La Quinta Holdings' (LQ) CEO Wayne Goldberg on Q2 2014 Results - Earnings Call Transcript

Aug.13.14 | About: La Quinta (LQ)

La Quinta Holdings, Inc. (NYSE:LQ)

Q2 2014 Earnings Conference Call

August 12, 2014, 05:00 PM ET

Executives

Nikki Sacks - Investor Relations, ICR

Wayne Goldberg - Chief Executive Officer

Keith Cline - Chief Financial Officer

Analysts

Thomas Allen - Morgan Stanley

Joel Simkins - Credit Suisse

Smedes Rose - Evercore

Shaun Kelley - Bank of America

Diana Katz - Lebenthal

Steven Kent - Goldman Sachs

Joe Griffith - JPMorgan

Operator

Greetings and welcome to the La Quinta Second Quarter 2014 Earnings Conference Call. (Operator Instructions) I'd now like to turn the conference over to your host, Ms. Nikki Sacks of ICR.

Nikki Sacks

Welcome to La Quinta Holdings second quarter 2014 earnings call. Before we begin, we would like to remind you that our discussion this afternoon will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements. And forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements.

The factors that could cause the actual results to differ are those identified in the Risk Factors section of our S-1. As such, factors may be updated from time to time in our filings with the SEC, which are available on our website.

In addition, in today's remarks, we will refer to certain non-GAAP financial measures. You can find a reconciliation of the non-GAAP financial measures discussed in today's call to the most comparable measures calculated and presented in accordance with GAAP in our earnings press release and on our website at www.lq.com.

Here today are Wayne Goldberg, CEO; and Keith Cline, CFO. I'd now like to turn the call over to Wayne.

Wayne Goldberg

Thank you, Nikki. Good afternoon and welcome to La Quinta's second quarter 2014 earnings conference call. I'm very pleased to report another quarter of strong operating performance across our key metrics. These include RevPAR growth, franchise unit growth, EBITDA growth and EBITDA margin growth. Overall, the lodging industry remains healthy, with a steadily improving economy and strong transient travel demand. La Quinta is extremely well positioned to continue to capture this demand as we capitalize on our refreshed and upgraded portfolio and our repositioned brand.

With 12 new franchise openings and increased occupancy during the quarter, our geographic reach and customer base continue to grow. Franchise interest remains robust for the La Quinta brand, as evidenced by a growing pipeline, including three new central business district properties and two new international markets. Furthermore, we also continue to de-lever the balance sheet by utilizing our strong free cash flow to prepay debt and deliver on our strategic objectives, all of which are designed to increase shareholder value.

Additionally, due to our strength year-to-date and our outlook for the remainder of the year, we are raising our full year 2014 adjusted EBITDA guidance to a range of $367 million to $372 million. I am pleased with our results and the strong performance we delivered against our key metrics in the second quarter.

First is RevPAR growth. During the quarter, we increased occupancy by 168 basis points, bringing it to over 70%, while also driving ADR growth of 5.1%. With this combination of improved rate and occupancy, we achieved RevPAR growth of 7.7% compared to the second quarter of 2013. For the first half of the year, our RevPAR is up 7.3% from the prior year, driven by 150 basis point increase in occupancy and a 4.8% increase in ADR. The increase in RevPAR was driven by a combination of factors, the continuing economic recovery and attractive supply/demand environment with minimal new builds in our owned markets, the addition of new distribution channels, and our ongoing focus on operational improvement and enhancements to the brand experience.

According to research conducted with our La Quinta Returns members, guests said they would value a service that would make travel more convenient and make them feel assured. As a result, La Quinta launched another hotel industry first in late March with Ready For You. When a guest books a room from a desktop on lq.com, as part of the reservation process, they select their intended time of arrival. Then on the day of arrival, Ready For You notifies the guest via text message or e-mail the instant their room is ready for check-in. To date, usage of Ready For You has been strong and has exceeded our expectations with approximately 45% of all desktop bookings taking advantage of this new service delivered through innovative technology.

Our second key metric is franchise unit growth. La Quinta remains the fastest growing select service hotel brand in the United States. Yet, our footprint in the US is still less than half the number of our main competitors. Furthermore, we have a significant opportunity to expand our footprint as La Quinta is not yet represented in 37% of the Smith Travel Research defined market tracks. Said differently, we are only in 63% of these markets and our competitors are already in 92% of these market tracks. We have a scalable platform with a well established infrastructure, which positions us for meaningful growth in our high-margin franchise segment.

During the second quarter, we opened 12 franchise hotels, bringing our year-to-date total to 24 hotels with nearly 2,300 rooms. Furthermore, as we continue to expand our footprint across the country, including high ADR and central business district markets, we further extend our customer base and brand recognition. During the quarter, we added three additional downtown central business district locations to our pipeline. We added downtown Houston, downtown Dallas and downtown Oklahoma City. In addition, we added a new construction hotel at the Chicago O'Hare Airport.

In terms of our international expansion, I'm excited to announce that we have recently signed franchise agreements for three properties in two new countries, one in Nicaragua and two in Guatemala. All three will be high quality new build hotels that will further extend our presence in Latin America. These deals demonstrate the strength of the relationships we have established with our existing partners. Our franchise partners for these new projects are already looking to franchisees in Honduras, a location we anticipate will open by the end of 2014 or very early in 2015.

Looking ahead, our expanding pipeline supports ongoing unit growth. At the end of the second quarter, we had 190 fully executed franchise agreements in our pipeline, which represent an additional 15,678 rooms. As a reminder, based on our history, on average we expect 25% to 30% of the hotels in our pipeline to come online each year in 2014 and 2015. We also believe openings will continue to accelerate as the economy continues to improve.

As an owner/operator, we truly view our franchise owners as partners with a common motivation to uncover operational efficiencies. We have also been evaluating and evolving the overall hotel design. And during the second quarter, we unveiled an exciting new prototype. This new design is called La Quinta Del Sol. It is fresh, bold and modern, reflective of our brand today. But it is more than just about the aesthetics. It is also designed to have an adaptable and scalable footprint to optimize revenue per square foot and maximize return on investment. The first La Quinta Del Sol property is under construction in College Station, Texas. And we already have an additional 12 franchise partners planning to build this new innovative hotel design.

All of this translates into our third and fourth key metrics, adjusted EBITDA and EBITDA margin growth. During the second quarter, we grew adjusted EBITDA 13.1% and expanded our adjusted EBITDA margin by 170 basis points. While we already run extremely efficient hotels, there are opportunities for incremental enhancements where we can reduce cost and improve the guest experience.

For example, we've almost completed the system-wide conversion of our guest high-speed internet. This conversion increases bandwidth on average over 10 times the existing service, while driving an overall cost savings. Through this expanded service, we lower cost and enhance the guest experience by giving our guests what they want, faster internet service and the ability to use multiple devices and stream video and music.

Finally, we have significant balance sheet opportunity. As we have stated, our business has very strong cash flow characteristics and it's our intent to continue to meaningfully reduce our debt. In the second quarter, we voluntarily prepaid $80 million of debt. We will continue to execute against our strategy of delevering the business. In fact, we intend to accelerate our debt prepayment in the second half of this year. And based on our current outlook, we are confident that our net debt to EBITDA will be below 4 times by the end of 2015.

In summary, La Quinta continues to make tremendous progress in evolving our portfolio and our brand. We have a highly dedicated and loyal consumer, a highly dedicated and loyal workforce and a highly dedicated, loyal and growing group of franchise partners. We have embedded growth opportunities as we drive RevPAR increases in both our owned and franchise segments and unit growth in our high-margin capital-light franchise segment. We are laser-focused on delivering on these strategic objectives, all of which are designed to increase shareholder value.

And with that, I'd like to turn the call over to Keith to discuss our second quarter results in more detail and our outlook for the remainder of 2014.

Keith Cline

Thanks, Wayne. Before I get started, I want to let you know that the results we're discussing are in a pro forma basis, giving effect to La Quinta's IPO, which we completed on April 14, 2014, and the related transactions as described in our public filings and press release.

As Wayne discussed, we delivered another quarter of strong results. During the second quarter, total revenue increased 8.2% compared to last year, driven primarily by our 7.7% RevPAR growth. This growth was due to strength in both our owned and franchise segments. In addition to the RevPAR increase, revenue growth was due primarily to the addition of net 4,100 rooms in our franchise system compared to the same time last year.

High-margin flow-through increases in ADR combined with the leveraging of our efficient cost structure delivered a 14.6% increase in operating income compared to last year. This excludes the impact of $5.1 million impairment charge and unfavorable expected terms of the upcoming ground lease renewal for one of our owned hotels. Second quarter adjusted EBITDA increased $12.2 million to $106 million, representing a 13.1% increase over 2013. Adjusted EBITDA margin for the second quarter improved 170 basis points year-over-year to 48.5%. We have an extremely efficient operating model, the high absolute margin. And as we leverage ADR increases and grow our high-margin franchise segment, we expect to deliver further margin expansion.

During the second quarter, we incurred a number of one-time expenses directly related to our IPO and associated transactions. Excluding certain expenses, which I will detail shortly and the impairment charge I just mentioned, total operating expenses increased 6.6%, with increases across various categories including direct lodging expense, G&A expense and other lodging and operating expenses. The increase in direct lodging expense was driven primarily by higher occupancy and increases in travel agency commission. The increase in G&A was due primarily to additional costs associated with operating as a public company and non-cash compensation expense. The increase in other lodging and operating expenses was driven primarily by increases in general liability insurance and property taxes.

As Wayne discussed earlier, we are extremely pleased with our second quarter results and performance against our key metrics. Our business continues to deliver strong RevPAR growth, franchise unit growth, EBITDA growth and EBITDA margin growth. Given our IPO and associated transactions, the second quarter included several one-time items that are worth discussing.

During the second quarter, we incurred a one-time tax expense on our income statement of $321 million, which drove the net loss we reported for the quarter. As a reminder, this expense was not a cash expense in the period and was recorded as we established a net deferred tax liability on our balance sheet. Based on the net operating loss carryovers available today, assuming no limitations on their use, we anticipate no immediate cash impact from this item in 2014 and 2015. Beginning in 2016, we expect the annual cash impact of this item to be approximately $27 million. In the meantime, we are proactively looking for ways to operate more efficiently, and this includes minimizing tax expense over the long term.

Additional one-time expenses associated with the IPO transactions included $26 million non-cash stock-based compensation expense primarily related to the exchange of certain long-term incentive ownership units along with grants under the incentive plan we adopted in connection with the IPO. We also recorded a $2 million loss on the extinguishment of debt and wrote off unamortized issuance cost in connection with our debt refinancing.

Turning to our balance sheet, our business generates significant free cash flow and as we have consistently stated, our intention is to utilize our free cash flow to pay down our debt and further reduce our leverage. During the quarter, we made a voluntary prepayment of $80 million on our term loan facility. We anticipate that once our net debt to EBITDA reaches approximately 4 times, we will evaluate a balance of debt repayment with a market appropriate return of capital to our shareholders.

And finally, our outlook for the remainder of 2014. We are pleased with our performance for the second quarter and year-to-date. Lodging industry remains healthy with a steadily improving economy and strong transient travel demand. We are well positioned to continue to capture this demand and believe this will be seen in strong results delivered across our key metrics. With that, we anticipate RevPAR and the system-wide comparable hotel basis to increase between 6% and 7% compared to 2013. We expect pro forma adjusted EBITDA to be between $367 million and $372 million, an increase of $4.5 million at the midpoint from our prior guidance. And capital expenditures to be between $71 million and $77 million. In terms of unit growth, we expect to open between 45 and 50 new franchise locations.

With that, I'd like to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Thomas Allen from Morgan Stanley.

Thomas Allen - Morgan Stanley

Your 2Q RevPAR growth of 7.7% was very strong and it accelerated about 100 basis points from your first quarter year-over-year growth. We're seeing that across at least the mid-tier segment of the industry. What do you think is driving that improvement and do you think that should continue?

Wayne Goldberg

We're clearly benefiting a supply/demand balance. We continue to see very little new supply. We continue to see occupancy and demand increase. And we continue to see the ability to move the ADR. We also finally see the economy segment really starting to improve as well. And that bodes very well for us to continue to be able to move the rate as the economy segment moves the rate. And that just gives us the ability to be seeing value and move rate further against our competitors. So we do believe that it continues, yes. We feel good about the guidance and the performance in the second half.

Thomas Allen - Morgan Stanley

Two follow-up questions to that. One, you before had RevPAR growth of 7.3% for the first half of the years and then your guidance is 6% to 7%. So is that suggesting that you expect a deceleration in the second half of the year, and why would that be? And then the second question is I know it's hard to read into your customer base the split between leisure and corporate demand, but is there any way to kind of extrapolate where you're seeing more acceleration between those two groups?

Keith Cline

We're absolutely not expecting any kind of a deceleration in the second half. As Wayne mentioned, we feel good about our guidance and confident that we'll perform well against our RevPAR projections in the second half of the year.

Wayne Goldberg

And as far as the leisure and corporate mix, what I'd tell you, Tom, is we've always gotten our share of the leisure traveler. We continue to get more than our share of the leisure travel. All of our focus for the last several years on a continued basis continues to be to drive business traveler, the business travel and to get a larger share of the business travel. That's where our focus has been. That's where our marketing is. That's where our advertising is. And that's where all of our emphasis and focus continues to be. Again, we get the leisure travel without really having to focus on that.

Thomas Allen - Morgan Stanley

Just on corporate expense, I feel like the street has been mis-modeling it for the past couple of quarters. So is there any way you can give us some color on what you're expecting for 3Q and 4Q?

Keith Cline

We just filed our press release recently, but if you take a look at the pro forma table in there and keep in mind some of the one-time items that I discussed and take a look at G&A expense, in particular the six-month numbers, you'll see that the six-month number pro forma this year ran about 8.7% of revenue. Last year was about 8.1%. This year includes the impact of grants made under the Omnibus Incentive Plan that were non-cash related as well as public company costs. And we previously mentioned public company costs this year would be about $4 million. And I would assume a run rate after this year on the non-cash stock compensation of about $6.3 million annually. So as you look at the run rate that's in there for the first half of this year, it would weigh a little heavier in the second half, just because you're getting a full two quarters, including public company costs versus just getting one three-month period.

Thomas Allen - Morgan Stanley

And just as I look at the EBITDA table and this is comparing apples to oranges, but when I look at the $6.3 million that you reported in the second quarter when you break down the EBITDA between owned, managed or franchise and then corporate, is there a way to think about what the right run rate is there? I think it was $9 million in the first quarter, $6 million in the second quarter.

Keith Cline

As we've talked about before, when you look at that segment disclosure, that is how we take a look at primarily the owned hotels, franchise and management EBITDA, and the composition of that does differ between our financials. So to translate that back to the segment disclosure is a bit troublesome, because it's had a level of detail below our face financials. So I try to speak then to the face financials, because it's more illustrative of what you'll see going forward.

Operator

Our next question comes from Joel Simkins from Credit Suisse.

Joel Simkins - Credit Suisse

I have a couple of questions on the development outlook. I guess first if you could just talk about what your franchisees are seeing in terms of the financing environment right now. And then secondly, you guys did announce this new prototype pretty recently. Just curious what the developer interest has been since this is announced and also how this might shape up from a cost per key economics' perspective when it might get in the field.

Wayne Goldberg

We see very strong interest in the new prototype. I will be completely upfront and tell you that we have the first hotel under development, under construction in College Station. So again, we're going to reverse engineer with the goal of the development of this prototype being cost-neutral to our existing prototype. We have one under construction today. We have 12 additional franchise partners that have already committed to building this even ahead of actually being able to demonstrate what the real cost of developing it is. I believe that we will be successful in our endeavor to keep it cost-neutral. As I said, we're going to reverse engineer to that anyway. And we feel very good about the interest in this new prototype. We think it is cutting edge. We think it is differentiating. And we think it is fresh and bold and does all of the things to continue to keep our brand fresh and relevant that we need.

So we feel very good about the interest. We feel very good that we've got 12 folks committed to building it ahead of having the first one actually completed. We're hearing that it is improved. Our franchise partners on what we're hearing are not having a problem getting financing on the deals that we're signing and that we're doing with them. And on a cost per key basis, the new prototype we believe is going to be if you use an average of 80 rooms, we believe it's going to be $6 million to $7 million for the development of the property, which is in line with our existing prototype that they're building today.

Joel Simkins - Credit Suisse

And you mentioned in the press release you expanded into Guatemala and Nicaragua. How should we be thinking about continued growth in Latin America and also perhaps stretching down into South America longer term?

Wayne Goldberg

We feel very good that we've demonstrated the ability to grow our brand in Central and South America, Latin America. And in fact, 11.6% of our pipeline to date is international with 22 hotels out of 190 in our pipeline being international. Obviously 16 of them are in Mexico, one in Honduras, one in Canada, two in Guatemala, one in Nicaragua and on in Colombia. We believe we'll have continued opportunity to continue to expand our reach in Latin America.

Joel Simkins - Credit Suisse

And one quick follow-up on the second quarter. So obviously you had some very healthy ADR growth, very strong margin growth. How should we be thinking about kind of the pace of margin expansion going forward? Is some of this just a function of you getting very healthy rate or you continue to really kind of pick some operating cost opportunities? And then just adding to that, obviously you guys have some strong presences in California, Texas, Florida, and those economies are doing well. Is there any potential kind of labor cost pressure out there on the horizon?

Wayne Goldberg

We don't see any significant pressure. I will tell you that it's a combination of both of the things that you mentioned. We do see increases in ADR, which obviously helps us drive margin as a larger percentage of our RevPAR growth comes through ADR, that flows to the bottom better than increases in occupancy where you have a cost to sell an additional room. We don't believe there is a silver bullet with incremental cost savings, however there are opportunities. And we're very focused on continuing to drive those opportunities and cost savings to the bottomline.

And I'll give a couple of examples just in the last several months. We've done some reverse auctions. And for example just toilet tissue and tissue paper and toilet paper, we were able to save over $100,000 in a reverse auction for those items. Trash bags alone, we save $400,000 on an annual basis by doing a reverse auction on trash cans. We're looking at a number of additional commodities where we believe cost savings here are real. And in aggregate they add up and they are substantial.

The other one I mentioned was our high-speed internet where we're significantly increasing our delivery of service to the consumer and giving them what they want. At the same time, this new platform gives us the ability to remove and eliminate a very expensive T1 line at each property. So our OpEx savings for this platform, even though we're multiplying the bandwidth delivered by 10 times to the consumer, we're going to save over $1 million a year in operating cost by eliminating the T1.

So we feel very good that there are incremental savings. There's incremental things we can do and that we'll able to continue to capitalize on those. And we're always looking for those opportunities and will continue to do so. These are just a few examples for you.

Operator

Our next question comes from Smedes Rose from Evercore.

Smedes Rose - Evercore

I'm sorry if I missed this, but what was the RevPAR number in the second quarter, the absolute number?

Keith Cline

The dollar number itself?

Smedes Rose - Evercore

Yeah, in the first quarter, it was $50.44 in your release. And I don't see it in this release.

Keith Cline

It's actually going to be in the Q that we filed, will be available in the morning. So as you think about system-wide comparable RevPAR aggregate dollars, $59.39 generated the 7.7% of RevPAR increase.

Smedes Rose - Evercore

You mentioned that you're not seeing a whole bunch of supply. I was wondering if you could just maybe quantify that as a percentage of what you're seeing in your markets, if there are any that you do see a little more supply than you would like or can you give any more color?

Wayne Goldberg

We don't see a significant uptick at all. In fact, if you go back to April of '08, we had 88 hotels in our owned markets under development or under construction in our comp set. These are hotels that we would put in our comp set upon opening. At the end of the first quarter, I think I reported that we had 37 hotels under construction in our direct comp sets in our owned hotels. Today at the end of the second quarter, we have 39. So we've seen it increase very, very slightly and we're not concerned about what we're seeing, because we just don't see a significant uptick in development and construction starts in our markets that we own and operate hotels.

Smedes Rose - Evercore

It looks like your pipeline went up by about 16 hotels sequentially, I guess taking out the ones that you added and then netting out the increase. But does that include the new prototype that you mentioned? Are those in there now?

Wayne Goldberg

Yes, yes. The College Station prototype that is under construction is in the pipeline of 190.

Operator

Our next question comes from Andrew Didora from Bank of America.

Shaun Kelley - Bank of America

This is actually Shaun Kelley for Andrew. I just wanted to ask, sticking with the pipeline question, if you could just remind us what you're showing in pipeline, are those all signed hotel contracts? And then I guess secondarily, what's the overall timeline to open once something enters the pipeline for you guys?

Wayne Goldberg

First and foremost, every property in our pipeline has a fully executed franchise agreement to support it. It doesn't go into our pipeline until it's signed and countersigned, so it is fully executed. On average historically, 25% to 30% of the pipeline comes onboard on an annual basis. Again, the pipeline is a fluid number. I mean there's properties that are added to the pipeline. There's properties that are opening. And then on a constant and a consistent basis, we're reviewing, because it doesn't do us any good to keep properties in the pipeline that we don't believe are going to get developed. So over time, some of those come out and we replace those with new properties, but we want to make sure those markets are opened if we're not comfortable that the hotel is going to get developed.

Shaun Kelley - Bank of America

Could you just give us an update on any conversion opportunity? And is that an opportunity for La Quinta overall and then kind of what are you guys seeing as it relates to portfolios or things that might apply?

Wayne Goldberg

We've been very consistent over the last several years. Approximately 80% of our properties coming into the pipeline are new construction and about 20% are conversion. Obviously we can open a conversion in most cases quicker. You're talking 12 to 18 months on a conversion. On a new construction, you're talking 18 months to three years for the development and opening of hotel. So again, we're willing to take conversions, but we only take conversions that meet our criteria and are going to represent our brand the way the brand is today.

Shaun Kelley - Bank of America

My last question would be on developer financing and incentives. Do you provide key money for your properties and kind of how much do you have allocated for that, and is there any opportunities for capital recycling on the one side and then how competitive is that landscape right now on the other?

Wayne Goldberg

It is a competitive environment. I will tell you that our brand, our company, our team does an excellent job. We will offer key money. However, we have a very strong track record of only offering key money where it is a very strategic location. And again, total amortizing out there over the life of our program, I think we have $3 million amortizing in key money in total. So it isn't something we've had to do a lot. We are willing to do it to get the right strategic location, but only for the right key strategic location, high barrier to entry, high ADR type market, central business district type locations.

And in the US, we don't discount ongoing fees. But again, it has not impacted our ability to grow the brand, as is evidenced by the growth over the last 10 years.

Operator

Our next question comes from Diana Katz from Lebenthal.

Diana Katz - Lebenthal

So what's great about your story is obviously how balanced your distribution is geographically across the US. But maybe you can provide some color regionally on the RevPAR growth. What were the strongest and weakest areas in the quarter? And then you also mentioned you benefit from the economy scale and maybe you can remind us what percentage of your hotels are in this scale?

Wayne Goldberg

First of all, 83%, 84% of our properties are in the mid-scale. Only 10% of our properties are actually in the economy segment. And 7% of our properties, believe it or not, actually compete in the luxury category. Again, that is Smith Travel Research price point breakdown.

Keith Cline

And, Diana, I believe the comment that you're referring back to Wayne's response was he has mentioned we have economies of scale when it comes to procurement. Is that what you're referring to?

Wayne Goldberg

Majority of our property sit above the economy segment, sit in the mid-scale and upper mid-scale. But as the economy segment, which was the last segment to go in, they're also the last one to come out. We're finally seeing that segment have the ability to grow the ADR. And if they move the ADR, that gives the folks that sit above them the ability to move the price as well and keep the same value relationship between them. So again, the more they push the rate, the more we can push the rate as well. We've been pushing the rate anyway, because we're in a different segment. But as they start to move it, it gives us more ability to move it and keep that price value comparative the same.

So as far as weaker markets, I guess the best way to articulate this is if I look overall, I can tell you that in the first quarter, I talked with you about the fact that we had a handful of markets that actually were not performing in line with the overall brand or company. In fact, we had three markets that actually were down in RevPAR and all three of them were comparison-based items. For example, we had New York, which was Sandy comparison to the prior year. We had New Orleans which was the superball. So the good news is while those markets in the first quarter were very explainable and I could explain exactly what the comparison issue is, we have the same thing in the second quarter.

In the second quarter, we only have two markets that we actually have negative RevPAR, and both of those markets are comparison issues. We had Oklahoma City, which was a clear impact of the tornado in the prior year in Oklahoma City. And we had New York City, which in the second quarter we still had some remnants of Sandy from the prior year. And the gap has really closed where the difference in the first quarter versus the second quarter is dramatically different in New York. But those are the only two markets where we have weakness and we don't have growth in RevPAR.

Again, we see pretty significant strength across our markets everywhere else. And those are the only two that stand out and they both have really specific comparison issues that we can point to.

Diana Katz - Lebenthal

Obviously the trend in business is your bread and butter. But with some recent pickup in trends in group and government revenues, can these have any sort of meaningful impact on your business?

Wayne Goldberg

Again, we continue to focus on growing the business travel, which is where we message and we market, because we know we get the leisure, as I said before. I think we can point to that. The three highest demand days are Friday, Saturday and Wednesday, Friday and Saturday being the weekend and the leisure travel and Wednesday being the peak business or corporate travel. We do have a lot of opportunity to continue to grow the corporate travel segment of our business. And we're really focused on doing on. And I think we've been successful in the last several years doing it and we see trends in momentum continuing to improve in this area.

Operator

Our next question comes from Steven Kent from Goldman Sachs.

Steven Kent - Goldman Sachs

You said earlier that you're not in, I think, 37% of the market or some kind of measure of STR and your competitors are only in 8% or not in 8%. Of your pipeline, what is going into some of these underrepresented markets? Is your pipeline starting to gain traction in some of these underpenetrated markets? And then just finally, I know we've talked about this before, moving toward asset-light, the idea of maybe selling some of the existing hotels and keeping the franchise contract, have you changed your view on that?

Wayne Goldberg

Smith Travel Research defines 628 market tracks. And that's what I was speaking to when I said that we're not in 37% or 232 of those market tracks today where our biggest competitors and our three largest competitors are in 92% of them, which is a lot of white space for us. The 190 properties in our pipeline, 31 additional market tracks that we're not in today we get in with the existing pipeline of 190. 11.6% of that pipeline is also international and 16% is urban as defined by Smith Travel Research.

Keith Cline

And then as you think about selling owned hotels, I mean clearly we continue to believe in the owner/operator model and our ability to leverage these operating efficiencies across segment, as Wayne articulated during his script. However, as you look at our franchising business today, we do have critical mass and there's really no magic to us owning 353 assets. So we'll continue to evaluate this opportunity. Over time, I would expect to see some pruning of the portfolio and/or us looking at selling assets encumbered with the brand. But still at the end of the day, we'll make certain whatever decision we do make will be accretive to the business and to the shareholders.

Operator

Our next question comes from Joe Griffith from JPMorgan.

Joe Griffith - JPMorgan

Did you talk about your RevPAR index performance in the second quarter? And can you give us the end of period franchise room count?

Wayne Goldberg

I'll tell you that in the second quarter, we made some very strategic decisions that we were to going to aggressively move rate. We knew in the second quarter that we had a significant occupancy premium against our competitors, in fact approximately 300 basis points in occupancy above our direct competitor. So we made a decision that the right economic decision for the brand was to be aggressive with pricing. And it did cost us a little bit on the occupancy index in the second quarter. However, we did grow our ADR index in the second quarter. And candidly, it was the right economic decision for the brand. Having to do it over, we would do it the same. But it did cost us a little bit, we're down about 40 basis points for the quarter in index overall as a result of that strategic decision. Year-to-date, we're still slightly up in index against our direct competitors.

Keith Cline

And as you think about room count, once you get a chance to see the Q, you'll see I think on Page 11 that at the end of Q2 we had roughly 85,000 rooms in the system and 40,000 of those rooms were franchise locations.

Operator

At this time, we've no further questions. I'd like to turn call back over to our management for closing comments.

Wayne Goldberg

Thank you all of you for participating. Thank you for your interest and the confidence that you have placed in us, in our brand. Feel free to contact Keith or myself at any time if you have any questions. We look forward to speaking with you again when we report third quarter or in between if you have questions for Keith and I. Thank you very much.

Operator

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

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