Q2 2020 Extended Stay America Inc Earnings Call
Greetings and welcome to extended stay America second quarter earnings call. At this time, all participants are not listen only mode.
Question answer session will follow the formal presentation.
So I didn't want you acquire operator assistance during the conference. Please press Star Zero and your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to you chose not to live Vice President of Investor Relations. Thank you you may begin.
Good morning, welcome to extended stay America, the second quarter 2020 copper gold.
The second quarter earnings release, and an accompanying presentation are available on the Investor relations portion of our website at year say dotcom, which you can access directly at www dot about state Dot com.
The accompanying presentation as supplemental data on recent trends in comparison to recent industry and segment results.
Joining me on the call. This morning are burst <unk>, Chief Executive Officer, and Brian Nicholson Chief Financial Officer.
After prepared remarks by burst and Brian there will be a question and answer session.
Before we begin I'd like to remind you that some of our discussions today will contain forward looking statements, including the discussion of our 2020 I went for certain items expectations regarding the coated 19 pandemic.
Actual results may differ materially from as 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 discussed in our form 10-K filed the FCC on February 26, 2020, and our form 10-Q filed yesterday evening with the FCC.
In addition on today's call will reference certain non-GAAP measures more information regarding these non-GAAP measures, including reconciliations to comparable GAAP measures are included in the earnings release important 10-Q filed yesterday evening with the FTC.
We also referred to Revpar index, which reversed or person score calculated by comparing revpar on a comparable system wide basis through an aggregate revpar of a group of computing hotels generally into say market based on a weighted average of individual property results and with that I will turn it over to Bruce.
Thanks, Rob and good morning, everyone.
Start off I'd like to say, thanks to our nearly 8000 employees for all their hard work and tireless efforts over the past few months.
Not only did our dedicated associates keep 100% of our properties continue with operations during the most difficult period in the history of the lodging industry, but thanks to their efforts. We also made strong strive in building our business for the post pandemic long term.
Well I'm very pleased with our financial and operating performance during the quarter I'm most proud of how we achieve those results.
Our company has come together as a team like never before Weve lead hard into our corporate value putting people first doing what's right you caring for our community.
The acts of kindness compassion and understanding that our associates have demonstrated every day to their teammates and our gas during these difficult period.
Represent the behaviors that make those values real.
And I firmly believe that extended stay America culture has had a huge impact on the financial results were pleased to report today.
Well the covert 19 pandemic has severely tested our business and our people. It's also strengthen our company.
Not only did we keep every hotel in the system open for business, we've grown occupancy across the system each week since April.
We're now generating positive cash flow, we avoided significant furloughs and our hourly rags interactively hired across our portfolio.
We have continued to invest in our people and our business.
We've had strong talent with deep industry experience in the extended stay segment across the organization and those investments already making a noticeable difference.
Our ability to avoid management furloughs that headquarters and across the country is an unparalleled in the industry today and a significant competitive advantage as we're able to maintain continuity throughout this crisis.
Our entire company is highly motivated and fifth management team that means we are squarely focused on improving the business and planning for the future.
Our second quarter results clearly demonstrate that extended stay America and our business model is far different from the transient launching brands.
During the second quarter, our comparable system wide revpar declined by 28.7%.
And that compares the industry declines of 70% and declines of roughly 50% for other mid price extended stay hotel brands.
Fat, we'd be every benchmark of the industry by a large amount in the second quarter.
Our performance exceeded the overall industry competitive mid price extended stay hotels.
Our competitive set as well as the economy and Midscale chain scales.
Our Revpar index increased by over 4600 basis points to 141 in the second quarter.
But we are much more than an outperformer during a long unwavering pandemic our singular focus on the extended stay segment is not only of strategic advantage during difficult industry cycles.
But I believe it also be a source of value creation as we returned to more normal times.
One reason is that our company and our business model is incredibly flexible and adaptable.
Teams are nimble and quick to react to changing market conditions.
Last spring, we saw many important demand drivers such as transient leisure essentially disappear during the quarter.
Our teams pivoted quickly find new sources extended stay demand from segments, such as warehousing and logistics temporary medical in construction.
And difficult economic times, often create transition in People's lives and those transition also increases the demand for our crop.
Early on we aligned our field operations sales and revenue management teams around the single goal.
By new sources of extended stay demand and bring those customers to our hotels.
As the environment changes, we can and we will adjust our sources extended stay business.
Segment, which remains underserved in.
In doing so we can outperformed during the difficult time and fully participate in the better times.
All with limited volatility for our shareholders.
These are some of the themes, we intend to explore more fully in the analyst day presentation being planned for later this year.
In addition to our national and field based extended stay Salesforce. We're now seeing the positive impact of our initial improvements to our proprietary distribution channels, our web site in our call Center.
As the only lodging distributions system solely focused on the extended stay segment.
Essays proprietary channels are very valuable assets.
During the second quarter revenue from essays proprietary channels, which generates most of our extended stay business were down only 18% compared to a 55% decline for revenue delivered through third party OTV and opaque channels.
We believe that our product also represents a competitive advantage, 100% our guestrooms have full kitchens, giving our guest an unprecedented level control over their travel experience a critical customer preference is likely to be even more appreciated and it was before.
To highlight our product advances and the leading health and safety practices, we launched our stay confident program in May.
Stay confident provides a uniform platform to communicate all the actions, we're taking to keep our guests safe healthy and control of their travel experience.
We believe our value proposition for growing number of guests is stronger than ever and that value proposition in combination with our drivable suburban locations accessible price points.
And our ability to adapt to changing market conditions.
Positions us to continue to outperform.
I'd like now the turned some of the more recent trends that we've seen in our business during the month of July.
Today, our company occupancy levels are the envy of the industry. Our system wide occupancy has increased every week since mid April.
From a low point in the high 50% range in April we are now operating at an 81% occupancy level in August. This is above both our 2019 full year average and consistent with pre pandemic level at this time last year.
We believe our occupancy is currently the highest of any publicly reporting brand in the USA today, including significantly more residential economy extended stay hotel brands.
And our results are widespread in the second quarter, a handful of markets achieve either positive revpar performance or declined less than 5%.
And these statistics have continue to improve in August with 17 of our top 50 market currently showing either positive revpar revpar comparisons were down just 5% or less.
Average daily rate has improved as well from $53 HDR in late April to $59 last week, we now have more hotels operating above 90% occupancy then below 70%. This has enabled our revenue management teams to adjust pricing in many hotels.
Including pulling back on from deeply discounted promotional rates for stays of 60 nights or longer that we introduced early on in the pandemic.
The sense of urgency and alignment, resulting from the Coca 19 pandemic has accelerated the implementation of many strategic initiatives.
Most prominently we have focused on improving our core operations and driving extended stay demand.
Particularly proud of the rapid progress we've made driving more guests through our proprietary distribution channels.
While we have seen some decrease in business delivered from our national accounts due to cobot 19, our field sales team are delivering business that level levels that are consistent with this time last year.
I believe that's a major accomplishment in this environment.
We're also seeing encouraging results from our initial improvements in our call center and our website yesterday dot com.
Revenue from these proprietary channels has been down only roughly 10% in recent weeks.
And on Sundays, we've even seen year over year booked revenue growth at USA Dot com and our call Center.
The mix of revenue from extended stay guests during the second quarter increased to 72% compared to 61% to the same period of 2019.
Nearly already achieving our long term goal of 75% to 80% of our revenue coming from our core extended stay guests.
Throughout the company, we continue to invest in our people and upgrade talent where necessary.
Our commercial engine has benefited from many new leadership positions, including a new VP of marketing E Commerce, and new creative director into sales leader.
We continue to top grade our property management organization, including two new regional Vice presidents and multiple high quality district managers.
We also are building our franchise capabilities with new leaders and franchise development and services.
All of these folks are long time industry leaders with extensive experience in the extended stay segment.
These capabilities will facilitate our ship to an asset like growth strategy already underway.
I've said this before and I believe it firmly now more than ever.
Extended stay America has the most compelling value proposition in the industry.
Both developers that want to build new extended stay hotels and for orders of existing extended stay hotels that may wish to convert.
The awareness of the say brand and our singular focus on the extended stay segment in everything we do.
Coupled with our proven prototype and industry, leading performance through the pandemic positions us very well to be the leading extended stay franchise or in the industry.
We believe that ESA offers a superior value proposition compared to our competitors that offer transient oriented revenue.
Today for example, our four largest franchisees at sea phenomenal performance through the pandemic with some even seeing year to date revenue on par with 2019.
Our first new construction franchised hotel that opened in May is already running a revpar level of over $50 recently.
With the strength of our model throughout this crisis has a strong support system, we have seen significant interest from franchisees.
Especially around conversion opportunities in the near term and new construction has the credit market season the future.
Despite the challenges from Cobot 19, and that show in the market for asset sales our portfolio remains a source of long term shareholder value.
Strategically curated portfolio to identify properties with a higher and better use that can trade at accretive multiples remains the core tenet of our long term strategy.
The current environment may have slowed our ability.
To execute this strategy, but we remain confident that this will be an area of shareholder value creation in the years to come.
Before I turn the call over to Brian for more details I'd like to touch on our liquidity position.
In the last three months, we have moved from a pro forma cash burn of approximately $15 million per month. After interest in Capex in April two a pro forma cash increase of five to 10 million per month in the month of July.
These results include significant investments in on balance sheet Newbuilds development that will begin to taper off soon as we wind down our on balance sheet development program.
Due to our increased confidence in our ability to generate cash in this challenging environment last week, we repaid our $350 million revolver at our rights subsidiary from cash on hand.
As our cash flow continues to grow we expect to de lever the balance sheet continue to invest in our core business and judiciously return capital to shareholders.
Despite the challenges in the lodging environment I'm convinced now more than ever that given our unique business model.
Talents of our team and the strength of our corporate culture.
There are significant growth and value creation for EFA in the coming years.
I am confident that we continued to outperform during these difficult times fully participate better times when they arrive.
Executed in our growth plans and creates significant shareholder value in the process.
The best days for this company are ahead of US which of course include growing adjusted EBITDA to 2019 levels and beyond two years to come.
I'll now turn the call over to Brian to discuss our second quarter financial results further provide more details on our balance sheet and leverage and discuss some guidance for third quarter and 2020.
Brian.
Thank you Bruce.
In the second quarter comparable system wide revpar declined to 28.7% due to the covered 19 pandemic compared to the same period in 2019, driven by an 18.3% decline and HDR as well as an approximately 1010 basis point decline in occupancy.
The drop in Revpar was most pronounced in April where we saw declines of approximately 35% year over year, while June saw revpar declines of approximately 24%.
The decline in Revpar was primarily driven by 50% decline and transient business compared to a 16% decline in business from our core extended stay guests.
Revenue for guests staying a month or longer declined less than 10% during the quarter.
For the first half of 2020 comparable system wide Revpar declined 18.1%.
Revenue from third party channels declined 55% during the second quarter predominantly from OTI days.
Sales channels saw revenue declines of less than 20% driven by 13% decline in revenue from our call Center.
This pattern also held true even with our zero. The six night guests for saw revenue from third party channels decline approximately 60% while revenue from transient guests through essays channels declined approximately 35%.
The company's Revpar index increased 49% year over year to 140.6 in the second quarter with relative gains in both occupancy and rate.
Hotel operating margin declined 1270 basis points in the second quarter to 41.7%.
The decrease in hotel operating margin was driven by decreased company owned hotel Revpar.
Partially offsetting the decline in Revpar was a 10% decline in comparable hotel operating expenses in the second quarter.
The decline in operating expenses was driven by a decrease in OTA commissions, a decrease in digital marketing expense reduction in labor cost and a reduction in credit card fees, partially offset by increased expense for personal protective equipment for our associates, an increase in property taxes and insurance and a 1 million.
Dollar increase and allowance for guests non payment.
Hotel operating margin rose from 35.2% in April to 45.4% in June.
Well operating margin for the first half of 2020 declined 860 basis points to 43.8%.
Corporate overhead expense, excluding share based compensation and transaction costs.
Fell from $22.8 million in the first quarter of 2020 to 21.1 million in the second quarter of 2020, as we pared back expenses from our 2020 budget.
What was up slightly from the second quarter of 2019, due primarily to increased short term incentive compensation expense.
Adjusted EBITDA in the second quarter was $74.4 million compared to $153.6 million in the same period in 2019.
Decline in adjusted EBITDA was driven by the decline in Revpar, partially offset by a decrease in property level expenses.
Adjusted EBITDA was $15.5 million in April $26.9 million in May and $31.9 million in June.
Adjusted EBITDA for the first half of 2020 was $172.1 million compared to $270 million in the first half of 2019.
Net interest expense during the quarter increased by $3.8 million to $33.6 million.
Due to increased debt outstanding partially offset by lower LIBOR rate.
The company had an income tax benefit of approximately $6.1 million in the second quarter compared to an $11.2 million income tax expense in the same period in 2019.
Adjusted FFO per diluted paired share declined 67.9% in the second quarter to 17 cents per share compared to 53 cents in the same period in 2019.
The decline in adjusted FFO per diluted paired share was driven by a decline in comparable system wide revpar and an increase in net interest expense, partially offset by an income tax benefit and reduction in paired shares outstanding.
Adjusted FFO per diluted paired share for the first half of 2020 was 48 cents compared to 89 cents in the first half of 2019.
The company had a net loss of $8.8 million during the quarter compared to net income of $59.7 million in the same period in 2019.
The decrease in net income was driven by a decline in comparable system wide revpar.
An increase in depreciation expense a net interest expense, partially offset by a decrease in hotel operating expenses and an income tax benefit.
The overwhelming majority of the net loss in the quarter occurred in April as the company reported net income of approximately $2 million in June.
The company had a net loss of zero point $9 million for the first half of 2020 compared to net income of $88.1 million in the first half was 29 team.
Adjusted paired share loss per diluted paired share in the quarter was four cents compared to income of 32 cents in the same period in 2019.
The decrease was primarily due to the decline in revpar as well as increased depreciation and net interest expense.
Partially offset by an income tax benefit and a reduction in paired shares outstanding.
Adjusted paired share income per diluted paired share for the first half of 2020 was three cents compared to 48 cents in the first half of 2019.
The company ended the second quarter with $682 million and cash unrestricted cash and total debt outstanding of approximately $3.08 billion.
Due to the company's significantly improved operating position since April and with the company currently generating positive cash flow that revpar levels in June July and so far in August.
We repaid the $350 million re revolver last week with cash on hand, reducing our growth gross debt outstanding to $2.7 billion.
We feel our balance sheet is strong.
With ample cash and liquidity and no significant maturities until May 2025, and covenant light debt.
We are pleased that we are once again generating positive free cash flow as Bruce mentioned earlier at Q3 Revpar levels to date, the company generates pro forma between five and $10 million and net positive cash flow per month, even including our significant investment into on balance sheet hotels, which we expect to re.
GAAP up in the first half of 2021.
Our focus on uses for free cash flow in the near and medium term will be to maintain sufficient liquidity to delever, our balance sheet to invest in our core business and prudently to return capital to shareholders.
Capital expenditures in the second quarter totaled $50.7 million, including $1.8 million for renovation capital and $21.8 million per hotel development.
The company opened three new purpose built USA hotels during the quarter, while a franchisee opened one new purpose built Esa hotel.
As a reminder, after we complete the on balance sheet Hotel development process in the first half of 2021, we expect to grow unit count predominantly if not exclusively through franchise growth rather than through on balance sheet development.
Our total pipeline stood at 69 hotels at the end of the second quarter.
We do not expect the pipeline to begin to increase meaningfully again until the financing market improves and general revpar levels begin to increase.
But we remain very active in discussions with current and potential franchisees both for conversions in the near to medium term and new build in the medium to long term.
Yesterday, the board of USA tough fatality incorporated declared a cash dividend of one cents per paired share payable on September eight 2020 to shareholders of record as of August 20, Fiveth 2020.
The management team and the boards of USA and SSH hospitality continue to review the company's distribution levels.
Sage hospitality will continue to meet its re requirements, including distribution to shareholders of at least 90% of its pre tax income.
The company did not repurchase any paired shares during the second quarter and our current total outstanding remaining authorization for paired share repurchase remains $101.1 million.
The company does not currently expect to resume share repurchases this year.
For the third quarter, the company expects comparable system wide revpar declines between 18% and 21% and adjusted EBITDA between 98 and $105 million.
Revpar engine in July declined approximately 20% partially helped by the July 4th holiday shift.
And is down approximately 18% month to date in August.
Comparable system wide occupancy in recent weeks has been around 80% hitting 81.5% last week.
Adjusted EBITDA in July was approximately $38 million.
Due to the uncertain nature of the pace of the economic recovery.
The results of the upcoming election.
The potential for future shutdowns are going backward and reopening phases as well as the unknown timeline for a vaccine.
We will not provide guidance for the full year 2020 for most operating metrics. However, we do continue to expect to capital expenditures for the year to be between 160 at a $190 million.
While we lower our net interest expense estimate to $133 million due to lower LIBOR rates and the revolver pay down of the Sage hospitality.
We modestly increase our depreciation expense expectation for the year to 198 million to $203 million.
Operator, let's now go to questions.
Thank him if he would like to ask your question. Please press star one and your telephone keypad.
Comes from me should generally indicate your line is in the question can you may have had started Kim if he would like can we move your question fund the Kim.
Participants using speaker equipment may be necessary to pick up Dan said before seamless diabetes before we begin the question answer session I would like everyone to ask everyone to limit their questions to one question and one follow up question and a letter to try to accommodate everybody in the queue.
Our first question is from Anthony Powell outlet Fastly. Please proceed.
I love the morning.
Congrats on some of the and some of the better results and seems Florida.
Thanks Anthony.
Just.
Question on I guess, how we should think about the recovery obviously you guys.
I'm pleased to see business, a lot, but any kind of describe.
Wrap on EBITDAX high answers there wasn't screen business. So.
You need change just to get back to China.
Pardon me EBITDA or can you tend to get there.
Exclusively through remains to be extended stay segments of the business.
Yes, hi, thanks here. Thanks for your question.
You know transient business will always be part of the business model I think you know.
The company realize a bit too much on transient business in the past it was up to 35% of our our mix and that was really quite stressful for the business and the.
And the operations transient business.
Goal was to be around 2025% to filling the gaps and I think that's our long term goal and certainly in terms of.
You know profitability I think that mix will be more profitable for us in the long term and.
In terms of Revpar I think you'll also see our ability to get back to peak revpar.
Performance.
Without as much transceiver business as we had in the past.
Thats been demonstrated but some of our franchisees.
Pre pandemic.
They were operating.
At levels similar to us in terms of transient business unit. They made that shift prior to the pandemic gum and demonstrated positive Revpar performance, which has also helped them throughout throughout this period.
Right.
I think that answer to that fairly I think fee.
Anthony.
Pre pandemic as Bruce indicates it was our target to try to reduce our transient mix from.
About a third of our business to something closer to a fifth of our business.
[music].
Yes, obviously since the pandemic has happened that has helped us to reach those goals faster than we would have otherwise, but we intend to hold serve into continued to build out business from here with that mix that is really more optimal for our operating model.
Yes, Thanks, and I guess.
On that topic.
Yes, 30 days.
Eventually.
It's more the business extended stay how that mix. Some makes me year, Okay and are you seeing more on stock subscribed to business type state increase month over month.
Yes.
Yes, sure I mean, when the pandemic cat that was the first place we when we went to the 30 day plus business because we knew that the more residential business would.
Would grow during uncertain times and that's exactly what we did early on sort of the March timeframe, we really leaned into food highly discounted residential rates, we have a rate that is.
As for folks want to stay for 69 surplus they pay up half of it upfront and that is up very highly discounted rate. Since then we have backed off on some of those rates as our occupancy has increased so we have.
A number of hotels that are operating at 80, 590% for those hotels, we've taken that right off the.
Off the system in favor of a higher monthly rate, which we call our retail monthly rate. So we.
The good thing about this business is you know we're very flexible we can just in terms of revenue management management revenue management strategies.
Yes, we see changing market dynamics and.
Through this pandemic our markets have been very theres, a lot of volatility out there we have a number of markets actually we have four markets that are actually positive revpar performance year to date.
Including Charlotte, which is which is pretty amazing and as we said in the remarks, we also have a number of markets.
And our positive Revpar performance in the month of July on the other head. We obviously have some markets that are negative and.
And many markets that have.
Opened up and re closed or or had some other local issue. So it's a very local business and that's why we have a revenue management staff in the field and headquarters that can manage those.
Those local dynamics and them and maximize performance.
Things change.
Anthony one other thing I would add and I think this is.
Just highlights the flexibility that Bruce mentioned.
We have mentioned prior that we changed our incentive programs rather than tying those incentive programs to budget performance.
We began incenting our field personnel our sales personnel.
To generate 30, plus business and for the hotels or groups of hotels for which they were responsible essentially gave them targets that ticked up month to month.
In terms of 30 plus business.
We have identified enough project business that we've actually change that incentive now beginning in July.
Two.
Incent people to produce more seven plus business. So it's it's not just a focus on that residential but it's really more true.
Extended stay for weaker longer.
Alright, thank you.
Thank you.
Our next question is from Chris Rock with Deutsche Bank. Please proceed.
Hey, good morning, guys and congratulations on a.
Very solid quarter in.
In these times.
Question was on the on your franchise pipeline and was hoping maybe give us a little bit of color on what some of those franchisees look like in terms of what they what they own currently or do they own other hotels currently and then.
As you are talking to them through this process.
Do you think financing or anything like that.
Become more of an issue.
And how you think about that the cadence of your pipeline going for.
Sure.
You know franchising continues to be a major strategic initiative for us as we mentioned in the remarks, we've hired a number of people in franchise service and franchise development in the second quarter, all industry veterans, who know the industry in particular, we know the extended say segment. So.
This is it's a difficult time for franchising, but we're not backing away from it in any way shape or form and we're committed to to that segment of the business.
What we're seeing right now is we are seeing a lot of conversion interest.
Unfortunately.
[music].
The universe of convertible product to extended stay as not as you know is not as large as the universe for our trends in competitors, but theres still product out there many of these.
Owners or potential owners are looking to transact.
In terms of the change of control from.
The current ownership many of those are coming to us.
We're seeing candlewood potential conversion toward potential conversions towneplace suites potential conversions.
Some other brands as well.
On the new gold side, we have a lot of interest.
But again there is some folks that have.
Access to capital, but many don't and.
I'd say those those conversations are.
Our longer down the road.
Okay.
And color Bruce and then.
And.
In terms of how we think about margins going forward I know you had made some changes.
In terms of breakfast and housekeeping you do provide.
No.
And those of you just temporary do you think there's any kind of longer term changes to your your model, which is obviously.
Already less less labor intensive than others, but but do you think some of these changes do do stick around.
Yes.
Excuse me.
Yes, I think it's probably too early to tell I think the main.
Way, we can influence margin is obviously the shift of.
Shifted mix were transients more extended say business in more normal times, you're right now we've seen some savings through breakfast that was offset by further expenses from BPMI, we've seen labor savings from west transient business labor savings from.
Less frequent cleaning of rooms for long stay guests.
Closing down some amenities.
You know wage pressure potentially could.
Abates a bit in the future, we havent seen that yet.
But that is a possibility.
I think that somewhere I think that summarizes it well.
Okay very good thanks, guys.
Our next question is from Chad Laden with Nick Clegg Macquarie.
Hi, Good morning, Thanks for taking my question congrats on a quarter.
Thank you.
Brian I wanted to.
Given a little bit more detail in the third quarter guidance, which you noted July and August how that's trending and thats kind of rate rate, where the guidance is.
For September it how does the potential online learning and you know kids not going back to school do you think this helps hurts or is it indifferent in terms of what you normally see in a September.
Month from from a Revpar standpoint, do you think this dynamic could kind of change anything when we get into that period. Thanks.
Thanks, Chad that's that's a very good question.
We have hinted.
You know, we're comfortable guiding to third quarter.
And the.
Basically the the width of the range in third quarter is driven in large part by exactly those kinds of questions about September.
Yes, I think.
A case could be made that.
[music].
That an online learning environment in.
Most of the markets around the country will be a little bit more disruptive.
The business travel I think you could also make the case that.
We continued to grow our business, especially within.
Groups and types of business.
Back in the May June timeframe.
Went online learning was already prevalent.
And so.
I have some confidence in our.
Team out in the field that they can continue to identify and bring that business into our hotels.
Yes, despite the online learning environment as we move further into 2020 I think fee.
Yes, there are more items of concern you get into a presidential election season that can.
There can be just a lot of unknowns of brown, what's going on.
Yes, and then when we get back into.
More people indoors and less exposure to sunlight list vitamin D.
Who knows what happened the case counts and so we do what we are.
I will watch these things very very carefully.
Fortunately we have.
A tremendous number of hotels around the country where in.
Every major market, except a wahoo.
Within the United States, we have the ability to.
Got to really watch carefully to see what's working to apply learnings from one part of the country to another.
And so.
I think ultimately the the business response there lies in resilience.
Yes, the only thing I'd agree with everything right. So the only thing I'd like to add is that you need to think differently about our business customers than traditional business I mean, the folks that are.
Staying at our hotels for business or not are not people that have the option to be on zoom calls like the rest of the still I mean, they have to be there physically to do their job.
I think thats, what distinguishes our business travel for most other business travel in lodging industry.
The have to be on location.
So I think.
Online learning regardless of.
How that pans out that will continue to be the case.
Just as an indication of how.
I would say how scrappy our sales forces.
Online learning, having kids at home that it's going to create a lot of stressed or people that have to work at home and we've been having initiative for sort of offering.
Remember the name of it.
Hey.
Use of our hotels in our Internet and our facilities for the day or for the week for folks that need to get out of their house and have acquired place to work stay smart stay smart headed thank you. Thank you.
We'll see if it works, but I think thats a good indication of how this this business and our sales and revenue management find opportunities.
Great. Thank you yeah, it'll be interesting to see.
And then Brian you noted that you'll be generating free cash flow.
In the in the third quarter and I also think in your prepared remarks, you mentioned that core focus is to de leverage do you have an updated goal in terms of where you would like to see that that leverage.
In the next in the next year or two.
Chad Weve.
Our long term goal doesnt change in the long term under normal circumstances, we'd like to be under four times leverage.
We think the fact that we were.
That our net leverage was sort of in that neighborhood going into the pandemic has really helped us.
And certainly the the combination of that relatively low Len net leverage.
Yes.
Sufficient cash on hand, certainly helped us to continue to move through the pandemic and to continue with capital projects, including on balance sheet development, which to my knowledge was not something that anybody else was doing.
During the deficit of pandemic.
[music].
We.
As you say, we expect to be or as you know, we expect to be cash flow positive.
A lot of that cash is going to be generated by the read the re will.
Return at least 90% of its its taxable income this year to shareholders. We expect that the majority of that return will happen.
Early in 2021, when we have certainty about what the totality of 2020 Retaxable income will be.
Okay. Thank you very much guys.
Thank you.
Our next question is from David Katz with Jefferies. Please proceed.
Hi, good morning, Thanks for all the detail much appreciated.
Congrats on the quarter and thanks for including.
Look I wanted to just get out Capex, which Brian I think you articulated carefully.
It's something that should ramp down.
By the first half of next year.
Can you just talk about what a baseline ongoing maintenance number would look like and just how far down that 160 to 190.
Turns into and how that progresses.
Yes, David Thats a good question. The I think you can basically back into it by taking out the.
The new development Capex.
Basically the.
The new development.
With each passing month since we opened more hotels, we have fewer and fewer hotels in active development and so that development number will taper and we expected to basically be over.
Certainly by this time next year.
In terms of the maintenance for the existing hotels.
Yes that number traditionally has been.
Approaching $100 million call. It between 80 and 90 million in a typical year.
And.
As we move forward, maybe that number tweaks, a little bit, but what that's essentially where we are.
Got it and.
Well on the subject of conversions right understanding that the capital community is going to drive new construction.
Can you just talk about the cadence.
Versions as we move forward intuitively they would ramp up.
Through the rest of this year.
No hotels sort of figure out their ongoing path and whether there is one or what that would look like.
How reliant is not on the capital community if at all.
I think we have a very good story in terms of conversions, we have converted a few hotels late last year and another one.
I believe in February of this year pre pandemic.
Those hotels that we converted are actually running basically about flat post pandemic into their pre pandemic.
Performance under under prior brand. So I think we have a very good story to tell.
We're telling it but again a lot of these transactions are also predicated on a change of control.
Of ownership.
There are also we have to wait for windows generally in terms of hotels to trade. So.
I think it'll be a little bit lumpy, it's hard to forecast a.
You know a clean.
A clean trajectory there because it's they're all very.
Again transactionally.
Dependent.
Got it okay. Thank you.
Our next question is from States Rose with Citigroup. Please proceed.
Hi, Thanks.
Im just wondering if you could touch on what you're seeing on labor costs in general either at the property level around kind of housekeeping that that kind of cost or sort of general managers in a management.
Level in this environment as I have you seen any change one way the other there.
Yeah, Hi space. This is Brian the.
Really surprisingly for an economy that has 10 plus percent unemployment.
We have not seen.
A lot of ability at least not generally across the country.
To flex our labor rates at all.
Labor savings that we have achieved year to date.
Really been driven by a reduction in labor hours, rather than in a change in rate now.
It's my belief that and some of the feedback that we get from the field.
That the unemployment subsidy that's been in place here until the end of July on which is really kind of an open question as Congress continues to.
Debate what go forward assistance should look like.
That $600 subsidy to existing unemployment benefits myth that.
Yes.
People, who are earning an hourly rate at a company like our hotels actually earn more money by not working than they earned by coming back to work at our labor rates.
So I think until.
There is an adjustment to that subsidy a downward adjustment to that subsidy.
You know where.
Someone might turn.
70% of what they would earned by working rather than 140% of what they would earned by working.
We're going to continue to see a challenged rate environment.
There are a number of people who do want to work.
And there are people, who give up on those those extra benefits just to come in and.
And do a job and be productive maybe said a good example for their kids whatever it might be.
But we think it hiring will be much easier.
And rates will.
Possibly come down a bit when we're seeing into that subsidy or a reduction of that subsidy.
Okay. Thank you and then I just sort of hinted that eventually getting back to kind of a return of capital as part of your.
Model actually reading I guess, reaching some leverage targets.
Do you see a reinstating a more normal dividend first before share repurchase or how do you think of those two things or is it kind of too far down the road to worry about.
Yes.
We do think about it we talk about it with the board at least quarterly.
We have begun to kind of think through some scenarios about what the dividend looks like.
When we get into 2021 for right now yes the.
The plan continues to be certainly subject to change, but for now continues to be.
That we.
Have a modest dividend until we get to the beginning of 2021 in early 2021, we make a catch up right dividend.
We'll determine what if anything happens from the C and will establish dividend policy going forward likely at that point.
Okay. Thank you.
Our next question is from Shaun Kelley with Bank of America. Please proceed.
Hi, good morning, everybody.
Bruce I just wanted to go back to your prepared remarks.
You had a pretty interesting comment I think you showed it in the slide deck as well about how you out how you significantly outperformed.
The other mid priced extended stay.
This is at the segment I'm, just wondering especially given your experience here. If you could elaborate a little bit on that outperformance on either what's driving that may be geography differences in.
Business model, our price point.
Little bit about just what might make up that segment of competitors because I know for some of US you track some of the data in the space.
Getting crystal clear data on the extended stay segment is a little bit more difficult.
Sure.
We have obviously the claim challenge we.
See the figures for the publicly reporting extended stay brands are there.
They are pretty much.
Well known.
I would say as either I wouldn't say its geography mean, we have some very challenging markets. You know posts pandemic. We're in a lot of coastal markets. We're in a lot of.
Major cities in Boston, New York, and Miami, and the Bay area in California in Seattle that have been very hard hit from.
From a from a business perspective during the pandemic.
We have less.
Less presence in the Midwest, which is actually.
Last hard hit our our properties in the mid Western we're doing very well in the southeast generally are doing very well. So I think the outperformance is not geography relays again, we have some very challenging markets geography wise.
I believe and.
I think this is true that our competitive advantage as being an extended stay hotel company is what has led to that.
Outperformance.
If you look at certainly some of our other midscale brands are tied to transplant distribution channels.
They lost more than they did not have the ability to make that up because they did not have the infrastructure to go out and find extended say business like we do so I really I really think it's that simple.
Yes, Sean the the mid price segment, I think as you're aware as you know thats candlewood and I'd. She product that's towneplace ameriana product that is home to Hilton product.
Mainstay.
And so it will include include ever home suites, when they get them open I guess from choice and appointed by wind up.
All of these companies except for us are primarily focused on generating and driving transient business.
So if you look at their websites compared to our website our website is geared to.
Selling and booking extended stay business.
A very important channel for US is our call center call centers or not is important for a lot of these other brands, especially the the bigger brands and the.
When you're selling extended stay if you're going to get a book a room for more than a week certainly for more than a month, you're going to want to ask a human being about what's in the market what's nearby where do you go to eat what do you do that.
We are geared to selling that business in a way the.
These other mid price chains or not.
Thanks, Brian. Thanks, Bruce then then I guess to follow up would be yes, I know you've talked about this a little bit so I want to on totally rehash that just thinking yes. This balance between maybe a centralized sales effort and a little bit more of a localized effort. It feels like whatever that balances you struck it pretty well.
Particularly for this kind of really difficult operating environment, but kind of what is that balance as you see as you see that the landscape evolving kind of going forward.
Is it a kind of top down driven centralized model or is it yes. No you have like a local person on side. You know is the needs in that that local community or how are you striking that balance at salesforce.
Well, we have we have both right now we have in Nashville, Salesforce as is centralize the deals with national account soon and larger companies going.
On a national national level and offers our portfolio of products. So those accounts and we also have a local salesforce that end market that is partnering with local revenue management professionals is partnering with our operating professionals that no deeply know the market.
It's going to be a mix of both going forward in this environment, obviously, the national account business has fallen off.
Just because.
Of less sort of grey collar business travel I would say we've made up for a lot of that in terms of the local business. So it'll be a balance going forward. We have we have both from both of those.
Parts of the Arsenal at our disposal and as times get a little better we'll probably.
Back off a little bit on some of the local business and that in some more corporate business.
Again, it's very it's very market driven it's very.
Location driven.
Both are very important for us going forward.
Thank you guys.
Our next question is from Michael that scenario with Baird. Please proceed.
Good morning, everyone.
Good morning.
Good morning, just that just a follow up from a question at the beginning.
You mentioned, the 80, 181.5% occupancy level as you guys are thinking about the next few quarters and even into next year.
What's the upside potential here and as its high points is a three point how are you thinking about how much higher occupancy can be given your.
Greater extended stay strategy today versus brick and Dominic.
I'll I'll start with Brian and I think obviously this is a high occupancy brand new 80, 85% occupancy is not something unusual.
The opportunity we have now which we're taking advantage of is trying to generally I would say move rate as much as we can in those high occupancy markets that we have.
The number of markets that are above 90% of number of hotels that are booked 90% and those are places, where we have a chance to.
We have to work to try to move rates and Thats what were doing.
Yeah the.
I'd also note Mike said, our our seasonality right now looks very different than it has in years past, but it's still there.
Transient business has not gone away completely transient business has.
Has shrunk dramatically, but given that right now it's about a fifth of our business as we move out of the summer and into the fall.
Yes, I would expect that we will see.
Some absolute occupancy.
Declines in that transient business, we will work to try to replace that business with.
More extended stay business, but we'll see how it goes as we move through the fall.
But certainly as we move into.
Into the future.
Looking a couple of years out.
You know traditionally we've had occupancy.
In the eighties in the second and third quarters.
Maybe in the sixties in the first and fourth quarters and have averaged about 75%.
The focus on more extended stay mix should allow us to drive more occupancy in the fourth and first quarters.
Which should improve our annual.
And drive up our Revpar.
Got it and you mentioned trying to move rate higher and I know before you mentioned rolling off to 60 day discounts and offering a 30 day rate, but what's the pushed back if any from customers on rate increases or is it still really a mix shift focus for you.
Yes, I think thats more of a mix shift focus.
Yes, thats for new customers coming in.
And then any pushback or no you haven't really tried to push rate yet or when you decide to push rate more than gently.
I would say, we're pushing it generally at the moment.
Thank you.
Good.
Yeah I never question answer session I like to turn the call back over to praise for closing comments.
Okay, well I just like to thank everybody for your interest in your your questions. We really appreciate it.
The company and I'm very proud of our performance.
But mostly I'm proud of the people behind the performance I mean.
This is.
Results like this don't happen all by themselves. It takes a lot of work it takes a lot of sweat and.
Our team has really come together and I appreciate that.
Hopefully I think to the street and to investors. We've demonstrated through this second quarter and through this pandemic period, just how different go. This company is and how much upside. We believe there is in the future by relying on the key strategic advantages that that we have and that no. One else has the industry and that is you know our business model.
And our exclusive focus on what I think is the best segment in the lodging industry. So our plans going forward are going to be to continue to lean into those strategic advantages and.
We look forward to grow in the company in a in a post pandemic environment whenever that may be but again. Thank you for your questions. We look forward to speaking with you in the future.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you feel like visitation.