Q3 2020 Extended Stay America Inc Earnings Call
Greetings and welcome to the extended stay America third quarter 2020 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now.
I like to turn the conference over to your host Mr., Robert Blu Investor Relations. Please go ahead.
Good morning, and welcome to extended stay America third quarter 2020 conference call. The third 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 state Dot com.
The company presentation of supplemental data on recent trends in comparison to recent industry segment results.
Joining me on the call. This morning are Bruce Haas, Chief Executive Officer, David Clarkson, Chief Financial Officer after prepared remarks by burst and David There will be a question and answer session.
Before we begin I'd like to remind you that some of our discussion today will contain forward looking statements, including a discussion of our fourth quarter and 2020 outlook and expectations regarding the good bit 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.
It's a different from those implied by the forward looking statements are discussed in our form 10-K filed the FCC.
Very 26, 2020, and our form 10-Q filed yesterday with the SEC.
In addition on today's call, we will reference certain non-GAAP measures.
More information regarding these non-GAAP measures, including reconciliations to comparable GAAP measures for including the earnings release and form 10-Q filed yesterday with the SEC.
We also refer to Revpar index, which were first your percentage score calculated by comparing revpar on a comparable system wide basis to an aggregate revpar of a group of competing hotels generally in the same market based on a weighted average individual property results.
With that I will turn it over to Bruce.
Thanks, Rob and good morning, everyone.
I'm very proud of our performance during the quarter as we'd be not only our own expectations and outperformed all industry and competitive benchmarks are.
Comparable system wide Revpar declined 14.7%.
Significant improvement.
The decline in the second quarter.
She did the guidance we provided in early August.
Our third quarter year over year, Revpar performance was more than 20 points better than the mid priced extended stay segment.
We also gained more than 30 points of Revpar index compared to our comps.
This performance was driven by the strength of our singular focus on the extended stay segment.
We are a pure play on extended stay and we believe that to be a significant impediment here.
Extended stay revenue generated from our proprietary distribution channels, our web site and our call center increased slightly year over year in the third quarter.
Fight declines in 80 are across the board and some very difficult market conditions in some of our largest markets through the pandemic.
Our relative Revpar performance improved each month during the third quarter.
Occupancy has been running close to 2019 levels since early August.
Well some of our verticals have been hurt such as I T consulting Preopening and event.
80, or if it is down across the country, our field sales and operations teams have demonstrated strong performance from important verticals, such as construction supply chain and medical workers, while also developing new customer segment.
Third quarter, adjusted EBITDA of $112.7 million increased by nearly $40 million compared to the previous quarter coming in well ahead of our expectations and guidance.
And as a result, we generated more than $60 million in free cash flow during the quarter.
Our strong performance was driven by motivated and engaged associates at all levels throughout this company.
8000 associates rallied around our mission.
Third our core extended stay guests.
As a result of the efforts of our associates were able to pay our frontline management bonuses increased the wages of our front line hourly field employees and continue to hire in many areas of the country.
Unheard of today and its industry, all while maintaining strong cost control at our hotels.
The corporate office thank.
Thank you colleagues and for your hard work and dedication this quarter.
They did and engaged employees focused on a common set of goals drive strong performance there.
The numbers bear this out for extended stay America. That's we have nearly doubled our associate engagement and glass door scores from a few years ago.
Engaged associates result in more satisfied customers, which in addition to our other operational initiatives have resulted in a nearly 25% improvement in our social media scores and large increases in our net promoter scores this quarter.
Social media scores and MPS are highly correlated with Revpar, we're taking strong action to build upon these improvements the long term with initiatives such as our recently launched quality assurance program.
During the third quarter, we not only successfully manage through the pandemic, but we also continue to invest in the future of the company and the EPS a brand.
Given the relative performance during a pandemic and sometimes asked about the companys prospects for the post pandemic period, but we all hope will be coming sooner rather than later.
I believe investors should not consider a week and strong performance to be something that will fade when the pandemic guidance.
But something but will instead become the basis for improved performance post pandemic.
Improved of course, not only from current levels of profitability, but also improves relative to our pre pandemic performance.
Our recent performance during the pandemic demonstrates the depth of the extended stay market.
In the midst of the current disruption of the lodging industry, we've been able to operate at nearly 80% occupancy.
When the pandemic and most of those current demand drivers will remain <unk>.
<unk> add back additional sources of higher rated.
Like various consulting customers event, driven business and corporate business in the seven to 29 day week segment that's.
That should allow us to maintain higher occupancy higher rate, which we will believe will translate into improved profitability.
The depth and power of the Ics.
And its day demand and its related industry, leading profit margins you something I do not believe we fully accept pre pandemic.
With that in mind, we are taking steps with our revenue generation platform.
Not only driving our current relative outperformance.
Which I believe will take the company to new levels of performance when the pandemic out.
Improving our commercial engine in our core hotel operations, it's one of our highest areas of value creation opportunity.
We have made substantial progress on both of those films upgrading talent in many conditions implementing these strategies to improve our call center at our web site.
Continuing to remain focused.
On driving core extended stay customers into our hotels.
These efforts are already paying off.
Revenue from our proprietary channels in the third quarter was nearly flat compared to the same period in 2019, and we saw the largest single month's revenue generated by our website yesterday dot com in the company's history during the month of July.
And for the month of September revenue from extended stay guest was up 7% with extended say occupancy up 18% compared to 2019.
Largely offset a 40% drop in transient revenue this.
This production from our commercial engine is unprecedented and I think it highlights how unique our value proposition is to both franchisees.
And to our shareholders.
Extended stay America will deliver strong results in good times.
As well as bad.
It's important to note that we've achieved these strong third quarter results despite difficult market conditions in our highest revpar markets and we expect to gain further traction as these markets return to normal.
And with our lean operating model increases in revenue were close to the bottom line at a high rate driving EBITDA and margin.
Going forward, we expect to go to shareholder value not only by improved performance of our owned hotels.
But also by growing the number of hotel properties operating under the same flag two franchise.
And we also have a strong focus on creating value by ensuring our owned hotel portfolio.
We've made progress quarter further developing our assets segmentation strategy.
For our owned assets.
We also made progress during the quarter further developing our asset segmentation strategy for our read assets.
As we strive to maximize the value of our reach to more proactive asset management.
We will be targeting renovation investment in those assets with the highest potential to drive above market Revpar performance.
And then those expenses were one of our hotels is more valuable for a higher and better use by a non hotel investor we will seek to realize that excess value for our shareholders simply.
Simply put our asset disposition strategy is to strategically cure rate the portfolio of assets that we can transact at multiples significantly above the company's current trading levels.
This is made possible by the fact that we have assets and hotels located in your replaceable premium locations.
In addition to our operating performance, we believe the value inherent in our report polio is another source of shareholder value that is on appreciated by the market today.
We will further quantify these disposition opportunities and expect to share some more on this important strategy 2021.
We continue to work to facilitate our shift to an asset light unit growth strategy through franchising upgrading talent in that group, adding more resources to support the franchising system.
I truly believe that extended stay America has the most compelling product value proposition in the industry today, both for developers that want to build new extended stay hotels as well as owners of existing extended stay product if they wish to convert.
The awareness of the U.S. aid brand and our singular focus on the extended stay segment everything we do coupled with our proven prototype and our industry leading performance through the pandemic.
Positions us to be the leading extended stay franchise or any industry.
Well the lodging industry lending environment is not favorable to new construction development at the moment.
We continue to see strong interest among developers for the future and significant activity with respect to conversion from competing brands.
We expect to close additional conversion opportunities into the U.S.A. drank during the fourth quarter.
Discussions with future and existing franchisees remain very productive and.
I strongly believe that once the financing markets improve we'll be able to deliver on significant brand growth through franchising.
And finally, we remain committed to a balanced capital allocation strategy.
The strength of our model and our strong cash flows allows us to invest in the business.
We pay that and return capital to shareholders.
This quarter, we generated more than $60 million and free cash flow.
We paid all amounts outstanding under our $350 million revolver, while continuing to invest in the business and maintain our hotels, while others in the industry defer capital and significantly trend staff that may damage their long term growth prospects.
David will focus more on cash flow in just a few months.
Okay.
As I shared in the last quarter. Despite the challenges in the lodging environment I'm convinced more than ever that our unique business model the talents and extensive segment specific industry experience to the team and the strength of our corporate culture will all lead to significant growth and value creation opportunities.
He has seen in the coming years.
I'm confident that we can continue outperform during these difficult times.
Well, we participate in better times when they arrive.
Execute our growth plan and create significant shareholder value in the process.
The best days for this company are ahead of US which of course includes growing adjusted EBITDA to 2019 levels and beyond two years to come.
And now I'll turn the call over to David who I am thrilled has assumed even greater responsibilities and our senior leadership team.
As our new Chief Financial Officer, David.
David will discuss our third quarter results, our fourth quarter guidance.
In addition to some further details on our dividend David.
David.
Thank you Bruce.
Although I am a longstanding stay veteran and I've had the opportunity over the years to interact with many of the people listening to this call I'd like to start off with this is my first call as CFO of extended stay America by thanking Bruce and the board for their support.
I'm honored and I look forward to continuing to work with our investors and analysts enhancing shareholder value through the execution of our business strategies, improving our organization and continuing to strengthen our already strong process either controls.
I would like to thank my team and colleagues for the smooth transition and hard work over the last several months.
In the third quarter comparable system wide Revpar declined 14.7% due to the Cove at 19 pandemic compared to the same period in 2019, driven by 13.7% decline in HDR as well as a 100 basis point decline in occupancy.
Comparable system wide revpar improved throughout the quarter with July down approximately 19% August down 14% in September down 10%.
Both August and September benefited from the shift in strength of Labor day.
About 200 basis points of the MTR decline was the result of a shift in mix to longer stay guests with another 300 basis points, resulting from larger occupancy declines in higher rated markets relative to the lower rated non top 25 markets.
The decrease in Revpar during the third quarter was driven by a 40% decrease in nightly transient revenue and a 12% decrease in our weekly revenue, partially offset by a 5% increase in our monthly plus business.
In total our core extended stay revenue saw a slight increase in the quarter highlighting the strength of our commercial engine and our unique focus on this segment of the industry.
For the first nine months of 2020 comparable system wide Revpar declined 16.9% driven by a 12.9% decrease in HDR.
Revenue from third party channels declined 44% during the quarter predominantly from protease yeah.
Yes, eight channels saw revenue declines of only 3% and in the month of September actually increased 3% again, highlighting the strength of our commercial engine.
The company's Revpar index increased over 33% year over year to 129 in the third quarter with relative gains in both occupancy and rate.
We believe we will continue to see very strong Revpar index scores compared to 2019 levels for many years to come.
Hotel operating margin declined 650 basis points in the third quarter to 47.3% compared to the same period in 2019.
However, this represented a 560 basis point increase from the second quarter.
The decrease in margin was driven by decreased company owned hotel Revpar increase in charges related to guess non payment and P.P. expenses for our field associates. This.
This was partially offset by decreases in marketing expense largely OTA commissions rent expense and a slight decrease in labor costs, even with occupancy nearly flat.
Hotel operating margin for the first nine months of the year declined 780 basis points to 45.1% showcasing that even in the worst event and industry history, we can maintain very high operating margins.
Corporate overhead expenses, excluding share based compensation and transaction costs was $21.5 million in the third quarter of 2020 adjusted for severance costs overhead was approximately flat compared to the third quarter of 2019.
Adjusted EBITDA in the third quarter was $112.7 million and nearly $40 million increase sequentially and well above our expectations as we saw strong improvements in our revpar change year over year as the quarter advanced this.
This was down from $156.3 million a year ago. However, the decline in adjusted EBITDA during the quarter compared to the prior year was driven by a decline in revpar, partially offset by 3.5% decrease in comparable property level expenses.
Adjusted EBITDA for the first nine months of the year.
Was $284.8 million compared to $426.3 million in the first nine months of 2019.
Net interest expense during the quarter decreased by $4.2 million to $32.3 million due to a lower LIBOR rates and transaction financing costs in the third quarter of 2019 related to the sale of senior unsecured notes.
The company had an income tax benefit of approximately $7.1 million in the third quarter compared to $10.5 million in income tax expense in the same period of 2019.
Adjusted FFO per diluted paired share declined 25.9% in the third quarter to 40 cents per share compared to 54 cents in the same period in 2019.
This decline in adjusted FFO per diluted paired share was driven by a decline in comparable system wide revpar, partially offset by an income tax benefit reduced hotel operating expenses and a reduction in paired shares outstanding.
Adjusted FFO per diluted paired share for the first nine months of 2020 was 88 cents compared to $1.43 in the first nine months of 2019.
The company had net income of $31.5 million during the quarter compared to net income of $53.2 million in the same period of 2019.
The decrease in net income was driven by a decline in comparable system wide revpar, partially offset by a decrease in hotel operating expenses and an income tax benefit.
The company had a net income of $30.6 million for the first nine months of 2020 compared to net income of $141.3 million for the same period in 2019.
Adjusted paired share income per diluted paired share in the quarter was 19 cents compared to income of 33 cents in the same period in 2019.
The decrease was primarily due to the decline in revpar as well as increased depreciation partially offset by an income tax benefit lower hotel operating expenses and a reduction in paired shares outstanding.
Adjusted paired share income per diluted paired share for the first nine months of 2020 was 22 cents compared to 81 cents in the same period in 2019.
The company ended the third quarter with $396 million in cash and restricted cash and total debt outstanding of $2.7 billion.
Due in part to the company significantly improved operating position with the company currently generating positive cash flow since June we repaid the $350 million.
Outstanding under our revolver in the third quarter.
Excluding this repayment our cash position increased by approximately $64 million, even with significant capex investments during the quarter.
Our primary use of free cash flow in the near and medium term will be to ensure sufficient liquidity is maintain invest in our core business and prudently returning capital to shareholders.
Capital expenditures in the third quarter totaled $39.6 million, including $2.9 million for renovation capital and $16.7 million for New Hotel development.
The company opened one new purpose built USA during the quarter, while a franchisee converted one hotel to the U.S.A. banner during the quarter.
As a reminder, after we complete the on balance sheet hotels in process, 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 65 hotels at the end of the third quarter and as Bruce mentioned, we expect several conversions from franchisees in the fourth quarter the U.S.A. banner.
Our revpar trends have been quite consistent over the last six weeks or so running down versus last year between 11% and 14% nearly every week.
Our expectation that those trends will continue and that our fourth quarter comparable system wide Revpar will decline between 11, and 15% compared to the same period of 2019.
This is a wider range than we typically provide but feel it is appropriate given the general economic and travel uncertainty, including the increasing number of coated cases, we.
We expect adjusted EBITDA for the fourth quarter to be between 78 and $88 million.
For the full year 2020, we expect comparable system wide revpar declines between 15, and a half and 16.5% and adjusted EBITDA of between 363 and $373 million.
We expect capital expenditures for the year to be between 170 and $190 million as we differ slightly less maintenance than previously planned as a result of our stronger performance.
We have lowered our net interest expense estimate to $130 million due to lower LIBOR rates and the revolver pay down at U.S.H. hospitality and modestly increased our depreciation expense expectations for the year.
To between 203 and $206 million.
The company did not repurchase any paired shares during the third quarter and our current total outstanding remaining authorization for paired share repurchases remains at $101.1 billion.
Yesterday, the board of extended stay America, Inc. declared a cash dividend of one cents per paired share payable on December Eightth 2020 to shareholders of record as of November 24th 2020.
This will mark the third consecutive quarter of the distribution of one cents per share.
Yes, H. hospitality will of course continue to ensure it meets its requirements and we'll also continue to seek to minimize income taxes for the consolidated enterprise, including distributions to shareholders of at least 90% of its taxable income.
Accordingly, the company expects to make it catch up distribution in the first quarter of 2021.
We are pleased to be in a position to return capital to our shareholders and expect the range of this catch up distribution in early 2021 will be between 15 cents and 20 cents per share. The final amount will vary depending on the final taxable income at U.S.H. hospitality and is subject to the approval of the board.
Operator, let's now go to questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
In the interest of time, please limit to one question and one follow up question and then rejoin the queue for any additional questions.
You May press star two if you'd like to remove your question from the Q.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key one moment, please while we pull for questions.
Your first question comes from the line of David Katz with Jefferies. Please proceed with your question.
Hi, good morning, everyone and.
And thanks for taking my question I wanted to sort of get into the a bit deeper into the notion of unit growth.
And you know talk about sort of Vicki you know benefits barriers issues in Russia round.
Conversions.
Which you know is sort of topical across the industry and you know whether that's those are financial or sort of practical execution.
You know opportunities that you have.
Sure Yeah. Thanks, David Happy to answer that question. Thanks for your interest you know in terms of unit growth as we've stated we're working through our pipeline of on balance sheet development. We opened a new hotel in Tampa, I think just yesterday and I will be opening for more and working through that.
Pipeline from on balance sheet development over the coming months. So we really are shifting.
Your franchise development, you know unit growth strategy, you know our timing is difficult right now with the pandemic. Obviously, we believe we have an extremely strong value proposition given our strong brands in our singular focus on the extended stay industry, particularly our distribution channels that are.
No unique in the industry. So no one can grow into over the I think Brandon on the type of business that we can deliver but unfortunately the financing environment is different we have a great deal of interest in the third quarter both exist.
Existing franchisees looking to bulk.
But unfortunately as you know given the.
Uncertainty in the market given covert given you know got markets, you know that interest hasn't necessarily translated into.
Ah you executed contracts.
Go very competent well and I feel very confident that when.
You know the markets come back we'll be first in line through new development given the performance that we have in our.
Our strong value proposition in the meantime, you know we have had some luck in conversions you know the conversion opportunity and extended stay is not nearly as extensive as is in some of the the transient business. Because you know we require full kitchens and you know there's a much more limited universe of.
Potential conversion opportunities lots of transient owners over the years have looked at trying to find ways to convert transient hotels get extended stay hotels, but the economics are better.
Very difficult and I haven't actually seen that work yet, but the good news is that we do have a pipeline of conversions coming in the fourth quarter and some that we believe will come in the first quarter of next year as well.
So we're working through those as we speak we're not in a position to be one announce numbers, but its a.
It's it's an opportunity it's not a massive opportunity, but I think it's upgrades together to to have a better new development market.
Got it thank you very much.
Thank you.
Your next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, good morning.
You talked about.
She reading your portfolio and maybe renovating some of the assets that you own in the restructuring could you maybe go more and so what you're thinking there and.
What's the goal there as it tried to capture higher hi, rayna customer or add some more detail would be great.
Yeah sure I appreciate it so it was really I'm too you know to.
Two legs to that.
That question you know the first is really in terms of making more strategic investments in our re portfolio. Obviously, we have 550 hotels.
We own you know not all of those hotels are are equal we have some hotels that are extraordinary circumstances or for extraordinary locations.
Strong demand drivers more white collar high rated business that we think we can attract.
So we're really looking at the more strategic in terms of rolling out a new renovation program and focusing.
Renovation dollars on those assets, where we believe we can drive above market.
Rates in Revpar growth over the coming year. So the first part of it is really you know looking at a more strategic and renovation investment noxious throughout the whole system, but really targeting at least in the first wave that renovation investment in those assets, where we really can think we can move the needle the needle dramatically.
Second part of your question is sort of more on the Curations <unk>.
Yeah, we've talked about that before we have you know.
Portfolio that was one of those deals can you know 2025 years ago by.
By some very smart real estate developers and we have you know markets that have evolved to a point, where you wouldn't develop a midscale lodging asset on that they are today and we have a number of opportunities.
That we're working through currently that are in negotiation due diligence.
Area stages.
You know for non hotel uses where the buyers no value that asset much at a much higher level than hotel owner was so we're working through those and we hope to have some something to announce shortly but.
Our general policy is not to not to announce that in some of them.
Pretty a pretty close to being dry minuscule so.
But there's a number of opportunities that we're going to we're working through as we said on the call. You know we will continue to refine that analysis and continues to walk through our portfolio and try to develop.
That set of opportunities, where we believe that there are assets that are yeah, we could be more valuable in other hands and then other uses.
Compared to the best possible.
Possible value that we can drive out of that as of mid scale expenses gossip.
That work continues.
Thanks, Dan.
A lot of it appears that that owned hotels and maybe the upper mid scale or upscale segment seems to have.
You know expanded their extended stay mix.
In a normalized environment could you maybe give some of that business that went to those higher priced segments or how do you see the overall competitive landscape evolve for an extended stay business that's out there now.
Yeah, I mean, there's no there's not [noise] extended stay there's many different tiers to the extended stay market and you know I think we definitely with our brand our brand is extremely strong and you've done a lot of research consumer research in terms of the strength of our brand.
Our brand is.
Resonates not only was sort of you know core our core customers, but also resonates and it's attractive to the customer.
Customers that competitor grants that are you know, it's a higher price points.
So you know through our renovation strategy through the strength of our brands. You know we do think we have the opportunity to steal some share from some of those higher rated brands move higher rated segments and that's so that's really the core of the.
At the core of that.
That idea.
Thank you.
Thank you.
Your next question comes from the line of Chad Beynon with Macquarie Group. Please proceed with your question.
Good morning, Thanks for taking my question.
Regarding your fourth quarter EBITDA guidance. It appears that you're assuming a similar I guess negative relationship to EBITDA decline to revenue as as you saw in the third quarter can you just talk about maybe some of the things that go into this you know are we assuming.
That seems that seasonality and just the uncertainty around cove. It obviously from an absolute revenue standpoint bring that down and you're just not able to get any additional operating leverage just some more color that would be helpful. Thanks.
Sure David sure Chad David.
Sure Good morning, Chad. Thanks for the thanks for the question Yeah, you observed correctly that we're we're essentially I'm, assuming a continuation of recent trends our revpar has been down a as I mentioned in my prepared remarks between 11 and 14% for you know most of the last six.
Two weeks or so.
Quarter to date, thus far we're kind of right in the middle of our.
Ranged down about 13.5%.
Meanwhile, our expenses have been also pretty steady and pretty predictable our largest.
Hotel level expense of course is payroll.
Most of our staff positions are fairly fixed in nature and with so we're seeing kind of inflationary increases in those in those roles.
Housekeeping is the exception and because of our longer length of stay this year, where we're seeing declines in housekeeping. So payroll is generally running you know about flat year over year, and we expect that to continue in Q4.
Other expense areas, we're continuing to see savings in breakfast costs, and let's see a commissions are those savings are being slightly offset by increased <unk> costs.
An increased cash credit so net net on the expense side, you know, we're expecting property costs to be slightly lower than last year.
You know, but but as you.
Thank reference you know it's.
Most of our expenses are pretty fixed in nature, so to the extent our revenue declines year over year, it's hard to to flex a lot of that and drive a lot of.
Operating expense savings to the bottom line, but.
You know I think we're being being smart and and allocating our payroll appropriately where there are hotels with lower occupancy, we're pulling back where there are hotels running high occupancy.
Which is most of our hotels were kind of running in accordance with our labor model.
You know we have done things like.
[music].
Clean rooms, less frequently every other week as opposed to every week for people staying weeks and months at a time, that's something that we'll continue to evaluate and give guests the option to us to do.
When it comes to seasonality in the business.
So our business is less seasonal than the traditional hotel company and this year with a higher.
Mix of extended stay business, we should be even less seasonal than we normally are.
And holidays have been good for us.
During the pandemic, because it's it's sort of an easier and easier comp as a year ago. The the more transient business checked out and so labor day. For example, we were only down 2%, which was much better than our trends in surrounding weeks.
And so to the extent that that pattern holds in Q4, Thanksgiving and Christmas I'd expect us to be closer to the top end of our of our Revpar range.
You know.
That said we did not.
Baked into our forecast any changing trends is as a result of Kobe case is going up and some some states certainly are imposing a few more restrictions to combat the the pandemic. So we've not seen any of that reflected in our numbers and and we've not bake that into our outlook, but.
You know I think that hopefully hopefully that helps jet.
That's great. Thank you David and then Bruce you noted growth through franchisees versus on balance sheet, but given the improvement in the extended stay brand in your recent RFP EIS does this open up an opportunity.
Opportunities for traditional M&A or is the focus is going to continue to be with franchisee growth. Thank you.
Sure Yeah, I think you should think about the opportunity restrictions you grow obviously, we're we're open to M&A, yeah, we would be very open to a brand acquisition.
But there is just not theres not many out there I mean, most of the brands are are locked in with them, whether bring families and drilling.
It's really not a whole lot in terms of a brand acquisition opportunities out there, but if.
If we could find something that would fit we would certainly be something that we'd be interested in.
Okay. Thank you both last quarter. Thank.
Thank you thanks Chad.
Your next question comes from the line of Stephen Grambling with Goldman Sachs. Please proceed with your question.
Hi, Thanks in the opening remarks, you referenced that you still see opportunity from some of the more dense.
Population locations hours, maybe haven't recovered yet what does the path of recovery, there acquired and what might be the interplay with stronger demand in less densely populated markets look like.
Yeah, I'll start and then ask David to chime in as well really we've seen you know.
Well first of all I think our results are our strong. Despite the fact that we have high concentrations in the northeast in Boston, and New York City area in Washington, D.C., Florida.
The Bay area in California, Seattle, those are some of our highest revpar markets. Those are some of our dense markets in terms of unit count and those have been some of the markets I think then.
Hardest hit not just for us, but for the entire industry. So.
We're pretty pleased with the results that we've had despite our concentration as high Revpar markets. So we've seen some improvement and slower we continue in every single one of those markets that highlight.
Highlighted we continue to outpace our concept by the strong margin, even though were down substantially from where we were last year. So.
Well I think that those markets are well, obviously, you know recover hopefully no news a vaccine will.
Start to move the needle and you know.
And as markets recover and you know in terms or so rate and it's primarily a rate issue not necessarily for us in occupancy issue in most markets.
You know that is tied that will but we'll have to fill up as well.
The pace of that.
That recovery in those markets or is uncertain.
Understood I guess.
Things that either.
Yeah, I'd just add real quickly that you know the markets where were down the most some of which Bruce mentioned the Bay area, Seattle, Boston DC area. Those are the markets, where the industry is down the most and you know in some cases in most cases those markets are down you know 70% or so.
[music].
Industry wide, you know and our index growth in those markets is the highest so you know I think it's really just going to take those markets sort of returning more to normal and there should be some you know some nice uplift for us there and I'd also point out that in in each of our top 20.
Markets, our Revpar index growth is positive. So I think you know that highlights.
You know they just system wide you know what we're what we're doing in the uniqueness of our business model and the focus of our sales team on driving extended stay business.
It's paid off for US you know in every market.
That's good color and as a related follow up you also noted very positive growth from the website.
Direct and I think you said July.
Is there any way to frame or quantify how much of this is driven by shifting consumer demand the decoded versus your actions and can you just remind us about how you think about the longer term opportunity for improving distribution.
Yeah sure no I think I really appreciate that question because I think that it's something that's really under appreciated you know there is no one in the industry that has fine tuned to their distribution channels. You know, it's a focus on expenses like we have so we really do have a very unique asset heavy industry not just.
Our sales force or distribution channels, which are proprietary distribution channels, given our website during our call center.
Made we have new leadership throughout the commercial engine, we have made some changes to how we market.
We've made some changes to our existing web site. We are in the process of building, a new and a much better web sites that will be launched in the first quarter.
But in the meantime, you know, we haven't stopped or I'm trying to optimize our ecommerce and you haven't stopped trying to optimize the booking pass on or on our website promotions that we're doing.
And those are paid off I I don't think there's been any sort of systemic shifted booking patterns from customers I think what we're seeing in terms of.
Our distribution channels in the <unk>.
Changes the new management team in the in the commercial engine has has made to to drive those changes so that's.
I think there's more to come there.
We continue to.
Investing in that area and I.
I think there is no doubt that we will certainly have the on the best.
Distribution channel extended stay distribution channels in the industry by far.
That's it thanks so much.
Sure. Thank you.
Your next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.
Hey, good morning, guys [noise] once.
I wanted to ask you about the morning wanted to ask about the your I guess monthly extended stay customer and as we think about at some point you rotating a little bit back towards more transient shorter term.
How quickly can you pivot that and maybe the question is can you remind us kind of the mechanics of those longer term stays in terms of how what the lead time is on renewals and how quickly you can convert them to those same rooms to shorter term higher rated stays.
Sure Yeah I appreciate that thanks, Chris Yeah, we are in some markets actually already doing that we're doing that.
Through pricing, we have you know a number of markets where were in a number of hotels are we revenue manage on a hotel by hotel and district by district basis, and we have a number of properties, where we can consistently over.
90% and we were able to push rate by.
Through route through revenue management, you know most of our customers are on a sort of a month to month basis. We do have some better on 60 days, but those are the minority of part of our business. So we certainly do have the ability to run ship thought make sense, we see demand coming in.
Particularly from higher rated extended stay business, which is 71.
29, 29 make decisions for us as you know as we see that coming as we see some transparent come in.
We will take opportunities to revenue manage our way back to a more favorable one or more favorable.
The more favorable gas mix, but you know in terms of the lead time. Its you know think of weeks it's weeks not months.
To move the needle there.
Okay.
Very good and then on the franchise side.
Certainly.
Understand appreciate your comments about the financing issues that are out there and those are very real but can you give us some flavor of kind of what you're.
Your prospect.
Pipeline looks like in terms of the franchisees are these are these guys that are.
Different extended stay product do they own a different limited service product is there any way to kind of just categorize them to figure out when they're when their liquidity situation is going to guidance.
Right.
Yeah, I don't know if we can you know we have a.
Our pipeline is pretty diverse you know we have you know individual franchise, usually think of the traditional our franchisees that are that were talking about we have.
You know existing very large scale existing extended stay owners both.
Both in our brand and composure brands that were we're talking to and.
We have no commercial real estate developers that are also looking at the graph. So it's a fairly fairly diverse group of franchisees, which I think is healthy and.
I think it's hard to characterize so I think each one you have to kind of look at on an individual basis.
No right now there's just not on I think the confidence in the market to you know parts.
Particularly from new development to pull the trigger there is there is a lot of like I said activity on some portfolios and extended stay hotels that are.
Being purchased by some of 'em folks that were working with on the franchise side.
That seems to be you know buying stabilized assets you know, we're going from I think it easier clean for people to get their heads around in this market and then.
And taking on development rights, so that seems to be where the most of the action is right now.
Okay I appreciate that very helpful. Thanks, guys.
Thank you. Thank you.
Your next question comes from line of Smedes Rose with Citi. Please proceed with your question.
Hi, Thank you.
I wanted to ask just a little bit more about the the long term gas that you mentioned in your opening remarks, you saw revpar for that monthly guests go up by 5% and then you just mentioned on the previous question about maybe mixing that down a little bit us more shorter term transient comes back and I just wonder.
To ask you what what percent of occupancy is the monthly guests now and any kind of who who is that is it is it more people staying for personal reasons or is it a mix of personal and longer term business or you know for some corporate business I guess.
Yeah sure. Thanks me, though but I'll turn it over to David in a minute to give you some of the data there, but just in terms of the character of those guests and we think of.
Long term justice folks that are staying with US you know 30 nights plus and that really does you know encompass both folks that are staying with us for personal reasons and folks that are staying with us for business reasons, particularly on the business side I'd highlight construction we have.
Number of hotels are no construction crews that are on multi mode.
Multi month tend to be multiyear projects could stay with us.
We certainly have still temporary mother medical workers staying with US we have just six workers along with us.
You know our business customers since I think you pointed out before or folks that need to be physically pressing for their job. They do not have the opportunity to stay on zoom calls all day to do their business, though.
That business is there you know best and that business can be 30, plus that can be weekly business on the on the personal side you know a lot of that is really locally driven business and that's really where our field sales force comes in.
To find pockets of that business be you know these are folks that are you know in life transitions. These are folks that are.
That are moving these folks.
Looking for housing we've had you know many gifts and then stayed with us and guidance.
Lot of emails from guests that are you know.
You know how to home schooling their kids in our properties because of the pandemic in the economic dislocation they've had to move cities.
So you know that is that is the nature of those guests and as I said you know that's generally the residential personal business generally the lowest rated part of the part of the stack. So.
As we see other and other segments improve over time, we will be able to.
Revenue manage more more carefully that that group.
David would you could you could you add some details on the on the mix numbers.
Sure. So smedes, our our room night mix in Q3 was about 58% of our occupied rooms, where people staying 30 or more nice.
Which is about a 10 point increase over the prior year.
And that shift all came from one through six nights day, which went down from 33% a year ago to 23% this year and so the seven to 29 the weekly stayed flat at about 20%.
Okay, and just so the 58% that's the longer term stay.
Sorry to put you know make you sort of go down this rabbit hole, but what I mean, what percent of that what's the breakdown of that between the sort of life transition personal stay customer versus the more you know business oriented customer.
Yes, because I mean, the reason I'm asking because I'm thinking about pricing power for next year and it seems that that life transition customer, it's going to have a lot less ability to pay a higher rate. Some just sort of wondering you know whats kind of the pool I guess, it potentially be replacing that customer over time.
Yeah, I think I'll ask David I'm not.
Perhaps we had some estimates on that I'm not sure we necessarily for all customers have a purpose of your statement.
When they check in but maybe David can estimate that but you're right I think you know that.
Particularly the you know we have a rate that is here to stay of 60 nights, where you pay for you know 30 nights and advancing that these are generally our lowest rated.
First of all sorts of business that is something we did rely on extensively during the pandemic, particularly when it started and we have been able to success and that that's generally again largely residential if you will our personal business.
You know as markets have improved we have moved out of that.
But I think it was a real opportunity for us as you know not necessarily to pick up a lot more transceiver business because that's not really what we want to do we will pick up some of that but I think the UTI opportunity going forward will be to shift out some of them have personal business too.
Medium term extended stay sort of this extended stay that business. It's in the seven to 29 29 night state stage length, which we really suffered greatly constrained.
I T consulting work that we had the.
The preopening work for restaurants retail and stuff what she said we had to read all of that.
Sort of white, if scratch collar extended stay business, we really got hit.
Government business, we go in that category as well a lot of that travel really got hit during the pandemic. So I think you know the opportunities not so you replace that person.
Personal auto rate lower rated personal stay business transient business, which is disruptive to our business model, but as things other corporate segments weekly weekly corporate segments come back to transition into that but they do do we have any estimates on the.
On the mix and personal versus corporate business in the <unk>.
Well, it's difficult to tease that out with a lot of precision, but I'd say you know up to 30, plus you know probably a you know a third that are people you know staying on more discounted rates with its you know two months or longer.
Right and as Bruce mentioned as we move through the pandemic. We've we've successfully been able to reduce the amount of discount that we've you know been offering for for those folks so, but there still remains opportunity to shift that that longer stay mix to.
Ah you know higher paying 30, plus and also higher paying seven to 29 sort of corporate as as things begin to come back.
Hi, I appreciate it and then David maybe you could just you talked about a catch up dividend in the first quarter just in general I mean, how are you guys thinking about capital return.
In addition to that either through just instituting a more.
More normalized dividend or share repurchase or some kind of move through this.
Sure. So the the catch up dividend I referenced we plan to pay in Q1 and that will kind of get.
The the read dividends for 2020 up to 100% of the taxable income, which is what weve a targeted as a as a payout ratio for the read in recent years that's what's.
Most tax efficient for us and you know, we're pleased to be able to return that capital to shareholders.
I think going forward in 2021, my expectation is that we will reinstitute a regular quarterly dividend from the Reed.
Equal to roughly 25% of what we think the rights taxable income will be for the year you know in the past. We've also paid a dividend from the C Corp.
I do think that additional returns of capital to shareholders over and above the riet distribution, whether it be from C Corp, dividends orphaned share repurchases will be.
Quite limited in the in the near term, but certainly it's something that.
We will continue to discuss with our board saw at least quarterly but you know.
Just paying a a dividend at all I think differentiates us from a lot of our a lot of our peers and next year you know our.
Re dividend will be I think a reasonable dividend yield for a for us.
Okay. Thank you guys appreciate it.
Thank you.
Your next question comes from line of Joe Greff with JP Morgan. Please proceed with your question.
I apologize. The next question comes from the line of Danny Assad with Bank of America. Please proceed with your question.
Hi, Hi, good morning, guys.
David in your prepared remarks, you made your capital allocation priorities pretty clear and we can definitely appreciate that we're not you know in a place where we can get formal guidance here, but can you maybe just help us think about the priority of free cash flow and maybe in buckets. So you know.
How much on balance sheet development is left and then how much you know what those ROI projects you guys mentioned make up and then if there's any IP spend when we think about next year's priorities.
Oh sure so with respect to our development Capex you know Weve got after having opened one hotel today, we've got five hotels under construction or.
Cost to complete construction on that group of hotels is about $25 million half of which I'd expect we'd find in Q4 with the remaining into a into next year are I T. Capex is you know kind of on that $10 million to $15 million in the $10 million to $15 million.
Range annually, a you know this year, our maintenance Capex will be you know something on the order of.
$75 million to $85 million, we did you know defer some projects. This year as a result of the pandemic n. and wanting to maximize liquidity.
You know some of those will will get pushed into in the next year.
You know with respect to ROI investments on the on the hotel Bruce talked about that a little bit well, we're not ready to you know provide guidance for next year on that we're still working on working on those plans and we typically provide guidance for the year, both operating and capital allocation.
And during our call in Q1, which I'd expect we would do this year you.
But generally speaking with respect to capital allocation, certainly we want to invest in.
Our hotels to to maintain them and where appropriate invest an ROI projects.
You know well continue to pay the REIT dividends at roughly 100% of taxable income you know to the extent there are assets sales.
Which there are you know some in the pipeline, we they would expect to.
To you know do a combination of paying.
Paying out a dividend to the extent, there's a taxable gain on that which is the most tax efficient thing for us to do and depending on the the quantum of proceeds.
Potentially repay some debt as you may know, we have $50 million outstanding on our C Corp revolver.
So proceeds I'd expect could go towards repayment of that and you know where I'm happy to put put cash on our balance sheet and you know reduce our Ah reduce our net debt in that in that way as well so hope hope that helps.
That's super helpful. My follow ups actually on a on a prior question that was asked.
Keith can you guys I think it's Steven was talking about you know just distribution channels can you just remind us.
How much of your proprietary channels make up of the total mix and if that's materially different than it would have been last year or in a more normalized environment.
Yeah sure yeah, it is materially different than last year.
As part of our.
No our longer term plan pre pandemic to reduce our reliance on <unk> from GBM.
GDS channel can be opaque channels, which.
Delivered a lot of time, we're tracking things too. So it was not necessarily you know a good fit for us. So you know the pandemic live accelerate.
Mix shift for us.
Our goal now is to keep that mix shift would be pretty much where we see it today.
Growth rates in our and our proprietary channels and so as we can but you know what weve seen are just very generally you know we'd look at your two main proprietary channels or our call center.
And our our Internet channel and those two channels you know in terms of mix.
We're up about 5% over.
Over where they were last year you have a call center was in the mid Twentys. It's now in the low thirtys, the or Internet mix in the third quarter of last year was below.
20% and come out with something below 20. So we certainly have seen that shift shifted out of Inovio T. A channel, which is down shifted out of the opaque channel, which is down as well generally those are transferring channels.
Very helpful. Thank you.
Thank you.
Your next question comes from the line of Michael Bellisario with Baird. Please proceed with your question.
Good morning, everyone.
Michael I'd add.
Just one question on on flow through as you guys are starting to think about 2021 and as you're looking out the 22, where does that flow through shake out relative to the historical call. It 60% to 70% range that you guys. It seems pretty pandemic and kind of taking into account all the.
Structural changes and the cost savings that you guys might realize in the coming years.
David just a quick.
Yeah, you know it you know we're in the process of putting together our operating plan for next year right. Now you know I think the amount of flow through will largely be dependent upon you know what is the revenue recovery you know the the.
The larger the increase in revenue the the higher the flow through so.
Not in a position now to sort of get flow through guidance for for next year, we'll do that.
On our call during Q1.
I guess, maybe though as you think about relative to pre pandemic can you maybe walk through some of the puts and takes.
That have occurred in 2020 that might mean, it to be higher lower or the same.
Yeah. So you know I think that the puts and takes will be some of the things I highlighted that you know we observed in Q3, which are.
You know breakfast costs, which have been down since the pandemic. We you know at some point next year might look to reinstate that if conditions.
Conditions warrant you know the housekeeping.
Frequency you know is another thing that we'll continue to.
Think about it weve been cleaning rooms every other week.
You know we May continue that we may give guests the option to have.
Weekly housekeeping.
You know on the on the flip side or to the extent.
Sort of the shorter term business comes back, particularly through a T A's.
Oh CIT commissions, you know would would go up.
As with some of the you know required housekeeping. So you know I think there there is a lot of sort of things that are.
Cross currents. If you will you know I think what that as I mentioned, what's most important is the extent of the the revenue recovery I think there are.
Some.
Some changes that we can we can make whether it be breakfast and housekeeping, which will which are which will help our flow through but there will be some some headwinds as well.
Got it thank you.
Your next question comes from the line of Thomas Allen with Morgan Stanley. Please proceed with your question.
Thanks for fitting me in I'm just in your prepared remarks, you talked about a number of strategic initiatives initiatives. If you will discuss more on that here.
Comparing to your 2016 Investor day discussed many of the same thing so improving about they're mad men carrying on port folio investing whether return selling where those dalibor real estate I guess like the broader question is what's left to be done or what do you think prior management teams kind of best Thank you.
Sure Thanks, sometimes to be for the question I think.
You know I think we've been fairly transparent guidance. We've you know as we've gone through the quarterly process of discussing where our plans are.
We do hopefully we'll have an investor day, when the dust settles a little bit next year to expand in those plans I think.
I don't think.
The only I think the main difference is we're really focusing on our core business here and we're going to focus on maximizing the value of the segment and we're going to focus on the very best no extended stay player in the industry and I think I think that you know at a very high level I think.
You know the difference I think the prior management team to chase a they are a little bit chase transient customers there.
I think the asset Curations strategy was different did not focus on higher and better use assets is focused on refranchising.
I'm just focused on balance sheet development, we're shifting that too.
You know to franchise development, but I think at the core of it all you know at the core of it all is a singular focus and and a singular focus on what we're best stuff, which is being a pure play in the extended stay business and maximizing the value of.
What I think is the most attractive segment in the hotel industry as he said not just you know performing well when when times are terrible like they are now but.
Building, our commercial engine building, our you know our operating our operating strategy. So that you know if the market comes back we will.
Participate in that come back and or more and I think you know we have the opportunity to do that we have the opportunity to do that through more selectively and strategically investing in our best properties and more strategically cure rate in our portfolio to find value dislocation some that were that exist. So.
Yeah, just said I think we've been pretty transparent on on what we're doing I think we would like to put a bow around all that.
As we get some more certainty in the market next year and and look forward to that.
Helpful. Thank you.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr., Bruce Haas, Rick for closing remarks.
Well I just like to thank everyone for their interest and their questions.
No good solid quarter, we realize we have a lot of work left to do we believe there's a lot of upside that we can continue to go after and I'm looking forward to any follow up questions that you have and or.
We believe that we're transparent and open and look forward to further discussions over the over the coming days. So thanks and have a great day everybody.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
[music].