienced rebranding and repositioning as those company and branding and some other folks in this company. So that'd be very carefully the segmentation as we as we said before extended stay America owns the category. It's really important assets, we have to be really careful about rebranding or or or using.
That's very strong strong asset that we have on their brands. So.
Well look at it some it's not something we're.
Have any plans to do in the immediate future it could be an option down the road.
But right now we're really focused on duration of the portfolio property improvement and.
And if to the extent we have some further thoughts on that.
The Investor Day later this year.
We'll share them at that time.
Perfect. Thank you.
Thank you.
Our next question has come from the line of Shaun Kelley of Bank of America. Please proceed with your question.
Hi, good morning, everyone and thanks for all their prepared remarks Bruce.
Maybe just to start.
I think some of your Evolut is obviously, a significant remix and we're starting already see a counter some of the numbers.
Hey, can you talk a little bit about what this might mean on the operating product again I appreciate probably getting a lot more color on this in the summer bye.
When you think about a leaner labor model or what you can do any operating front as you shift to carry embracing our oral more residential model are there moves you can make like.
Closing a lobbies at night, not having 24 hour staffing like I think some of these things are.
More standard at your prior employer or these initiatives that will be looked out you defer the whole portfolio or you know a portion of the portfolio and how do you think about that.
Well certainly if we look out of segmentation strategy that could be part of that model.
Our property operations focus right now is not necessarily on cost cutting although as we deliver more extended stay guests that will naturally happen through lower housekeeping hours and so forth, which is a variable expense.
But what we're really focused on in property operations is not cost cutting although we're going to continue to be very prudent about that making some very modest.
Investments in property operations and management in our quality assurance function, which will launch in April, but what we really want to do with improved the guest experience at the property because the opportunity at the property level is not a cost opportunity, it's a revenue opportunity.
And Thats what were going to focus on appears a direct and clear correlation between our net promoter scores and our social media scores in revenue and we can see that in our assets. The assets that we have performed very well in social media that prefer that have very high net promoter scores at much higher Revpar index is then assets.
So our focus and Randy spoken for the entire operations team is really using the tools that we now have in Q way.
Delivering the right kind of customer experience delivering the basics delivering a clean grew well maintained group every time to every customer putting in some more.
Operational.
Processes to make sure that happens, we're putting some more management in terms of the team to make sure that oversight is there.
And we really believe thats, where the opportunity is to drive revenue.
And we can't continue to cost come our way into into.
To profitability here, but.
We can maintain our costs and by doing the basics rightly say through so theres a lot.
A good opportunity to increase the topline.
Thank you for that and the follow up I have would be on the renovation capital so clearly.
Pausing the renovation activity for this year.
But can you give us a little bit of a clue as to how you think about maybe medium or long term because we have seen sort of.
Over the years, a fairly consistent need for you now.
Our rounds of renovation as it relates to this portfolio and.
Is that something that's going to re gear up in 2021, or what do you think about the physical asset quality and how have you.
How do you think you're approaching it I. Appreciate you may now be able to give us numbers, yet, but how should we think about you guys approaching.
The renovation piece for 2029 beyond sure I appreciate that important.
I mean first first answer is that we're committed to continually renovating and maintaining our asset base at very high level.
That will not stop we have paused in.
2020 were doing.
Few properties in South, Florida that had already been underway.
But after that we will pause because we want to make sure. Our renovation strategy is well aligned with our brand strategy and is well aligned.
With our asset management strategy.
But we do expect to.
Complete sort of that.
At revamping of how we want to approach renovations. This year, we certainly will be.
Back in the market for renovating assets, perhaps on a more selective basis in 2021, once we have completed that strategy.
But I think the good news is that when we look at our social media scores, we look at what customers say about us on a trip advisor.
The feedback that we get from customers, we don't get a lot of feedback thus as we didn't enjoy our state because your hotel wasn't renovated or it's not brand new feedback. We got is there was something in my room that Didnt work my room, what's in clean.
Maybe the service was enough to standards those are things, we can attack this year and before I spend where we spend a lot of money.
On renovating our properties I want to make sure our operational house is sound and that we can maintain these properties and we can keep them clean and we can provide right service and then we will then we'll see the lift for renovations that we need.
Thank you very much.
Thank you.
Our next question has come from the line of Harry Curtis.
Please proceed with your question.
Good morning, everyone, just maybe a bit my follow up.
Paulson.
But your comment about.
Competing against.
New extended stay brand.
I guess my concern is that they have bigger distribution system, but is the offset that.
Move.
Mix or was that higher.
Yes.
A different segment I'm trying to understand.
Why you're less concerned about it sure not so good question and I.
I think that was something that.
The general industry may not recognize I think many franchisees do recognize that difference so you're absolutely right. They have much bigger distribution systems, they have bigger loyalty programs.
They have.
They are very strong, but they're very strong in delivering transient guests.
And that's really where it ends with the big ramp it was very good at delivering transiting caps.
Our web site, which we're going to re launch later. This year is next year is going to be optimize for extends its stake.
Our Salesforce, which is 125 people fully focused on delivering extended stay there was nobody else has anything like that our call center agents are trained in delivering extended stay business.
Which is a much more highly considered sale because of the high average.
Average purchase versus the transit.
So we've optimized our channels to deliver what franchisees in the segment, one which is extended stay business. So.
I don't.
I don't.
Minimize the competition, but they're very good franchisors I've spent a lot of.
Certain blood sweat and tears as Mike peers have in some of those companies, they're very good but they don't do what we do.
Okay. So I guess to follow that is what are the you've been.
You spent a great deal of time in building a more of the residential model one of US what are the unique challenges.
That you've you've encountered particularly as you want to maintain your guest service for the non residential customers.
I think.
Yes, I don't know I'd say, we spent a lot of time building a residential.
Business in my prior life I think.
Our assets some assets lend themselves because of their location because the physical nature of the asset to a more residential model.
Unless residential model.
And we have the ability to put.
Bifurcate, our channels and put in the right kind of business for those assets, we've done that in the past.
We do that here today to some extent.
Our customers generally travel because they have a need for an extended stay experience. They are not generally traveling from one hotel to another theyre generally not traveling because they're part of a loyalty program when we get points. So there is some natural.
Segmentation of customer mix, just by nature of the fact that we are.
I considered purchased when you have a life events or a dislocation you need to address.
And Harry this is Brian another thing that I would add is the sort of up.
There are too.
Realities that we can take advantage of that allow us to do that mixing more carefully in were surgically. If you will first.
Most of our hotels are owned by Us and so we can control the way that we.
Bring in guests to those hotels and second we had a lot of concentration in the markets in which we operate generally speaking so looking at a market like Charlotte, where we have eight hotels.
One of which is basically brand new some of which are older summer exterior corridor summer interior corridor, all owned by E. Sage hospitality, we have the ability to essentially mix individual hotels to be more residential while other hotels are more corporate and you don't have the problems aside.
Ceded with essentially a mix of guests at an individual hotel.
Okay I appreciate that and just one quick quick follow up on net Capex following up again on Sean's question.
As we look into.
Into to say 2021.
As you as you draw it down or or complete the 16 on balance sheet developed hotels.
What do you expect do you think that that translates into lower total capex in 2021, 22 or would that.
Premature to jump to that conclusion.
Short answer is yes.
Okay.
What I want to be up.
I'm sorry, so the answer to the question is yes, it probably has.
Yes, hi.
Yes.
Again, there's still some uncertainty about what the renovation program looks like exactly.
What kind of timeframe thats on whether we talk about a 678 10 year cycle, but regardless, we will not spend as much in renovation capital in 2021 and beyond as we will.
Development capital in 2020.
Longer term our capital needs will decline.
Very good thanks very much thank you.
Our next question has come from the line of Smedes Rose of Citi. Please proceed with your question.
Hi, Thanks, I just wanted to follow up.
Some of the on some of the margin question can you can you just talk about what sort of pace.
Increase you're seeing just our wages and benefits and.
How does that tie into kind of maintaining your margin in 2020, given your revpar guidance.
Yes, good question Smith the.
In terms of our actual payroll our actual hourly wages were running at a year over year increase right now of about 5%, what we can what we call payroll and related which includes benefits and other costs was actually slightly above 5% right now.
In addition to that are we would expect our payroll expense overall to be up a bit more than 5.5% because we are making some marginal improvements in the operations of the hotels, although we're talking about.
A couple hundred basis points or less.
There are some other areas and we've highlighted these before where we are able to drive costs either to be flat or down.
Our utilities expense essentially has not risen on a per occupied room basis during our last as a public company despite utility rates rising because we have.
Taken steps through capital and other steps to decrease our usage on a per occupied room basis of electricity water in particular.
Well payrolls a challenge in terms of percentages were actually seeing larger increases.
Property tax and in property insurance, although those are smaller dollar amounts to start with.
Okay. Thank you and then I just wanted to ask to you mentioned.
As you kind of try to shift your customer base to more longer term and residential but do you expect the OTA in third party bookings channels to decline and lock step with that I just noticed in your K that it was about 26%.
2019.
Yes, we absolutely expect.
Brian I know pointed answer that question.
Yes, yes.
The OTI ages, we use them today are sort of a.
The channel of last resort, if you will.
Sales in at the end.
And so if were successful in generating more extended stay demand earlier within the booking window. Then there is frankly, just less demand left over for OTI Asian, We're we're working very hard to make sure theres less left over for.
The.
Yes, you with your twos is most of those days are one or two nights.
And that kind of churn of customers really causes a lot of pressure to our operating model.
So to the extent, we can move that out we can lower costs.
And.
Those.
Through our website or through our channels have an understanding of the product is understanding of the services and get when you book through an OTA certainly through innovation.
Customers have no idea that they're saving extended stay property. They have no idea that theres not a full breakfast and they have no idea that they don't have daily housekeeping. So there is a real disconnect between the customer expectations and what we can deliver so to the extent, we can mitigate that that was certainly.
Provide multitude of benefits in terms of cost in terms of operations in terms of.
Our perception social media and so forth.
Okay. Thank you.
Sure. Thank you.
Our next question has come from the line of David Katz of Jefferies. Please proceed with your questions.
Hi, Good morning, guys. This Kwan fourth team thanks for taking the question.
Most of what can go back to your third point of the four point strategy regarding your increase franchising efforts can we should begin to that little bit further with more granularity to the extent that you can meaning how do you plan on attacking that is that just the terms on the franchise and contract more boots on the ground how should we think about that.
Sure.
I spent a lot of years and franchising and.
It's it's a great business model.
We have a lot of relationships.
Through those years.
We have we've actually made in this company I think remarkable progress and franchisee with very few resources. We have two development people, we have a half time service person and lot of folks sort of kicking in.
Help around the edges.
We're going to set up a dedicated and we aren't we've already done as we set up a dedicated sort of.
Business unit focused on franchising.
He's where maybe this is in our baked into our guidance the investment that we need to making this model.
People.
Processes and its relationships and we're going to be we've already made an offer recently if someone is going to come in lead our our service function will be actively recruiting for more development professionals.
And.
And.
Additional sort of overhead that would go along with that.
But yes, some if it's just it's a matter focus it's a matter of resources and it's a matter getting the word out.
Right types of developers about what the opportunities.
Thanks very much.
Yes.
Our next questions come from the line of Joe Greff of JP Morgan. Please proceed with your question.
Hey, guys.
First question.
You referenced the Revpar index improvement in the fourth quarter and for the first year what is it on an absolute basis.
Are you close to 100, and where was it a fee and then what's that.
So you're asking about our Revpar index relative to our internal comp set.
Correct.
Yes for I think that.
Yes on the year for 29 key we were close to 97%.
Fourth quarter, our Revpar index was essentially 100%.
Was essentially.
Where was it that Pete.
Joe I don't remember at the moment, but I can follow up with you on that.
Okay great.
Bruce you talked about at a four key pillars and that the first one was on the guest experience.
Part of your commentary talked about some of the cost associated with that can you talk about can you quantify the costs.
And whether or not that they are onetime in nature are the replicated beyond 2020, do any leak into 2021.
Yes, I mean.
Certain of these costs like setting up our quality assurance function, which we're doing through an outsource provider, which is standard in the industry will be an ongoing function.
There are certain tweaks to the labor model we are.
Spare many with this year to see if they resulted in the revenue improvements that we we would like to see from that.
But.
They are not dramatic.
And anything we do in terms of the cost side of the equation, we believe will be.
[music].
Greatly.
We swamp by the revenue improvement so we'll be continue to be really careful about on.
And.
And we believe as a SaaS revenue opportunity by improving the guest experience from where we are.
It's pretty dramatic and we've seen that again, we've seen the model we've seen the model from our franchisees are bought our assets, we see no revenue double digit.
Revenue increases in Revpar index.
Increases at those properties that we.
Previously owned so there is the model there and.
We're very focused.
Thank you.
Again, I want to give you a follow up on Revpar index.
Still don't have the hard numbers in front of me for like each year since we've done a public company, but I do know that.
Relatively early in the cycle, because our occupancy returned to prior peak around 2010, while our competitors occupancy Didnt returned to prior peak until 2016.
We did look relatively favorable to our top sets early in this cycle.
Certainly those since everybody else has hit prior peak looking at a period of the last few years. Our Revpar index is is very very strong right now.
We have reached the end of the question and answer session I will now turn the call back over to Bruce half for any closing remarks, okay. Thanks.
Appreciate all the questions and I appreciate your interest and support for the company.
Im delighted to be here I.
I love the business lumpy operating model, we have a great group associates and the management team that can really make some improvements and make some progress at this company.
It didn't come up but I think it's important to note that I'm completely aligned with our shareholders and my compensation is almost completely equity based.
So I want all of our shareholders to understand that.
We are we are completely focused on.
Running this business to deliver the best possible returns, we came to our shareholders.
We're going to run better properties, we're going to have a stronger extended say.
Distribution system.
Very committed securing our portfolio we were opportunities.
To realize value out of our read assets and we're going to be extremely focused on that franchising is an untapped opportunity at this company as well and as Brian said, we'll continue to be very shareholder friendly in terms of capital returns.
Once again, great to be here, we'll look forward to speak with you in May and.
And I'm sure we'll be speaking with many of you.
For that.
Thanks and have a good day.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great day.