Extended Stay America Inc (STAY) CEO James Donald on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Extended Stay (STAY)

Extended Stay America Inc (NYSE:STAY)

Q2 2014 Results Conference Call

July 31, 2014 – 8:30 AM E.T.

Executives

Kay Sharpton – VP, IR

James Donald – CEO

Peter Crage – CFO

Jonathan Halkyard – COO

Thomas Seddon – Chief Marketing Officer

Analysts

Steven Kent – Goldman Sachs

Anthony Powell – Barclays Capital

David Loeb – Robert W. Baird & Company, Inc.

Chris Woronka – Deutsche Bank

Joseph Greff – JPMorgan Chase & Co.

Chad Beynon – Macquarie Research Equities

Christopher Agnew – MKM Partners

Operator

Greetings, and welcome to the Extended Stay America second-quarter 2014 earnings conference call. [Operator Instructions]. I will now turn the conference over to Ms. Kay Sharpton, Vice President of Investor Relations. Thank you, Ms. Sharpton. You may now begin.

Kay Sharpton

Good morning, and welcome to Extended Stay's second quarter 2014 conference call. Joining me on the call today are Jim Donald, Chief Executive Officer; Peter Crage, Chief Financial Officer; Jonathan Halkyard, Chief Operating Officer and interim Chief Financial Officer and Tom Seddon, Chief Marketing Officer. After our prepared remarks there will be a brief Q&A session.

And before we begin, I would like to remind you that some of the comments made by management during the conference call contain forward-looking statements including our 2014 outlook that are subject to risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. Forward-looking statements made during this call speak only as of the date of the call and the factors that could cause actual results to differ are discussed in our recent 10-Q and other public filings.

In addition, some of the comments made on this call may refer to certain search measures such as EBITDA, adjusted EBITDA, hotel operating profit, hotel operating margin, paired shared income, adjusted paired shared income and adjusted paired share income per paired share which are not GAAP measures. Management believes these measures provide useful supplemental information to investors regarding our ongoing operating performance and facilitate comparisons between the Company and other lodging companies, hotel owners and capital intensive companies. For a full reconciliation of EBITDA, adjusted EBITDA, hotel operating profit, hotel operating margin, paired share income, adjusted paired share income, and adjusted paired share per paired share to GAAP results in accordance with Reg G, please see our press release furnished as an exhibit to our Form 8-K dated July 31, 2014 which may be located under the Investor Relations area on our website at www.extendedstay.com.

And now I would like to introduce Jim Donald. Jim, go ahead.

James Donald

Thank you, Kay, and thanks, everyone, for joining us this morning. I would like to review our second-quarter 2014 results and update you on our ongoing initiatives. And then Peter will provide a more in depth discussion of second-quarter results, and Jonathan will cover our outlook for 2014.

We are very pleased with our second quarter performance which included sequential monthly revenue growth. For the quarter revenue grew 9.6% to $321.9 million and adjusted EBITDA of $157.9 million; it grew 16%.

We're more than halfway through 2014, and we continue to be energized by our prospects ahead. We're executing stated initiatives having completed all but one of our 92 hotel renovations, improving service and growing brand awareness. We believe for the balance of 2014 we'll continue to demonstrate strong performance in key metrics. We are pleased with the ramp up of the latest phase of our renovation schedule which included 92 hotels in our portfolio. These hotels which were under renovation in the first quarter of 2014 move into the 3 month post renovation period during which we typically see occupancy rates recover and benefit from increasing rates.

Additionally, our growth in the second quarter was also driven by the effect of cycling on a 35 hotel renovation phase that contributed to the displacement we experienced in the second quarter of last year. These factors contributed to RevPAR, sequentially strengthening each month throughout the quarter, and quarterly RevPAR growth of 9.4%.

In addition to our renovations, our central reservation system is contributing to a better guest experience. We are continuing to see improved performance from centralizing hotel direct reservation calls. We have almost completed rolling it out system wide.

Overall book revenue through the centralized call center channel was up over $40 million for the second quarter while hotel direct book revenue was down about $18 million resulting in a 10% increase in revenue for the 2 channels combined. Centralizing hotel direct reservation calls provides greater transparency into key operational metrics such as our responsiveness in answering calls and calls converted into bookings. Both of these have made significant improvements, and we believe will continue to drive higher revenues.

For the first time we launched a fully integrated national marketing campaign to increase our brand awareness. The campaign includes national TV and a number of online media elements, such as online video, digital banners, social networks and even a new mobile website. The campaign is utilizing 38 popular cable networks and hundreds of websites that index high against our target audience to maximize effectiveness.

The message is simple and highlights our core differentiator of a hotel room with a full kitchen at a great price. If you haven't seen the new ad yet, check it out on our Investor Relations website under About Us.

Now let me highlight the recent results of our operational and revenue initiatives. These include upgrading our operational practices and evolving our customer mix.

Just this week, our operations team completed the rollout of new procedures for the housekeeping and maintenance staff. With these new procedures in place, we expect to deliver a more consistent guest experience, lower our linen and energy costs, and reduce employee turnover. Later this quarter we'll do the same for our front-desk procedures.

A combination of our consistent hotel platform and owner operator model makes the implementation of this process change a very powerful lever. Our continued evolution of Good to Great in customer service while being a low cost leader will be further reinforced when both of these initiatives our fully executed.

Next, we announced our partnership with IdeaS, the division of SAS, for a revenue management system in June. We're pleased with the progress we've made to date. With the system in place, we'll be able to better manage or portfolio with tools that will allow us to maximize yield.

We anticipate applying the software in several hotels late in the third quarter. We will begin to then rollout the system later this year into additional hotels. We intend to take a phased approach to deploying this across the system geographically, as well as phasing in elements of functionality, so we anticipate the capabilities will materially benefit us in 2015 and 2016.

Looking ahead, we continue to refresh our portfolio. To that end, we start on our phase 7 renovations with 8 properties in Phoenix during the summer season since it is their slower season. The remaining 52 properties in the 16 hotel renovation phase are anticipated to begin in the fourth quarter.

Beginning our third quarter, July performance was consistent with the second quarter at just over 9% RevPAR growth. Our full attention is focused on driving solid results for the balance of the year through a better consistent guest experience, growing brand awareness and equity, evolution of customer segments, affective pricing against demand and generating returns from capital investments.

We are positioning the Company to be the best extended stay hotel brand in the industry. I'll now turn the call over to Peter to review our 2014 second -quarter results in more detail.

Peter Crage

Thank you, Jim. In the second quarter of 2014 we generated revenue of $321.9 million, an increase of $28.3 million or 9.6% over the second quarter of 2013. System wide, RevPAR grew 9.4% driven by an ADR increase of 6.8% to $57.98, and an occupancy increase of 180 basis points to 78.8%.

We benefited from the cycling over the displacement period in the second quarter of last year when 35 hotels were under renovation as well as from the ramp up period of our recent 92 hotel renovation. As we begin to take rate and these hotels return to pre-renovation occupancy levels.

We continue to be pleased with the overall performance of our platinum renovations, and in the quarter, another 48 properties completed a full year of post renovation results. On the aggregate, 172 properties that have completed a full year of post renovation results, the RevPAR index growth gains have been 8.8%. Additionally, our other properties that have not completed a full year of post renovation results are on track to deliver similar results.

Moving on to our hotel operating margins, we achieved a margin of 54.4%, an increase of 30 basis points over the same quarter in 2013. Flow-through was approximately 57%. Utilities came in favorable to our expectations, and we saw an abatement of property insurance, and repair and maintenance expenses during the quarter as we expected and discussed on our last call.

Our marking costs while at the level we expected, increased a total of $6.7 million; partly driven by an increase of approximately $3.9 million related to our national media campaign which was recognized in general and administrative expense in 2013, as well as an increase in hotel reservations expense of approximately $2.8 million mainly due to the system wide implementation of our central reservations call center, and commissions expense related to an increase in sales volume. In spite of ongoing costs related to our summer media campaign, we continue to anticipate further hotel operating margin improvement over the prior year driven primarily by revenue growth in our upcoming 2 quarters.

General and administrative expenses which were $21.5 million, decreased approximately $4.2 million over the same quarter in 2013. System wide brand related expenses in the second quarter of 2013 were $5 million and did not recur. Additionally, there was a decrease in compensation expense of approximately $1.7 million related to the settlement of previous incentive agreements with certain operations personnel offset by an increase of $1.1 million in noncash equity based compensation expense.

Public company transition costs of approximately $1.3 million, and consulting fees related to the implementation of our new strategic initiatives of approximately $0.5 million, totaling $1.8 million in Q2 2014, were approximately equal to the $1.7 million IPO related costs in 2013. These costs and noncash equity based compensation are excluded from our net G&A and our adjusted EBITDA.

Net G&A expenses for the second quarter of 2014 totaled $17.3 million. We are now anticipating net G&A costs on a full year run rate basis to be approximately 6% to 6.5% of revenue as we begin to realize some cost savings and efficiencies.

Adjusted EBITDA for the second quarter of $157.9 million increased $21.7 million or 16% when compared to the second quarter of 2013. Adjustments to EBITDA are detailed in our earnings release and include the aforementioned G&A costs, as well as a noncash foreign currency transaction gain of $0.7 million in the quarter related to the depreciation of the US dollar versus the Canadian dollar at our Canadian properties which have US dollar denominated debt. Interest expense was $46.5 million for the quarter, a $15.6 million decrease from last year due to the reduction of mezzanine debt post IPO, offset by $9.4 million of fees and expenses related to refinancing our remaining mezzanine debt.

We completed a $375 million senior secure term loan on June 23, 2014 with the proceeds used to refinance the outstanding $365 million of 9.4% mezzanine debt and pay related transaction fees and expenses. The 5-year financing was completed at LIBOR plus 4.25%, subject to a LIBOR floor of 75 basis points.

In 2014, the net impact of the fees and expenses of the refinance offset by the interest cost savings from the lower cost term loan for the remainder of the year results in a slight increase in the forecast for GAAP interest expense for the full year to approximately $150 million, and 2014 cash interest expense is estimated to be $127 million. Most importantly though, the full year run rate cash interest savings as a result of the transaction will be approximately $16 million.

Net income in the second quarter was $46.3 million, and $8.8 million increase compared to the second quarter of 2013. Income tax expense for the second quarter of 2014 was $14.2 million compared to $1.8 million in the comparable period in 2013.

The effective tax rate for the second quarter of 2014 was 23.4% and is based on the anticipated full year taxable income of the Company's wholly owned subsidiaries, ESA management, ESH strategies and the operating leases, as well as the dividend income related to the corporations ownership of the shares of ESH REIT Class A common stock. Adjusted paired share income for the 3 months ended June 30, 2014 was $54.7 million or $0.27 per paired share based on a weighted average diluted paired shares outstanding of 204.4 million.

Adjusted paired share income, a non-GAAP measure, represents net income as adjusted, attributable to the consolidated and combined entity. Adjustments to net income are detailed in our earnings release and include certain G&A costs as well as the fees related to the mezzanine debt refinance on an after tax basis.

Now allow me to highlight a few items on our balance sheet. We ended the quarter with a total available balance on our combined revolving credit facilities of $272.1 million. We also ended the quarter with $18.7 million in unrestricted cash on hand and $157.9 million of restricted cash.

Net debt was $2.8 billion at the end of the second quarter and represents 5.1 times multiple of net debt to adjusted EBITDA on a trailing 12 month basis. We were pleased with the execution of the new senior secure term loan which not only allows us to reduce our debt service and our weighted average cost of debt, but also our ability to prepay the loan after one year. Now I would like to hand it off to Jonathan to cover our capital spending, upcoming dividend and outlook for the remainder of 2014.

Jonathan Halkyard

Thanks, Peter. I am honored to be able to step in as the intern CFO and I want to join those in thanking Peter for his support and leadership of our finance team. Let me begin with our capital spending and then discuss our outlook.

Capital expenditures for the second quarter totaled $36.3 million related to our maintenance capital and hotel renovations. Year to date our capital expenditures total $85.7 million. We continue to anticipate total capital spending to be between $150 million and $170 million for capital renovations, IT projects and regular maintenance in 2014.

On July 28 we completed the sale of 2 non-core Hometown Inn properties. We expect to record a pretax gain of approximately $1 million in connection with the sale of these properties in the third quarter.

This morning, the Board of Directors of ESH Hospitality, Inc., the Company's subsidiary, declared a cash dividend of $0.15 per share for the second quarter of 2014, payable to ESH Hospitality, Inc.' s Class A and Class B common shareholders. The dividend will be payable August 28, 2014 to shareholders of record as of August 14, 2014.

We are re-affirming our outlook for revenue and adjusted EBITDA for 2014. We anticipate total consolidated 2014 revenue of $1.212 billion to $1.246 billion or approximately 7% to 10% growth over 2014.

RevPAR growth in the third quarter should be generally consistent with second quarter as the ramp of our phase 6 renovation offsets a more modest impact of our phase 5 renovation year over year. RevPAR growth in the fourth quarter should strengthen as our phase 6 ramp continues and we begin to comp favorably against the beginning of that renovation which began last November.

Adjusted EBITDA is anticipated be in a range of $570 million to $600 million or approximately 10% to 16% growth over 2013. Net income is now anticipated to range from approximately $164 million to $194 million. We updated this to reflect the impact of our mezzanine debt refinancing, the gain on the sale of our 2 Hometown Inn properties, noncash foreign currency transaction loss to date and increased depreciation expense. Please refer to our press release for details.

I'll now turn the call back to Jim.

James Donald

Thank you, Jonathan. Peter, thank you again, for your contributions to Extended Stay, and we wish you well in your future endeavors. We are fortunate to have a multi talented team, and Jonathan's background and experience will ensure that we have a seamless transition as we begin the search for our permanent CFO.

And finally, our leadership team and our associates continue to be laser focused on driving this company to become a leading brand in the industry. Our capital investment program, customer service initiatives, marketing and brand innovations, the evolution of customer mix, margin opportunities and overall growth initiatives will produce a long runway for growth and tremendous opportunity to generate superior cash on cash returns for our shareholders in 2014, and grow our business well into 2015, and beyond. I'll now turn the call back to Kay.

Kay Sharpton

Thanks, Jim. Before we begin the Q&A session, I would like to ask everyone to limit their questions to one, with one follow up, in order to accommodate everyone in the queue. Thank you, and operator, we can now go to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Ladies and gentlemen, please just hold the line for one moment while we reconnect the speakers.

James Donald

I guess they didn't drop off then.

Kay Sharpton

I guess not.

Operator

The first question comes from the line of Steven Kent of Goldman Sachs. Please go ahead.

Steven Kent – Goldman Sachs

Good morning. By the way, we just heard silence, so you didn't miss anything.

I have a question on the renovations and how to think about this. So you mentioned that phase 5 was maybe coming in a little bit weaker than what you expected out of phase six. I didn't quite understand that, so I wanted to hear that.

And then when you look at your company's overall RevPAR, can you tell us roughly how much of the RevPAR gains are attributed to your renovations? Because economy RevPAR growth trends have been notably stronger than the rest of the industry, so part of that you are benefiting from. So I'm trying to segment that out, and then also understand the phase 5 versus phase 6discussion.

Jonathan Halkyard

Hey, Steve, it's Jonathan. First of all, apologies. The line went dead for us too, but it was right at the end of our remarks, so you didn't miss much either.

No, the phase 5 renovations has been performing quite well. What we intended to communicate was that during the second quarter of this year, we cycled on the phase 5 properties.

There were 35 hotels in phase 5 which were under renovation in the second quarter of 2013. Therefore, we were experiencing displacement in the second quarter of 2014. So, that was a nice tailwind for us as we cycled on that renovation that was occurring last year.

It's early still for the phase 6 hotels. We completed that renovation at the end of March, early April.

So it's still early, but right now we're seeing performance that's quite strong out of the phase 6 hotels. Certainly, they're performing the way we'd expect them to perform at this stage after the renovation.

James Donald

With the exception of one phase 6, which is Canada, it's still about ready to wrap up.

Jonathan Halkyard

Yes. Those hotels are completing their renovation right now. In terms of the contribution to RevPAR growth that the renovated hotels have, it depends entirely on the proportion of the portfolio which is benefiting from the renovations.

So right now we have about 322 hotels that have had a platinum renovation. During the second quarter, that entire group indexed above our competition in terms of their RevPAR growth. So the ones that are ramping out of renovation tend to index to a greater degree than those that have been renovated for a period of time, but they're all performing quite well and indexing positively.

Steven Kent – Goldman Sachs

Okay. Thanks for explaining that.

Operator

Thank you. The next question is from Anthony Powell of Barclays. Please go ahead.

Anthony Powell – Barclays Capital

Hi. Good morning, everyone. You mentioned that you had some expenses in the second quarter related to marketing. And also, I believe in June release you mentioned some higher utility and repair costs. How much of the costs do you think were one time in the second quarter, and how confident are you that these costs will come down over the rest of the year and will not recur next year?

Jonathan Halkyard

You said the June release. Did you intend to say the first quarter release?

Jonathan Halkyard

No, the June 10, 8-K that you guys…

Jonathan Halkyard

Oh, I see. Okay. The marketing costs that we experienced in the second quarter, the brand marketing costs were about $3.9 million. There will be some additional costs that we will have in the third quarter related to the same national campaign which is a summer campaign.

But then those costs will not recur in the fourth quarter. As far as 2015, that depends upon, of course, our brand advertising plan.

Jonathan Halkyard

Got it. Okay. And as far as your occupancy, it grew faster than we thought in the quarter. Are you seeing any new types of customers booking at your hotels post renovation?

Could you update us on what percent of your guests are staying under 30 days and are you benefiting from any of the overall growth in leisure travel we're seeing across the board, especially in the economy segment? Thank you.

Thomas Seddon

Yes, this is Tom. We're continuing to see increases in demand from our less than 30 night stay although we are still just around 50% people staying more than 30 nights and just around 50% people staying less. So that's changing, but just continues to change a little bit at a time.

As far as leisure versus business, our exposure to leisure is the opposite of the industry. The industry is roughly 60% leisure, 40% business now, and we're roughly the other way around.

So we're certainly seeing that in our results. We are seeing our leisure demand, particularly in these last couple of months, certainly a very strong growth rate. That's a little bit of actually a handicap relative to some of the competitors who are more leisure exposed, although we get the benefit of that as the summer recedes and we get back to more of the business dominated time of year and a more stable base of our business helps us then.

So, definitely seeing the same sort of trend in strength in leisure that you are seeing in the industry. It just doesn't quite help us as much because they're not quite as exposed.

James Donald

Operator, I think we can take the next question.

Operator

Thank you. The next question is from David Loeb of Robert W. Baird. Please go ahead.

David Loeb – Robert W. Baird & Company, Inc.

Good morning. You sold the last 2 Hometown Inns for about $13,200 a key by our calculations. Can you give us an idea on how you see that relative to the asset value of your owned real estate, and particularly the 5,900 Crossland rooms?

Jonathan Halkyard

Well, those were 2 hotels that were non-core and not performing particularly well. They certainly were not benefiting from any of the capabilities or brand advertising that we have been investing in.

So, I certainly don't think the price at which we sold those on an asset basis really have any relation to the overall value of the portfolio. Those are hotels that we had not invested a great deal of capital in, nor did we intend to invest capital in.

In terms of the Crossland portfolio, although those, of course, are not branded Extended Stay America hotels, and so they don't get the benefit of our brand marketing activities, that portfolio performs quite well for us. Again, I don't think there's any relevance to the Hometown Inn sale price to that portfolio.

All that being said, the cap rate at which we sold these hotels, I think, is a very attractive one. We think the sale of these hotels was accretive to shareholder value.

And this was just another way of us continuing to concentrate on our core brand, ESA. As Jonathan mentioned, we're very pleased with the Crosslands now. We continue to run them as Crosslands, but this was a one off outside of the Crosslands as well. So we're pleased with that sale, and moving on from here.

David Loeb – Robert W. Baird & Company, Inc.

Great. Thanks.

Operator

Thank you. The next question is from Chris Woronka of Deutsche Bank. Please go ahead.

Chris Woronka – Deutsche Bank

Hey. Good morning, guys.

James Donald

Good morning.

Chris Woronka – Deutsche Bank

Wanted to follow up a little bit on the cadence of your expectations for second half. It looks like to us that your RevPAR comp gets about 280 bips easier in the third quarter versus second quarter both on 2013. We were thinking third quarter probably accelerates a little bit from second quarter.

I know you said July is up about 9% and change. Is there anything that impacts this quarter given where the comp is, the reason where you might not get the same 2-year growth?

Jonathan Halkyard

Yes. There's a couple of reasons.

First of all we thought it was important to talk a little bit about the third quarter simply because we're coming off of a quarter where we had revenue growth acceleration of over 400 basis points, and obviously, EBITDA growth acceleration that was even more dramatic over the first quarter. We are very pleased with those results, but we thought is was important to put the third quarter in a little bit of context.

The biggest driver is that during the third quarter we won't have quite as many of our hotels in that very strong ramp period post renovation. That's the main driver. We, of course, benefited from that in the second quarter with the phase 5 that we already described.

All of that being said, we still believe that we can put up on a 2 year stack basis, revenue growth in the high teens. And we've certainly done that or exceeded that over the past 2 quarters.

James Donald

High teens, low 20s.

Chris Woronka – Deutsche Bank

Okay. That's helpful. I guess just to follow that to margins. I understand your comments and some issues in the second quarter – various things – but is it generally to impute that to your guidance? Should we assume that there is going to be some incremental flow-through in the second half on the margin front?

Jonathan Halkyard

Yes. Our margins expanded in the second quarter. In spite of our additional investment in brand marketing as well as in some of our operational initiatives. We are going to continue to invest in those in the third quarter. We still expect some margin expansion in the third quarter driven by revenue growth.

I think it's also important to note – we mentioned it in the release, but because of the way in which we recorded our brand marketing costs in the second quarter of last year, those brand marketing costs were in SG&A. This quarter they burdened the hotel operating expense.

Adjusting for that, just changing economy geography we had flow-through of 76% in the second quarter. So that's an important, of course, increase in that from the first quarter.

Chris Woronka – Deutsche Bank

Sure. Understood. Okay. Very good. Thanks, guys.

Operator

Thank you. The next question is from Joe Greff of JPMorgan. Please go ahead.

Joseph Greff – JPMorgan Chase & Co.

Hey, guys. I'm probably asking a question that someone asked while the phone was disconnected. But on a similar topic with respect to the second half of the year and your flow-through assumptions, it's imputed from your guidance something like 70%-plus flow-through in the back half of the year to get to the mid-point of guidance.

One, am I thinking about that correctly? And two, that hasn't been achieved in the last 3 quarters and those have been some one offs that you have talked about? Can you talk about how would you get incremental flow-through in the back half there, at least in relation to the 57% that you had in the 2Q?

Jonathan Halkyard

Okay, Joe. You didn't miss any of the Q&A. We just began it when I think the lines…

James Donald

Steve was first up.

Jonathan Halkyard

Yes. Steve was the first question. We do believe that we can flow-through at that level.

In the second quarter, and we apologize for some of the confusion from this change in the way in which, or where we've recorded these brand marketing expenses. But in the second quarter, our flow-through was about 76% of the hotel operating income line when looking at our brand cost on an apple to apple basis. This year they were in the second quarter recorded in hotel operating costs, last year they were recorded in G&A.

If you adjust for that, we had about 76% flow-through as opposed to 57% as we reported. So we do feel comfortable with that level of flow-through. Obviously, it's helped during our higher revenue quarters, as the third quarter will be.

In the first quarter, as we discussed on that call, was burdened by fairly high utilities and maintenance costs which did not recur in the second quarter. We don't really expect them to recur in the third quarter.

Joseph Greff – JPMorgan Chase & Co.

Would you expect the flow-through to be stronger in the fourth quarter given the easier comparison or will be stronger in the third quarter give the seasonal trends you just mentioned?

Jonathan Halkyard

I do believe it will be strong in the fourth quarter for a couple of reasons. The first is that we will not have the incremental marketing costs in the fourth quarter. Because this brand marketing campaign really is a summer campaign. And that's probably the main reason that the fourth-quarter flow-through we believe should be fairly strong.

Joseph Greff – JPMorgan Chase & Co.

Got it. My last question. Third quarter adjusted EBITDA should be about 29%, 30% of the full year? Just so we have a target that's in line with your thinking and no surprises 3 months from now. Is that correct?

Jonathan Halkyard

Yes. I think that's probably close there, Joe.

Joseph Greff – JPMorgan Chase & Co.

Great. Thanks, so much, guys.

Operator

Thank you. The next question is from Chad Beynon of Macquarie. Please go ahead.

Chad Beynon – Macquarie Research Equities

Hi. Good morning. Given the extremely healthy industry backdrop in the economy chain scale and also the Extended Stay segment and no real change to supply at least from what we've heard from some of your peers, have you revisited the math on any of the silver renovations with maybe the opportunity to generate mid-teens returns which I think was your original target for platinums? And that in mind with the lower cost of capital, given your refinancing?

James Donald

Sorry, is the question are we revisiting converting the silvers to platinums?

Chad Beynon – Macquarie Research Equities

Correct.

James Donald

Yes, we are. As Jonathan mentioned in his remarks, phase 7 has begun in Phoenix. That's are slow season. And we will ramp those up late in the fourth quarter.

But we are also looking at the rest of the portfolio, and we're having discussions on that about where we go. But, it is clear that the mid teens cash on cash returns are giving us the energy, I should say, to embark on a somewhat aggressive campaign to get those converted. Not necessarily on the Crosslands, that's a whole new piece of our development work, but that's in our mix of things to do from 2015 on.

Chad Beynon – Macquarie Research Equities

Okay. So that phase starts around Thanksgiving, is that correct?

Jonathan Halkyard

The main part of it. It's already begun actually. We have 8 hotels under renovation right now in Phoenix because it's their slow season. The remaining 52 will begin in smaller sub phases probably in the November time frame.

So when you compare the fourth quarter of last year to this upcoming fourth quarter, the number of hotels that we're taking on is just a little more than half of what we had last fourth quarter. So it is another reason that just given our experience now both in terms of our renovations processes as well as the results is why we feel pretty good about the fourth quarter at this point.

Chad Beynon – Macquarie Research Equities

Okay, thanks. It may be too early to see a meaningful difference, but were you able to see any customer mix more focused on the short stay in the second quarter versus the first quarter or the fourth quarter of last year? Or is that maybe something we'll start to see a bigger change in the fourth quarter, after the marketing is complete and some of the other levers that you can pull will benefit?

Thomas Seddon

I think we're seeing some continued movement. I think it's a continual, gradual shift rather than sudden step changes. When renovate a hotel, as you expect, that's when we can really see some movement.

But we're also very pleased with what we're able to drive with rate performance relative to the market. One of the things that we would really point to is the ability to not only shift the mix from the phase segment to the shorter stay, but also within the longer stay segments increase our percentage of higher rated corporate business which helps us drive rate even if the length of stay mix doesn't shift. When we think about mix shift, there is both the shift from longer to shorter, but also the improvement in the actual rate that we're getting within the longer stay business.

Chad Beynon – Macquarie Research Equities

Okay. Thank you very much.

Operator

Thank you. [Operator Instructions]. The next question is from Christopher Agnew of MKM Partners. Please go ahead.

Christopher Agnew – MKM Partners

Thanks, very much. Good morning.

I was wondering if you could provide some more color on the anticipated benefits from the revenue management system, both in terms of magnitude and pacing and whether you would anticipate the majority of the benefits in 2015. And then on the implementation, you mentioned you're going to roll out different phases and by geographic area. When do you expect full implementation in terms of plan phases and also geographic rate? Thanks.

Thomas Seddon

Sure. Well, I'll hit the first part.

The folks who sell these systems will quote benefits in the range of 4% to 6%. Our business case assumes something more like 2% to 4%. That gives you a sense of how we think about the benefit when it's fully implemented and fully stabilized.

In terms of how that phases in we're trying to be pretty thoughtful about getting the benefit faster with managing the inherent risks in early technology projects by bringing this on phase by phase. As we stated, we expect to be piloting right at the end of Q3.

Then as that demonstrates success, we'll bring more hotels on regionally. That will take us through the end of Q4 and maybe into a bit of Q1.

Then we will also turn on additional pieces of functionality. So we think this will benefit us both in 2015, as we get all the hotels on the system, but then also start adding additional functionality during 2015.

We do expect to get some sequential improvement in 2016 on top of that as well because both from the additional functionality and just the natural process of getting more experienced and getting the benefit from the system. So we probably expect to be stabilized in the benefit we get from it towards the end of 2016. So it's 2015 and 2016.

Operator

Thank you. And the next question is from Anthony Powell of Barclays. Please go ahead.

Anthony Powell – Barclays Capital

Just a follow up on the RevPAR cadence for the rest of the year. Do expect the phase 6 renovations to have a bigger impact on the fourth quarter than the third quarter? And do you think your fourth quarter RevPAR will accelerate from third quarter?

Jonathan Halkyard

Yes, and yes. And the answer to the second question is, of course, driven by the first. We've seen this in prior phases where the hotels really ramp for the first 3 to 6 months after completion of renovation, so we would expect that to occur.

Secondly, we will benefit from modestly lower displacement in the fourth quarter as compared with the fourth quarter of 2013 because phase 7 is less extensive than phase 6 was. This is one of the reasons why we do ask folks to look at our 2 year growth rate. And unfortunately, we'll probably be continuing to talk about these cycling impacts next year because of the benefit of these renovations is so significant.

Anthony Powell – Barclays Capital

Great. Thank you. Peter, good luck in the next role.

Peter Crage

I'm sorry, could you repeat that?

Anthony Powell – Barclays Capital

Good luck in the next phase.

Peter Crage

Thank you very much. I really appreciate it.

Anthony Powell – Barclays Capital

No problem.

Operator

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to Mr. Donald for any closing remarks.

James Donald

Thank you, operator. I would say that it's rather obvious that we continue to be a company that is basically in the midst of this transformation and getting traction, each and every month, as seen in the first half. The leadership team here in Charlotte, the leadership team in the field, continue to be laser focused on taking this company to becoming a leading brand in the extended stay segment and the industry.

We're proud of our capital investment program, proud of our customer service initiatives. While again it's hard to believe they're still in the early phases, but they're coming on very strong. When you couple that with the marketing and the branding innovations, the evolution of the customer mix Tom talked about, and of course, we continue to see margin opportunities along the way, we're confident that this is going to produce – and I've said it before and I'll say it again – a long runway for growth, and of course, a tremendous opportunity to generate cash on cash returns for the remainder of this year, and 2015, and beyond.

I will turn the call over to Kay. Thank you very much for your time today.

Kay Sharpton

Thank you all. We'll look forward to talking with you next quarter.

James Donald

Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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