Q2 2019 Earnings Call
Greetings and welcome to the extended stay America second quarter 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 systems during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mr., Mike Hello, Vice President Investor Relations.
Good morning, and welcome to extended stay Americas second quarter 2019 conference call.
<unk> second quarter earnings release, and then 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.
Joining me on the call. This morning, as Jonathan Health Care, Chief Executive Officer, and Brian Nicholson, Chief Financial Officer, Robert Baird. After prepared remarks by John's going abroad, and there will be a question and answer session.
Before we begin this morning, I would like to remind you that some of our discussions today will contain forward looking statements, including a discussion of our 2019 outlook.
Actual results may differ materially from those indicated in the forward looking statements.
Forward looking statements made today speak only as of today the factors that could cause actual results to differ from those implied by the forward looking statements are discussed in our Form 10-K filed the FCC on February 27 2019.
In addition on today's call, we will reference certain non-GAAP measures.
More information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures are included in the earnings release and Form 10-Q filed yesterday evening with the FCC with that I will turn it over to Jonathan.
Thanks, Rob and good morning, everyone. Thanks for joining us this morning to discuss our second quarter 2019 result.
The four brought Brian and I get into the specifics I want to thank our 8000 associates for their hard work and efforts this past quarter and executing our operational and strategic plans.
They work really hard to serve our millions of guests each and every day and for that I'm very grateful.
Now, let's turn to our results for the quarter and updates on our other activities.
Comparable system wide revpar growth during the second quarter increased 2.1%.
After adjusting for onetime items in the second quarter as such in cycling Hurricane business in Houston in Florida.
Renovation disruption and holiday shifts.
Our core Revpar grew approximately 2% during the quarter or at a slightly faster pace than in the first quarter.
Adjusting for Easter the month of April and May performed fairly well, partially offset by a slow Jim.
The slowdown in June was broad based and was more pronounced in the back half of the month, Brian will address that in more detail later in the call.
Since I became CEO early last year I have refocused, our sales and operational efforts back toward our long stay guests.
Revenue growth among these core extended stay customers increase during the second quarter up around 1%, while our transient nightly business declined approximately 1%.
Channel growth was fastest on our proprietary digital channel, Yeah say dot com.
Which was up 7% compared to the second quarter of 2018.
Offset by declines in property direct revenue and global distribution systems revenue.
Our adjusted EBITDA during the quarter finished at $153.6 million.
Hotel operating margins remain challenging with labor costs property taxes, and property insurance rising significantly faster at this stage of the cycle.
We remain committed to minimizing expense growth, including investments to reduce utility expenses as well as keeping tight controls on overtime hours and working to reduce our turnover along those lines, our corporate overhead expenses in the second quarter and first half of 2019 are down more than 5%.
Despite continuing to build out the development and franchise team.
Our franchising efforts are picking up steam during the second quarter, we grew our pipeline by 18% to approximately 8700 rooms or more than 10% of our existing a state.
Since the end of the quarter that pipeline has continued to grow to 75 hotels were 9200 rooms, where nearly 15% of our existing state.
Almost 75% of our pipeline comes from more than 15 current and future franchisees.
We are gratified by the accelerating pace of acceptance among the franchisee community and I know, we will grow our pipeline further in 2019, and then to 2020.
We opened our first franchise conversion hotel during the second quarter in Houston, Texas, and we expect several more conversions by our franchisees during the third and fourth quarters of this year, we believe conversions represent a great opportunity for franchisees to grow there yet they but brand over the next few years.
And that existing third party yesterday hotel managers are well positioned to execute successful conversions.
I also want to update our shareholders on our board's evaluation of the corporate structure, a process with which our board has been engaged for many months.
After careful consideration of a variety of options, including discussions with potential transaction partners. Our boards of directors have concluded that none of these options currently provide superior shareholder value creation.
The boards remain open to actions in the future, including those that would involve a change in our corporate structure.
But the board's also believed that there is significant value embedded in our ESA 2.0 strategy, a strategy, which we intend to enhance through several several specific actions.
First while our progress thus far has been strong and growing our franchise pipeline. We believe we can be even more aggressive in growing our franchising business.
To this end.
We will increase our franchise sales and support staff over the next year with a corresponding increase in results. We want to continue to move more quickly to a lower capital higher ROI fee business over the next few years.
Further we will continue to improve the brand in operating performance of our business. While we've made great strides on both fronts that cycle. We believe there is more room for improvement. We're currently in a nationwide search for a new executive Vice President of operations. We're in the middle of a company wide effort to improve our service scores through operational improvements in regional adjustments to our product offering we've discussed in past quarters, our focus on general manager recruitment and training that effort has reduced G.M. turnover by 10 points and it's still coming down our goal with these changes will be to grow market share profitably with our core extended stay guest segment, which we believe is growing less prone to competitive predation and one which we continue to do that to dominate.
We're currently reviewing a range of options for our lower tier hotels, including continuing to sell and refranchise selling unencumbered or rebrand all with the goal of delivering value to shareholders in improving the brand quality and consistency across our portfolio.
Given the meaningful growth in our franchising pipeline and the current price of our shares which we consider to be undervalued. We continue to evaluate the level of capital committed to new on balance sheet development versus capital returns to shareholders and May rebalance. This allocation in favor of capital returns, we will continue to provide updates in the future.
But right now we believe our share price is significantly undervalued and we will increase the pace of share repurchases. So long as the valuation discount remains to that end last night, we announced an increase in the share repurchase authorization of $150 million, bringing our total outstanding available authorization to $263 million, which is approaching nearly 10% of our recent market capitalization.
Combined with the dividend yield near 6% a briefing recent trading prices. We believe we'll be able to return a significant amount of capital to shareholders over the next year.
As you know we've established a track record of conservatively managing our balance sheet weve, reducing that leverage from over five and a half times at our IPO to under four times in each of the last nine quarters, we've consistently repaid secured debt in connection with portfolio asset sales fixed nearly two thirds of our debt at historically low interest rates and extended maturities to 23 and 20 2025.
Well, our net leverage may increase slightly from 3.8 times at quarter end, given our share price valuation. We believe these share repurchases are the right use of our shareholders' capital.
We nevertheless remain committed to a conservative financial policy and expect to maintain a net leverage ratio between three and a half and four times, depending upon the timing of asset sales and of course, the lodging cycle.
This has been a year of technology innovation for yet say more than half of our hotels are now using our new property management system and we're on track to complete all company hotels by the end of October .
We expect to begin rolling out the new property management system to franchisees in early 2020.
The new system, it's significantly easier for our associates to use allows upselling more control over company policies and fee collections as well as more efficient handling of centralized billing and accounts receivable.
Also by the end of October we will have completed new network technology and broadband capabilities at all company owned hotels that will allow faster internet speeds for our hotel associates in gas as well as improved network security supportive a higher number of devices simultaneously and ultimately allow our guests to stream their favorite TV shows on the interim television we plan to roll this out to franchise hotels later this year and in 2020.
In the second quarter, we completed phase one of our new CRM system, where we have collected and are beginning to analyze guess behavioral data longitudinally over the past five years.
As we gain insight from this data we are developing more personalized and targeted offers and expect to implement updates to our loyalty program tweaks to direct marketing and improvements in our mobile app.
Speaking of mobile apps, we completed our new mobile App in June that brings our booking and loyalty application together in one completely redesigned and you deserve friendly mobile platform for both iOS and Android devices.
The new application makes finding and booking a hotel room of ours easier and we have plans for additional functionality in the next six to 12 months.
As industry Revpar growth growth has slowed and we ended the 10th year of this economic cycle. We've received a number of questions on how stay would do in a recession.
I believe we are well positioned in the event of an economic downturn first we think a typical industry downturn would be a fairly modest revpar decline of between two and 5% rather than the steep 20% revpar declines the industry saw and the great recession.
Second net supply growth at our prices has been significantly lower this cycle than in the last cycle, which we believe means less pressure on revpar.
In fact supply growth in the economy chain scale and mid scale has grown at fewer than half the number of rooms compared to the prior economic cycle, even with nearly twice as many years and this cycle to allow for growth.
Third unlike the rest of the lodging industry, which focuses on nightly transient business, we have three very different customer segments to draw on including the same transient guests, but also extended stay demand from business clients ranging from a week to two months as well as longer stay guests, who have a more similar profile to apartment gas.
If one of these three areas struggles we believe we can make up a portion of that business amongst our other two segments.
And as we are typically 10% to 15% lower in price than our system wide comp set. We also believe we would be able to provide a strong substitute for guests who still need to travel, but maybe looking to economize in a downturn.
And lastly, as I mentioned, our balance sheet remains very strong with just under four times net debt to EBITDA with a long dated flexible and low cost debt load.
We believe we can navigate any normal recession without changing our long term plans for reducing capital returns to shareholders.
Our next maturity is four years from now.
Additionally, we have successfully stress tested our balance sheet for his sessions significantly worse than the last downturn.
I'll now turn the call over to Brian to discuss our second quarter financial results further and our updated 2019 outlook Brian .
Thank you Jonathan.
As expected the second quarter of 2019 was challenging due to cycling difficult hurricane comps in Florida, and Houston as well as Easter shifting and renovation disruption.
Comparable system wide revpar increased 0.1% in the second quarter, beating our own comp set by 70 basis points.
This was driven by a 220 basis point increase in occupancy.
Partially offset by a 2.7% decline in average daily rate or HDR.
We saw an increase in revenue from our core extended stay guests in the second quarter of approximately 1%.
Well nightly transient business declined approximately 1% in the quarter.
Excluding the aforementioned impacts of hurricanes holiday shifts and renovation disruption.
Our revpar would have grown at approximately 2.0% in the quarter.
Our Revpar index, excluding hurricane and renovation impacted markets grew approximately 1.5% compared to our comp set.
Within the quarter, we saw broad based weakness in June , especially in the second half of the month, Miriam mirroring STR reported results for economy and Midscale chain scales.
During the second quarter comparable company owned Revpar decline to 0.1% slightly worse than our system wide results.
Which includes a relatively larger hurricane and renovation disruption impact.
Absolute company owned Revpar increased 2.5%, reflecting the improved portfolio quality after asset dispositions.
For the first half of 2019 comparable system wide revpar decline to 0.7%, which was impacted by approximately 2.5% from hurricane displacement business in 2018 as well as the renovation activity in 2019.
Hotel operating margin declined 200 basis points in the second quarter.
To 54.4%.
The decrease in hotel operating margin was driven by increased payroll expenses property taxes, and property insurance and higher marketing spend partially offset by a decline in utility expenses.
For the first half of 2019 hotel operating margin declined 210 basis points due primarily to a 1% decline in comparable company owned Revpar and increased payroll expenses.
Corporate overhead expense, excluding share based compensation and transaction costs decreased 5.8% to $20.1 million during the second quarter.
Decreased 6.8% to $40.9 million for the first half of 2019.
These decreases in corporate overhead expense reflect cost synergies realized in the third and fourth quarters of 2018.
Adjusted EBITDA in the second quarter was $153.6 million.
Adjusted EBITDA during the quarter was impacted by the loss contribution of approximately $6.7 million from hotels that were disposed in 2018.
And an increase in comparable hotel operating expenses.
Adjusted EBITDA for the first half of 2019 was $270 million.
Reflecting lost contribution of approximately $13.6 million from disposed hotels in 2018.
An increase in comparable tell operating expenses and a decline in comparable company owned hotel Revpar.
Interest expense during the quarter decreased by $2.7 million to $29.8 million due to less outstanding net debt and a decline in the LIBOR spread on our term loan.
Partially offset by an increase in LIBOR rates.
For the first half of 2019 interest expense declined 4.7 million.
To $59.4 million.
Income taxes during the quarter declined to $3.2 million to $11.2 million.
Driven by lower pre tax income as well as a slight decrease in our effective tax rate.
Income taxes for the first half of 2019 declined by $2.9 million to $17.3 million driven by a decrease in pre tax income.
Adjusted FFO per diluted paired share declined 8.6% in the second quarter to 53 cents compared to 58 cents in the same period in 2018.
The decline was driven by an increase in comparable hotel operating expenses.
Adjusted FFO per diluted paired share for the first half of 2019.
Decreased 11% to 89 cents driven by an increase in comparable hotel operating expenses and a 1% decline in comparable company owned hotel Revpar, partially offset by decreases in income taxes and interest expense.
Net income during the second quarter decreased 9% to $59.7 million.
An 8.9% to $88.1 million for the first half of 2019.
Driven by the previously mentioned items to adjusted FFO.
Adjusted paired share income per diluted paired share in the second quarter decreased to 32 cents per diluted paired share from 35 cents in the same period last year.
The decrease was due primarily to an increase in comparable hotel operating expenses.
Partially offset by decreases in depreciation overhead expense and net interest expense.
For the first half of 2019 adjusted paired share income per diluted paired share decreased to 48 cents compared to 54 cents in the same period of 2018.
We ended the second quarter with our net debt to trailing 12 month adjusted EBITDA ratio on a pro forma 554 hotel basis.
That's 3.8 times no change from the end of the first quarter.
Our total cash balance was $303 million at the end of the quarter were little changed from the end of 2018 and the first quarter of 2019.
Gross debt outstanding was $2.44 billion.
Capital expenditures in the second quarter were $57.6 million, including $9.3 million for renovation capital.
$13.9 million for development land acquisitions, and other Esa 2.0 costs.
A $9.2 million and I T capital.
Capital expenditures for the first half of 2019 totaled $112.9 million, including $46.0 million for maintenance capital, including insurable events of $6.1 million.
As well as $24.1 million for renovations.
We completed seven hotel renovations in the first half of 2019.
And started on six additional hotels in the second quarter.
We expect to start renovation activity around 30 hotels in the second half of 2019.
We expect to give an update on how these early renovated hotels are performing on our fourth quarter call.
Our own balance sheet development pipeline at the end of the second quarter stood at 19 hotels.
Well our franchise pipeline grew during the quarter to 52 hotels and has since increased to 55 hotels as of this morning.
We've had one converted franchised hotel.
Converted to any say in the second quarter, and we expect several conversions by our franchisees in the third and fourth quarter as well, which we believe represents a great way to increase our system size in the near and medium term.
There are currently eight hotels as of this morning under construction and we continue to expect to open a small handful of hotels in the back half of 2019 with more opening in early 2020.
Our total pipeline grew 18% during the second quarter and has grown 32% so far in 2019.
Yesterday, the board of directors of extended stay America incorporated and Sage hospitality incorporated declared a combined cash dividend.
[noise] of 23 cents per paired share payable on September 4th 2019 to shareholders of record as of August 20, Onest 2019.
Our dividend yield is now approximately 6% at recent trading prices.
Which is significantly higher than our weighted average and marginal cost of debt.
During the second quarter, we did not repurchase any shares.
As we said in our Q1 2019 conference call, we decided to suspend repurchases in light of consideration of various potential actions to create shareholder value.
Yesterday, our board of directors approved a $150 million increase in combined paired share repurchase authorization.
Which brings our total outstanding remaining availability to $262.7 million.
We expect to be very active repurchasing shares in the second half of 2019 at current trading levels.
Looking ahead to the third quarter of 2019.
We expect comparable system wide revpar growth will be between negative one and 1%.
Our third quarter outlook reflects an approximately 1% drag from hurricane Harvey and aroma business cycling as well as renovation disruption during the quarter.
Comparable system wide Revpar growth in July was approximately negative 0.4% continuing some of the softness that we saw in June .
We expect adjusted EBITDA of between 157 and $163 million during the third quarter.
For the full year 2019, we update our guidance as follows.
We expect comparable system wide revpar growth of negative one to positive 0.5%.
And adjusted EBITDA between 550, and $565 million, reflecting the lower than expected industry and chain scale Revpar in 2019.
The lower end of our Revpar guide assumes that the weakness we have seen in the last two months continues through the end of 2019.
While the top end.
Assumes the pace of revenue growth the industry saw in the previous 12 months.
The adjusted EBITDA total includes lost contribution of approximately $21 million from asset sold in 2018.
We are lowering our expectation for capital expenditures and 28 2019 at the midpoint by about $40 million, we expect to be between 270 and $320 million.
The decrease in expected capital expenditures is driven by lower capital expenditures for development.
As well as renovation capital largely due to timing, but also due to lower absolute spend.
We expect our annual interest expense to be approximately $120 million.
Below our prior guidance by $6 million due to the recent reversal in trends in LIBOR.
We expect adjusted paired share income per diluted paired share of between one dollar and one dollar and 10 cents per paired share a three cents decrease at the midpoint from our prior guidance driven by lower industry and company Revpar expectations.
Through our dividend and paired share repurchases, we now expect to return between 240 and $280 million this year to our shareholders, reflecting higher share repurchase activity, which represents roughly 8.5% to 10% of our recent market capitalization.
Among the highest capital returns as a percentage of market cap in the lodging in adjacent spaces.
Operator, let's now go to questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation Tom will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the Q.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star key.
We ask that you please limit yourself to one question and one follow up question.
Our first question comes from Michael Dahl Faria of Robert W. Baird. Please proceed with your question.
Good morning, everyone.
Good morning, just first for me in terms of leverage at 3.8 times currently.
How are you thinking about how far you're willing to push that.
Above the four times upper bound.
And given your comments you made in the prepared remarks, and how you're thinking about.
Valuation today at 15 Bucks a share.
Yes, hi.
Mike as we've said before we want to target staying between three and a half from four times I think over the long term.
Yes, absent real economic degradation, we'd like to like to move closer to that three and a half times.
Here in the short term.
We may get closer to four we may push for we made Bob over four for a very brief brief period of time.
But we are committed to capital returns were obviously.
Somewhat behind year to date and have some ground to make up here in the next.
Four and a half five months.
But we do intend to execute on that.
Got it Thats helpful. And then just on your commentary about.
Lower tier asset sales should should we view those comments as an acceleration and potential asset sales for those particular properties, especially relative to your prior 150 hotels target that you set forth.
Hi, Mike its Jonathan No I don't think you should view that as an acceleration.
Rather.
We are.
I think it's likely.
Those sales would be completed not this year, but in 2020.
But Furthermore, we're giving some consideration to.
Dealing with those.
Those assets and a number of different ways, which could include of course, a sale and refranchising like we've done in the past.
It up could also include selling those assets or some portion of those assets unencumbered.
And it could also include retaining many of those assets.
Under a different brand so what we're trying to solve for here is.
Of course shareholder value creation first and foremost but also.
Maintaining and improving the level of brand consistency that we have as of yesterday.
Our next question comes from Anthony Powell of Barclays. Please proceed with your question.
Hi, Good morning, everyone just a.
A question on the Board did you you said that the terms currently available for any kind of transformational transaction weren't.
Werent superior to the current plan could you maybe go into why you think that was weather just the stage of the cycle.
The stage of your franchisee business real estate values, just a bit more detail there would be great for all of us.
It it's really difficult for me to go into any more detail on that Anthony.
Except that it was you know it was a an extensive review and as we all know it was a fairly lengthy review and so you know that the exploration of those terms was was a complete one and as to as to.
Why.
The terms were what they were I wouldn't I wouldn't speculate on.
No on causes for that but beyond that I really can't offer much detail.
Right understood and then just on the on the new developments a it seems like you are you considering stepping back or are pulling back from new.
A new build on balance sheet and the franchising activity, it's been concentrating on conversions, what's what's the status of the new development prototype has it gotten a lot of traction in a developer community and and what do you think needs to be done there in order to speed the pace of franchise when you build a signings year.
Yeah, we you know it it it feels to me internally and so we've reached a bit of a tipping point with respect to franchise sales are you know we we noted in our prepared remarks, and then the really the meaningful increase we've had in just one quarter in the in our franchise pipeline part of that is due to.
The confidence our franchisees have been in the prototype we now have six or seven of these hotels under construction. Our first one dessert on our account our first one will open.
In the fall and but you know what that really hasn't been a concern of the of our franchisees for a year now I think.
So it's been just a process of of working with the community too.
You know to get them along in their understanding of our business model or their understanding of the demand drivers and it's really started to gain traction in the last a few months. The other contributing factor. Anthony is the is the conversion that we mentioned we had the first one open in the second quarter, there's going to be many more by the end of this year or the first one is working quite well the next ones I'm sure. We're going to we are going to work well. We're excited about that because it's a certainly an opportunity for us to.
Dr. franchise fee revenue more quickly than we might where they.
Developed by the by the franchisees and they're excited too because they are putting capital to work and growing area say footprint. So all of that really gives us a.
In part a reason to say you know, maybe we don't need to be as aggressive in developing our own hotels on our account we have many in the pipeline as we noted in the release or but were also you know we are we think that the use of our capital to repurchase shares on a risk adjusted basis is a pretty compelling use of capital right now even as compared to a building our own hotels.
Maybe just a follow up sort of like a a franchise understand franchisees are converting hotels into the system, but what do you think needs to happen for them to start putting.
I'd say a bit more risk into the system with new construction development.
Hi, I'm pretty happy with the pace right now I mean, we grew we grew that pipeline, 20% almost 20% in the quarter. So so I think what needs to happen is happening.
And the the conversions you know are happening but of the 75.
Hotels right now in the franchise pipeline, a six or seven of them are conversions. So so the vast majority of the of the new franchise hotels at this point in the pipeline are gonna be newbuilds.
Okay. Thank you.
All right. Thanks.
Our next question comes from tapping of Macquarie Group. Please proceed with your question.
Good morning, Thanks for taking my questions.
First Brian you you mentioned that the low end of your annual guidance implies the trends that you've seen in June and July .
Can you guys just kind of help explain why we've seen that core deceleration in demand in June and July was it leisure was it the July calendar, maybe some oversupply and other segments that kind of pushed down just anything that'll that'll give us the confidence that it won't get worse from here. Thanks.
Yep.
Appreciate the question we says.
We've seen and I think you know from what I'm gathering from the rest of the industry, we're not alone in this.
Oh, we have seen a deceleration in.
What I would call business transient we don't have a ton of leisure business I think as you're aware, but we do have.
Pretty good proportion of our business that is transient that's in the hotels less than six nights.
And then the majority of our business is in the hotel.
Seven or more nights.
This was the first or second quarter.
In many years that I'm aware of where we had more growth in seven plus then in transient business and that's just a function of what is typically in the market at that point in time, the what's available to grow is transacted during the sort of our high season second and third quarter.
And then we we typically focus on and see more growth in longer stay business in the fourth and first quarters.
But as I alluded to earlier, we had about a 1% drop in or one to six night business that is primarily business transient and we had about a 1% a little bit over 1% gain.
In our seven plus business.
Yes over the course of the month of July as I mentioned in the prepared remarks.
Our total revpar was down by the 0.4%.
This quarter, we were up against.
[noise], some weather and renovation headwinds of about 100 basis points. So we'd be slightly positive absent those effect and really the big driver the big difference between the sort of all things being equal 1% to 3% that we've been running for the past couple of years and the slightly positive that we saw in July .
Was that decline in.
Business transient.
It has evaporated it hasn't gone away, but it just it has been softer and its been similarly soft since mid June .
Great. Thanks, and then on future asset sales, Jonathan you said it will be more in 2020.
I think the.
The divestitures have averaged about 17 times free cash flow when rates were a little bit higher maybe demand was a little bit stronger is that still what you're thinking about in terms of kind of target multiples or would you maybe sacrifice a little bit of price.
To kind of eliminate future capex on on some of those properties. Thanks.
Yeah. Thanks, Jeff I mean, those were pretty those are pretty strong multiples for sure. So I wouldn't I wouldn't commit to those.
On the next round and if we were to sell them unencumbered.
That that might affect the price as well, but we still feel as though we know that the demand for these assets and strong.
Among our existing franchisees as well as from other groups who were not.
Who did not prevail in the last sale process.
So I, so I'm not sure I'd you know.
But that 17 times multiple out there.
Right now, but we still.
We still see very strong demand at very at very accretive multiples on a free cash flow basis.
Okay. Thank you very much.
Our next question comes from France Rose of Citi. Please proceed with your question.
Thanks, I just wanted to go back to the decision not to pursue strategic alternatives and.
Maybe could you just talk a little bit more around some of the considerations and only because it sounds like you're very confident in the current valuations and that the best use of free cash to repurchase shares, but you know what were potential partners are acquirers kind of what was there.
I mean was it a value issue with it a complications around your current corporate structure what were some of those I'm just trying to understand what what clearly maybe with a disconnect between what you're seeing and what they were saying.
Yes me, though I'll do the best I can on that I mean, like you know the considerations around those kinds of decisions certainly involved.
First and foremost a shareholder value creation.
And that is a you know in considering any any transaction or or action that would transform the structure of the company you know that ultimately comes down to judgments about.
About how the market values, the Companys real estate and how the brand is valued.
You know there are also considerations around.
That ultimate.
Control and.
Management of the brand.
We do benefit under our current structure from the.
But having the unified asset ownership.
Control of the brand and management of the assets, which gives us.
A lot of degrees of freedom around.
Innovation and continuing to develop the Brandon and so on so you know that generally speaking I mean those are those are and always have been the considerations is that balance.
Some of the benefits of a owner operator structure versus the potential valuation benefits associated with the dis aggregated entity.
Okay, Okay, and then I just wanted to.
Clarify something I mean in your Revpar guidance includes 200 basis points for the year from a syndicate of impact from hurricane related markets and renovation disruption on the hurricane side is that pretty much behind you now through the first half and what have you or less of an impact through the second half in terms of Uh huh.
Comparable.
Hey, Smedes there is some residual impact from the hurricanes.
We will have that fully cycled by the end of this quarter.
But through third quarter of the 100 basis points of hurricane and renovation impact about half of it is hurricane.
That's down from 300 basis points in the first quarter.
Okay. Thank you.
Our next question comes from Joe Greff of JP Morgan. Please proceed with your question.
Hi, Good morning, guys. My first question relates to the boards decision here you said it was a reached after an extensive exploration.
I just want to question you want on how extensive this was VP now as you said it was pretty lengthy.
Jonathan did the board work with outside financial Advisors legal and tax professional did you engage.
On each year or was it simply an internal exercise.
The board did work with outside financial legal and tax advisors during the review.
Okay. Thank you and and to what extent did the board actually speak with any shareholder and what role did that play here.
You know, Brian and Rob and David Clarkson and I, we all I think as folks on this call no I I think we are.
A very active in discussions with shareholders. We attend many conferences, we do non deal road shows.
We do many calls here from the office. So you know we.
Our our engagement with shareholders I think is.
Quite extensive.
And you know and we did our best to make sure that.
To the extent shareholders had views on these topics that those were.
That there those were known internally.
Right and then let me take a different topic.
Did you say, you're now what could be five hotels that are Ah.
Or in the pipeline related to third parties as of the.
[noise] quarter here, how many of those do you think open next year.
Those 55 I would say.
Including those that will be conversions.
Uh huh.
I'd say 10 to 15.
I think I think 15 would be very doable.
Got it and then when you look at your implied second half revenue guidance.
How much of that relates to franchise.
Franchise fees, Joe will be they'll continue to grow as we move through the second half.
But it's obviously a fairly minimal contribution at this point.
Relative to overall, even thought it might be $3 million to $5 million.
Thanks.
Our next question comes from Brian Dobson of Nomura. Please proceed with your question.
Hey, good morning, So just just turning to 2020 for a moment.
I guess, if revpar remains at these levels you should see some margin compression do you think that your new hotel openings should should be able to more than offset that that compression next year.
Uh huh.
Yeah. That's a good question I think you know first the we do believe that the margin compression that we saw in second quarter is likely.
Outsized relative to what we would see going forward.
We had a fairly significant.
Investment in digital marketing that we wouldnt necessarily maintain that growth in digital marketing spend although that has been helpful.
In driving seven plus business to our own channels like our website or call center.
We also have some I T projects going on that are primarily.
Capital investment in nature, but that has.
Caused a fairly material increase in opex as we've done the.
The new property management system.
The Wi Fi expansion at hotel level, we've had some equipment some redundant circuits et cetera that over the course of this project has kind of caused a little bit of an opex.
Spike that will go away as we move through this year.
That said I think we'd have to get to.
Yes.
It all becomes sort of a percentage gain that we have a.
Let's call it a 1%.
Decline in our operating margin on relatively stable call it flattish revpar.
We're going to need.
A few dozen hotels to compensate for that and we will get to that point of opening I, just I don't see it happening.
Yes until maybe six to 12 months out.
All right. Thank you that's very helpful.
And then in terms of your.
Capital return.
I guess, what would you consider running lower cash balances are using your revolver and in total.
How much including dividends do you think is possible realistically possible to return over the next 12 months.
Well that's a good question you know were.
We have a share repurchase authorization now of a little over $260 million.
With cash on the balance sheet of a little over $300 million.
Yes.
Dividend payments, obviously coming up and other uses of capital that then we're we're generating an awful lot of free cash flow as we move through time were still a very high margin business.
So while it's possible that we might touch the revolver I don't know that we necessarily have to.
Two.
Returned the capital that we've laid out.
Even at the high end of our range I think we still maintain cash balances and still maintain a lot of the EBITDA growth activities that we've laid out.
Including renovation and.
Some level of Newbuilds.
And what do you think that total capital return picture mapping.
Well.
We've guided to.
An increase at the mid point.
Yes in total it's about $240 million to $280 million. So we've guided to an increase at the midpoint.
$15 million the difference there.
Obviously is a share repurchases and we're going to be taken care of that at a fairly brief period of time, but fairly brief window here.
All right. Thank you.
Next question comes from Stephen Grambling of Goldman Sachs. Please proceed with your question.
So I'd say, it's a couple of quick follow ups first on the the Board review one other one just given the evaluation such as long as it did in Red part deteriorated over the period did the potential value for the different options evolve over the evaluation.
I I'm unable to provide any of those specifics Steven.
Fair enough and then can you remind us how your franchise agreements are similar or different than your peers and do you anticipate any change in terms as you build the base.
I think our franchise agreements generally speaking or are a lot more straightforward than our peers are you know we've done that deliberately keeping the.
The franchise fee and the system services be.
Very simple I don't believe that we'll have to.
Evolve or change those going forward or the the fact that we do not have.
And a points based loyalty program eliminates that's quite a lot of complexity that otherwise might exist in and a franchise agreement.
Other than that that you know that the terms of our franchise agreements are are perfect industry standard we are dealing with franchisees who are.
We are currently franchisees with many other brands. So so that certainly helped us as well to keep it keep it standard but they are simple and straightforward and I don't think we'll have to change them.
That's helpful. And then Okay go ahead I'm sorry.
No that was gonna let you go ahead.
Well I I would also add that a well I mentioned in the call we are going to increase.
The resources devoted to franchise sales as well as our franchise services organization. This is something that our current franchisees are asking for and we've committed to and that will involve bulking up that franchise services organization the establishment of.
[noise] team both for the franchisees as well as our own our own owned hotels and we think all of these efforts will support an increase in the pace of our franchise sales.
That's helpful. And then one last one it's also a follow up given your sensitize a model to recession, how should we generally think about the sensitivity.
And EBITDA to each point up or down of Rev. Par you know thinking about June July trend is the baseline.
[noise].
Yeah the.
I think it's fairly simple each point of Revpar.
Is probably worth about $8 million to $10 million.
In EBITDA.
So if we see a recession like.
Frankly every recession I'd experienced prior to 2007 2008.
We might see a dip of call it $40 million to $50 million EBITDA from where we are today and that would involve.
You know for us.
A little bit of a shuffling of the deck in terms of timing of capital projects, but would not be really disruptive in terms of our plans overall.
Even if we saw.
The really draconian.
15% to 20% drops in Revpar that we saw in the last recession.
I don't know that that eight to 10 would apply all the way down because there would be some changes to the model we would have.
A more radical mix shifting toward 30, plus guests in our costs would drop and so.
I would expect an EBITDA decline.
Say more in the neighborhood of 100 million and again, while that would mean more significant changes to our capital plans and we will.
What kind of tighten the belt further.
Yes, it's still something that we're very comfortable with our levels of leverage.
Even in that kind of.
Quote unquote Doomsday scenario.
So would be the capital capex be more flexible in that scenario than than operating costs.
Capex would be very flexible yes.
In terms of so much stations in terms of timing of new builds that yes.
Fair enough. Thank you.
Our next question comes from David Katz of Jefferies. Please proceed with your question.
Hi, good morning, everyone.
I wanted to ask about system growth you know we.
You know we look at a for example, a competing brand that is roughly half your size that you know is putting up mid single digits unit growth.
And you know, maybe even accelerate that into the back half of this year and next year.
And you know we look at what you know what you have with their system.
You know has moved around but really has not.
Grown meaningfully units.
In the context of.
A a extended stay park system that has about 3 million members in it which is relatively small.
My question is.
How have you thought about your ability to grow that as a single single branded entity and you know when we think about the value that that creates and your evaluation you know that that this course is superior.
Value is a subjective or qualitative discussion if we build a long enough tail, we could probably get right I'm sure. We would agree we could get to any value.
We want it you know at the end of the day. So you know how long should we be thinking about that 3 million members becoming.
Something that's 10 X that size like your competitors may have competing brands may have and.
How long should we think about.
Really getting that 625 hotels.
Just something much bigger when we have case studies in the public arena on larger platforms that have grown much more quickly.
Thanks, Dave and then there may be three or four questions in there I realize that.
I think I actually can't fix but [laughter] Ivan.
Hi, just leaving no David I appreciate that question, it's well post I.
I mean I'll offer the following thoughts first of all.
Our company is very different from some of the other companies that you're.
Now that you're referencing the brand families.
We are we are a single brand and we are one that has had a direct line of communication through a direct sales force.
With.
Large customers that together make up half of our business.
And so.
The the loyalty program that we have.
Is important but it is it is not its not the type of loyalty program, which are.
Which some other hotel companies have invested in and.
No and it's been quite a lot to maintain I don't think our 3 million member loyalty program gets to be 10 times that amount just given the size of this portfolio and the frequency that we have with some of our customers I think our challenge with the loyalty program will be too.
To continue to grow in value and also use it to.
Mine the behavior and the visitation characteristics of our customers. So that we can make our offers more compelling for them out in terms of the value you know and the value creation.
We do we do think there is a line of sight to a thousand extended stay America branded hotels in North America, We don't think that that is.
That that is constrained in any way by some of the success that other.
Extended stay product or have had what springs would be an example of that.
And the reason is because we don't usually come up against them in and competition for the the corporate project business that is our bread and butter, we much more come up again.
Competitors like Candlewood suites, and then other non traditional lodging options like short term apartment and the like and conventional hotels and the unit growth.
Supply growth in those competitive sets is not that dramatic.
You know and the final thing I would add in terms of timeline is that nothing that we're doing in this and some of these enhancements to our ESA 2.0 strategy would preclude.
Our our board in the future from deciding to take a different course in a rather we believe that everything that we're doing whether it be improvements to operations acceleration of franchising.
And certainly repurchases of our own shares.
Serve to grow the value of the real estate and the brand and therefore, we think that it it preserves that optionality for any different course in the future.
Okay, I think you've answered five of the six.
[laughter] look.
Are there.
Are there other strategies that you can pursue.
You know to help you benefit from the scale that may be outside of your company.
That may benefit either revpar or unit growth.
Or loyalty in some way I mean, you're obviously fighting the good fight, but from where we sit it doesn't necessarily appear to be a fair one.
When you are trying to grow a business and get a value commensurate.
With that growth.
All right you know against much larger platforms right I mean that the market has provided a series of case studies you know that that suggest single brands are having to have a tough battle.
What else can you do.
But there is a there's a couple of.
Ideas I would I would offer in response to that I do think Wow. There are there are certainly scale benefits.
Like the ones you've described.
You know there are also.
Many case case studies that would show that.
That a lack of focus.
Tends to be a desk economy of scale and so I do think that that is a benefit that we have both in terms of management and marketing.
That we can focus on this one particular segment in one and.
A small number of use cases, there are ways to benefit from scale are essentially rent the scale of others.
They could be by attaching a offerings to our loyalty program that we would that would cost money, but there are ways to do that many other not in lodging so much but in.
And airlines and rental cars and retail do that that's something that we can certainly do and the second I alluded to in my in my remarks, and one of the questions around solutions for the lower.
The lower IDR hotels in the portfolio that we may choose to rebrand them, either with our own brand or.
Through an existing brand and lodging.
And you know and take advantage of of I think the existing brand awareness rather than creating our own brand.
So there are a couple of ways for a company like ours to do that access.
The scale that exists elsewhere. It comes with a cost but I think.
You know I would I would also rely upon the focus that we get from being a single brand and that there's value in that.
Okay. Thank you very much.
Thanks.
Our next question comes from Thomas Allen of Morgan Stanley . Please proceed with your question.
Thank you I'm most of my questions have been asked and answered, but just just one left.
I'm worried there offers for either brand.
The real estate or the whole company.
And if that were or how many beds were there for for each of those.
Thomas I'm unable to comment on any of those specific.
Okay. So it was worth a shot thank you.
Thanks.
Our final question comes from Chris Woronka of Deutsche Bank. Please proceed with your question.
Hey, good morning, guys.
Maybe just pointed my questions do not relate to the strategic review.
But I did want to ask in the quarter I. You know your Revpar was you had occupancy gains rate decline and Paul just so I'd missed something earlier, but can you kind of talk about whether that was mix driven or something else that was part of a.
No conscious strategy to to dry box.
There was a mix component to that Chris the as I mentioned earlier on the call we saw a.
About a 1% decline in our one to six night business.
That transient business tends to be higher rated.
That are longer stay business, but we did see a gain in our.
Or seven plus business.
That.
Slightly more than canceled out the decline in one to six.
We do think that that frankly is good for us in the longer term, especially now that were.
Hitting the end of the summer, but because we have built a base of that longer stay business that tends to stay with us through.
Slower lower occupancy periods.
And frankly those are guests who were built to serve.
We have made a conscious effort to.
Try to appeal to those guests more because not only in terms of the room layout and the back of the house the way that we're staffed the way that our.
Sales effort is built the way that our other internal channels or bill.
We are really designed to serve those longer stay guests well.
They tend to appreciate their stays with us more in rate us more highly on social media and so we think that while it is a short to medium term benefit to have more of those guests at our hotels right. Now it's also a longer term benefit because.
They tend to spread a good work for us.
As as after they stay with us.
Okay. Just just quick follow up to that is as you as you start coming out of the renovations. This cycle do you think the mix profile you know changes there in.
I know in the in the prior round of renovations several years back you got a pretty nice rate lift, especially in the in the earlier rounds is that do you still see that happening this time were or something different.
Yes, Chris I would say that we would expect it to increase our appeal relative to our comp sets too.
Business transient guests and so I think we would see.
As more of that business is available we would take more than our fair share of that going forward.
But I think it also really improves or appeal to.
The seven to 29, I guess, those folks for whom a short term apartment, it's not really an option.
But who are in a market long enough.
That a traditional hotel is really not a very good option either.
Yes, we were through our digital marketing programs, we were able to drive an increase in those seven to 29 guests who came in through our website and through our call Center.
And we think that the renovations will only strengthen our ability to do that as we go forward.
Okay very good thanks, guys.
Thank you.
Ladies and gentlemen, if you can if the question and answer session I would like to turn the call back to John Hancock for closing remarks.
Thanks, very much thanks, everybody for joining us. This morning, we appreciate your support and we look forward to speaking with you.
In a few months to discuss our third quarter results and our progress on on ESA 2.0. Thanks.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.