Extended Stay America's (STAY) CEO Gerry Lopez on Q1 2016 Results - Earnings Call Transcript

| About: Extended Stay (STAY)

Extended Stay America, Inc. (NYSE:STAY)

Q1 2016 Results Earnings Conference Call

April 26, 2016, 09:00 AM ET

Executives

Robert Ballew - Investor Relations

Gerry Lopez - Chief Executive Officer

Jonathan Halkyard - Chief Finance Officer

Tom Seddon - Chief Marketing Officer

Analysts

Thomas Allen - Morgan Stanley

Anthony Powell - Barclays

Harry Curtis - Nomura Securities

Chris Woronka - Deutsche Bank

Chad Beynon - Macquarie Group

Joseph Greff - JPMorgan

Shaun Kelley - Bank of America

Operator

Greetings and welcome to the Extended Stay America First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Rob Ballew. Thank you, you may begin.

Robert Ballew

Good morning and welcome to Extended Stay America's first quarter 2016 conference call. Both the first quarter earnings release and an accompanying presentation are available on the Investor Relations portion of our website at extendedstay.com, which you can access directly at aboutstay.com.

Joining me on the call are Gerry Lopez, Chief Executive Officer; Jonathan Halkyard, Chief Financial Officer and Tom Seddon, Chief Marketing Officer. After prepared remarks by Gerry and Jonathan, there will be a question-and-answer session.

Before we begin today, I'd like to remind you that some of our discussions will contain forward-looking statements, including the discussion of our 2016 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 our actual results to differ from those implied by the forward-looking statements are discussed in our Form 10-Q filed this morning with the SEC and in our other SEC filings.

In addition, on today's call we will reference certain non-GAAP financial measures. More information regarding these non-GAAP financial measures, including reconciliations to the most comparable GAAP measures are included in the earnings release and Form 10-Q filed this morning with the SEC. All figures discussed today are on a comparable hotel basis unless otherwise stated.

With that, I'll turn it over to Gerry.

Gerry Lopez

Thanks Rob. And thank you everyone for joining us to review our first quarter of 2016. As you saw in the press release earlier this morning, Extended Stay America continues to perform very well. For the quarter, we posted total revenues of $287.6 million, a $16.9 million improvement over prior year fuelled by an outstanding 6.3% comparable hotel revenue growth above our guidance by the way, and by RevPAR growth of 5% arguably among the strongest numbers you will hear during these earnings season.

On adjusted EBITDA I’m happy to report that our performance kept pace coming in at $122.8 million, a $7.1 million improvement to last year, growth that was again fuelled by comparable hotel performance which was 6.1% better in 2015 and at the high end of our guidance.

Let’s get into some color and context behind these strong results. Revenue growth was steady and consistently strong throughout the three months of the quarter. This was a reflection of our ongoing initiatives, our geographically diverse portfolio on our much longer than industry average length of stay guest. Their stability combined with our initiatives and geographic footprint really worked well for us at Q1.

Beyond revenues, guest experience scores also showed some consistent progress throughout the quarter, and now stand at the highest levels since the IPO. In guest experiences since it was our renovations which are now 79% complete as of March 31. That combined with better service and execution at the operating unit level to deliver a strong year-on-year improvement we see. Ideas like our Clean Plus nightly housekeeping program made a difference. Not only in results we report to you such as adding 20 bips to our RevPAR but they also made a difference to our guests, who then take on to TripAdvisor and other social sites to tell their friend.

This progress and consistency mattered to us because we believe them essential in building a fundamentally sustainable business model that can stand up in any part of the business cycle. Of course it all hinges on the Extended Stay associates in 629 locations and our travel support center serving our approximately hundred thousand guests every night, a job they are doing increasingly well for which my team and I thank them very sincerely.

Further on the color and context, our strongest unit level performances during the first quarter were in the west coast which posted over 9% ADR growth as well as in the southeast, which saw similarly solid rate and occupancy gains. In the Northeast and mid-Atlantic, we saw above industry results driven by strong occupancy gains.

On hotels in the central area of the country, they did not fare as well this quarter with performance hurt by occupancy numbers that were all about our own self induced renovation disruption as well as a generally weaker industry performance in those markets. In the end, comparable hotel RevPAR grew 5% during the first quarter of 2016. This growth came in inspite of a 70 basis point increase in room displacement from renovations and a 60 basis point negative impact from Eastern and yet we believe it was among the industries best for the first quarter.

All this strong revenue and guest satisfaction improvement showed up in adjusted EBITDA as well, hitting a $122.8 million our best Q1 ever on a comparable basis and as I indicated earlier a 6.1% lift over 2015 first quarter.

While we continued to post strong top and bottom line results, we also remained focused on returning capital to our shareholders and improving our balance sheet. This morning, I am hoping you noticed that we announced an increase in our quarterly dividend of approximately 12% to $0.19 per paired share. We’ve only been pubic a couple of years, but we’ve raised our dividend every year we’ve been public. Our strong results have enabled us to do so.

In the first quarter, we also began to repurchase shares after our board approved and then increased our authorisation to $200 million. And as you all know, we’ve had a $0.25 special dividend at the beginning of the year in January.

While we continue to return capital to shareholders, we also made progress in improving our balance sheet by extending maturities at attractive rates. In March, we issued an additional $800 million in non secured Senior Notes during [Indiscernible] at 5.25% [ph] to retire mortgage and term loan debt that was matured in 2017 and 2019 and we expect to continue delevering overtime.

Throughout the quarter, we were also pleased with our sales and marketing initiatives implemented in the second half of last year and now fully bearing fruit. Our corporate sales team posted their third consecutive quarter of double digit revenue increases in the first quarter and made up nearly 45% of total revenue in the quarter on both strong rate and occupancy gain. We are seeing growth in new business from corporate clients that have historically used higher priced brands with favourable reactions to their near completion of the renovations of our entire portfolio.

We expect the corporate sales team to continue to outperform the rest of the year. Not to be outdone, our automated revenue management system continues to help improve our performance on high demand and show their date. In 2016s first quarter, this RMS helped lift our revenue by approximately 1% and will continue to expect this system to provide a 1% to 2% revenue lift for the full year.

Now moving onto the overall lodging industry, despite heightened concerns recently, supply growth expectations have not changed materially over the last year and supply growth is expected to be near long term demand growth this year and next year. Furthermore, while most of the rest of the industry is focussing on growing supply and upper midscale and upscale, we are roughly 80% of supply growth this year and 2016 is forecasted most are ignoring the lower end of the market, where Extended Stay does exist.

According to lodging the kind of metrics latest pipeline report, economy and midscale change scale are both expected to see below 1% supply growth in 2016 including less than half a percent in economy. These two chain scale combined represent only 10% of expected 2016 total hotel supply growth in the U.S. In 2017, these two chain scales will average roughly 1% growth or 14% of expected 2017 total industry supply growth combined, despite being approximately 35% of total room supply in the U.S.

Now while some recent articles have commented that Extended Stay supply is growing faster than the industry, demand has also being growing faster, up 5% in 2015 and while Extended Stay rooms make up just 8% of overall hotel supply it represents 22% of demand.

Here in the Extended Stay niche, like the overall industry supply growth is focussed upstream. In 2016, all Extended Stay hotels that operate in economy or midscale chain scale are expected to add approximately 45 hotels in the U.S. or 0.3% of total hotel supply in those chain scales.

Meanwhile, 160 Extended Stay hotels or 3.5 times as many are being built in the upper mid-scale and above with the majority in up-scale. These statistics gives us comfort that whether we are looking at our potential organic growth or when we return to unit expansion in the coming years extended stay has room to grow.

On top of that, we believe our geographically diverse portfolio, our limited exposure to inbound international travel and our continued tailwinds from company's specific initiatives such as renovations, corporate sales and revenue management would provide an additional boost.

Now I'll have to turn the call over to Jonathan who will provide more detail on our financial results and provide you an update to our 2016 outlook. Jonathan?

Jonathan Halkyard

Thanks, Gerry. Before getting into the specifics our performance in the first quarter, I really want to join Gerry and thanking all of our associates for their important roles and moving us forward over these past three months.

Beyond delivering on their revenue commitments, they managed the renovation disruption, put our revenue management system to work and dramatically improved our customer service scores and social media reviews, and for that I'm sincerely thankful.

And as a result, our first quarter results placed us on strong footings to start the year. Total revenues in the first quarter were roughly flat at $287.6 million, reflecting the 53 economy extended-stay hotels we sold during the fourth quarter of last year.

Our comparable hotel posted revenue growth of 6.3%. These results include a headwind of approximately 60 basis points due to Easter shifting from April in 2015 to March this year.

But the additional day in the quarter increased revenue by approximately 1.2 percentage point. Overall, RevPAR grew 8.2% in the first quarter driven by ADR growth of 9.5%. Our improved asset quality reflecting the 53 economy extended stay hotels that we sold in December helped lift our ADR growth by 3.6 percentage points.

Overall, occupancy decreased 90 basis points to 69.5% due primarily to an increased room renovation displacement from 1.1% of available rooms last year to 1.9% of available rooms this year during the first quarter.

Comparable hotel posted a RevPAR increase of 5% in the first quarter to $44.83, driven by ADR growth of 5.9% and an occupancy decline of 70 basis points. The decline in occupancy was caused by our hotels under renovation which saw occupancy declines of approximately 1200 basis points and the shift of Easter.

Our renovated hotels saw RevPAR growth of 6% during the first quarter, driven by an ADR growth of 5.6% and an occupancy improvement of 20 basis points. Our non-renovated property outperformed this quarter with 6.2% RevPAR growth driven by and ADR growth of 4.4% and a strong occupancy increase of 130 basis points.

Now while we're pleased with our non-renovated hotels performance during the quarter we do not believe it is likely they will continue to show RevPAR gains at that level for the remainder of 2016.

Hotel operating margin increase 30 basis points during the quarter due to high operating margins at our remaining 629 properties compared to the portfolio that included the hotels we sold in December last year.

Comparable hotel operating margins decline slightly by 20 basis points to 50.4% in line with our expectations and our guidance. Comparable hotel flow through defined as the change in hotel operating profits divided by the change in total revenue was approximately 46%.

As we've discussed previously flow-through tends to be lower in the first and fourth quarters due to seasonality of revenue. During the first quarter we also saw elevated benefited expense and higher planned maintenance expense.

These increases were partially offset by favourable utility expenses during the quarter and we continue to expect approximately 60% to 70% flow-through for the full year of 2016.

Corporate overhead expenses excluding non-cash share based compensation increased 4.2% to $22.3 million. Adjusted EBITDA for the first quarter was $122.8 million at the top end of our guidance range.

The gain in adjusted EBITDA from comparable hotels offset the adjusted EBITDA from the 53 hotels that we sold in December last year.

Comparable hotel adjusted EBITDA increase 6.1% or $7.1 million during the quarter. In the first quarter we continue the work we began last year on improving our balance sheet.

In March we had issued an additional 800 million in senior unsecured note to 5.25% due 2025 and retired $800 million and mortgage in term loan debit due to 2017 and 2019. This extended our average maturities by 1.7 year.

Our weighted average cost of debt is now 4.6% with an average duration of 6.2 year. During the quarter we incurred $12.1 million in debt extinguishment expense related to our refinancing activity, the majority of which was non-cash. As a result, our interest expense for the quarter increased from $31.3 million to $47 million.

Our effective tax rate for the first quarter was 16.4%. The company's tax rate for the quarter was lower than our annual guidance for taxes due to lower free tax income and a release of differed taxes due to an update in our distribution policy which I'll expand on shortly.

Net income for the first quarter decreased 47% to $14.8 million. Net income drop due to the higher interest expense, higher depreciation expense from renovation and the loss of net income from the 53 hotels we sold last year.

Our adjusted paired share income for paired share for the first quarter was $0.13 and adjusted paired share income, sorry, adjusted paired income was $25.8 million compared to $30.4 million in the same quarter in 2015.

The drop in adjusted paired share income was primarily due to our 53 hotel asset sale in December, higher depreciation expense from renovation and higher interest expense. The adjustments are detailed in this morning's release.

Capital expenditures for the first quarter totalled $56.9 including $31.7 million on renovations and $23.7 in maintenance capital. During the first quarter the company repurchase approximately 1.9 million paired shares for 28.8 million leaving an authorize amount of 171.2 million at the end of the first quarter.

We ended the first quarter with total cash of $358.8 million comprised of $172.4 million in unrestricted cash, and $186.4 million of restricted cash. Net debt was approximately $2.4 billion at the end of the first quarter and net debt to trailing 12 months adjusted EBITDA of comparable hotels was 4.2 times.

We continue to expect this leverage ratio to be at or below four times by the end of 2016. This morning the Boards of Directors of the Extended Stay America, Inc, and ESH Hospitality, Inc declared a cash distribution totalling $0.19 paired share for the first quarter of 2016, an approximately 12% increase from our prior distribution.

These distributions include $0.15 per ESH Hospitality Class A and Class B common share and $0.04 per Extended Stay America common share. The distributions are payable on May 24, 2016 to shareholders of record as of May 10, 2016.

Beginning in 2016, ESH Hospitality expect to distribute approximately 100% of its pretax income for distribution rather than our previously stated target of at least 95%. This change is expected to optimize the company's tax efficiency while retaining sufficient capital for ESH REITs ongoing needs.

Now looking to the full year of 2016 we expect total revenue of $1.266 billion to $1.290 billion representing comparable hotel revenue growth of approximately 4% to 6%. We expect $600 million to $620 million in adjusted EBITDA in 2016 representing 4.5% to 8% growth over comparable hotel results.

We expect capital expenditures for the year to total $240 million $260 million driven by an increased pace of renovation over what we did in 2015. For the second quarter of 2016, we expect total revenue of $332 million to 338 million, which represents growth of 3% to 5% over comparable hotel revenue in the second quarter of 2015.

This outlook includes softer results thus far in April and reflects the impact of an increase in renovation displacement as compared to the prior year. The impact from our renovation activity will reverse in the second half of the year and provide a bit of a tailwind in the third and four quarter.

We expect adjusted EBITDA of $165 million to $170 million during the second quarter and we expect flow-through in the second quarter, the lowest than for the whole year due to the timing of certain expense initiatives in one-time item this year compared to last year.

Extended Stay America will be participating at several upcoming investor events. On May 17th we will be attending the Nomura Gaming Leisure and Lodging Conference in New York City and on May 10th and 11th we will be attending the Wells Fargo Gaming Leisure and Restaurant Conference in Las Vegas. In early June we'll be attending the NYU Hospitality Conference and I'm looking forward to hosting our first ever Investor Day on June 2nd in New York City.

Now back to Rob.

Robert Ballew

Before we begin the question and answer session, I'd like to ask everyone to limit their questions to one, with one follow-up in order to try to accommodate everyone in the queue. Operator, we will now go to questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question and answer session. Management ask to please limit yourself to one question and one follow up question. [Operator Instructions]. Our first question comes from the line of Harry Curtis with Nomura Securities. Please proceed with your question. Mr. Curtis, please proceed with your question. Okay. Our next question comes from the line of Thomas Allen with Morgan Stanley. Please proceed with your question.

Thomas Allen

Hey, good morning. Can you give us some more color just on the renovated versus unrenovated properties performance? I heard you comments that the unrenovated properties performance probably won't be as good as this in future quarters, but can you just give us the more color because it was a little strange at unrenovated outperformed. Thank you.

Jonathan Halkyard

Sure, Tom, this is Jonathan. It certainly was different from the experience that we had in really the last six or seven quarters that the unrenovated property performed slightly better than the renovated properties did on the RevPAR basis. That was we believe more attributable to the market performance that those unrenovated hotels are in right now.

As look deeper into our competitive data during the quarter, our renovated hotels outperform their comp set to a certainly to a greater extent than the unrenovated hotels did, which is our expectation, just that in those markets, those markets themselves were little bit softer than those where we have the unrenovated hotels.

So, I would just make couple of further comments. First of all, the unrenovated hotels are obviously less and less a factor in our system as we proceed with our renovation program. So increasingly what you'll see is the overall company results reflect those of our renovated hotels which is very good thing. And secondly, we just thought that it was important to communicate to investors that we wouldn't expect our unrenovated hotels to outperform our renovated hotels going forward.

Thomas Allen

All helpful color, and then, can you just give also your some more color on your comment around April, is that April, you said April [Indiscernible] and also do you feel like you felt a rebound from the Easter shift or do you feel like there is muted, other companies have been saying that? Thank you.

Gerry Lopez

Yes. April is a little bit – been a little bit of a head scratcher for us. We did feel some rebounds with the Easter shift, but our business probably doesn't have as much leverage to those kinds of holiday shift. There's other hotels companies, so we probably do not see as much of an impact in March and not as much of a rebound in April. So, but I think suffices to say that that dynamic together just with how travel has shifted in April little bit with the other holidays, it just made it a little bit of an enigma to us.

Our business is looking a little bit stronger as we look out to May. June is a little bit too early right now. But we just thought it was prudent at this point to obviously incorporate what we've seen in April into our forecast for the second quarter.

Thomas Allen

Great. Thank you

Gerry Lopez

Okay.

Operator

Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Anthony Powell

Hi, good morning. You did a good job of adding new corporate clients in the first quarter. Do you believe that you're gaining some share from maybe higher pricing scales in that segment?

Gerry Lopez

We do. What we see when we sold new corporate business in is it comes from a couple of different places. We see its pulling from traditional hotels without kitchens, because that still the significant part of to business that just over fifth of all, the extended stay demand we're still saying in those hotels.

And we also see that we pulling people out service department as well. We see that happening a lot more than we see just conquest from other extended stay competitors because there is not that many other extended stay competitors [Indiscernible] supply observations, you know the biggest chunk of the market is still traditional hotels.

So, when we win it we'll win at or some other hotels sometimes higher price, sometimes the same and we'll also see ourselves in successful in pulling out alternative accommodation like department.

Jonathan Halkyard

The encouraging thing Anthony is that this group of people, 160 somewhat have really only been in place for the last three, call it four months. We really only got to the full staffing in the fourth quarter of last year like third quarter, early fourth quarter, last year spend sometime in training and [Indiscernible] of course it was a holidays, but that really only been hitting the streets hard for the three months and the gains have been almost immediate.

They have outpaced, our overall company growth for the last three, four quarters, the last three quarters even though again, they've really in place for quarter and a half. The last three quarters it's been double digit, this last quarter there were gain against the corporate accounts with better than 13%. So, we see a bright future ahead. They're almost, although ready at 45% of our business quickly moving into nearly half of our revenue. So, we think that that effort as much as it took us to get it started and get it going is really only now beginning to pay off and we think it’s nothing but a bright future ahead for that group.

Anthony Powell

Got it. And more follow-up on April, what customer statements you think that are slowing down in April. Where is kind of the weakness concentrated?

Gerry Lopez

What we probably seeing is a most softness in some of the short stay and leisure type business. One of the nice things about our business model is longer stay segment tends to just have more stability as you kind of expect. So where we seeing it and where we think would see in the comp set base in the market is more in the leisure and short stay side of things.

So, we've got the opportunity to evaluate our mix from a daily, weekly basis of how hard we're pressing those few things. So obviously you could expect where we're looking to make sure we have good pressure on the longer stay business to makeup as we do think back to spec that term. Short stay softness continues. Although as Jonathan said its bit of a head scratcher because it’s a short term effect because of the timing of holidays or something that would be going on both, but we've got a couple of nice levers to pull depending on what actually transpires.

Anthony Powell

That's it from me. Thank you.

Jonathan Halkyard

Thank you.

Operator

Our next question comes from the line of Harry Curtis with Nomura Securities. Please proceed with your questions.

Harry Curtis

Good morning, couple of questions. And I apologize if you already touched on this but you guys have a call that's overlapping other calls. The first is with mid single-digit RevPAR growth, but relatively flat EBITDA growth year-over-year, the flow-through wasn't terrific and I wonder if you could address that?

Jonathan Halkyard

Hey, Harry, it's Jonathan. You mean last EBITDA growth, EBITDA growth roughly equal to our revenue growth, so flat margins, I assuming that's where you're getting at.

Harry Curtis

Yes.

Jonathan Halkyard

You know, in our business our flow through has typically been lower in the first and fourth quarter of the year and just because of the seasonality and I think that that’s really what we’ve seen in this quarter as well. There were -- as mentioned in the prepared remark, the maintenance costs that we incurred as well as couple of other costs that were a little bit lumpy in the first quarter but otherwise it’s really just due to the seasonality and as we look forward to the full year, we expect that our flow-through is going to be 60% to 70%. So, we will have margin expansion over the course of the year and that obviously means that the third quarter and actually the fourth of this year we would expect to see a higher level flow-through.

Harry Curtis

Okay. Got you. And then second question is have you had any initial conversations with developers, if so, in early franchising interest?

Gerry Lopez

Yes, we have very primarily, very exploratory and we are encouraged, Harry, to be quite candid. People are eager. To be honest, more have approached us than we have approached. And there is what I would characterize as perhaps latent demand for us to come out. In part, because it’s been a while since we’ve done it, any expansion, any hotel, any unit growth whatsoever. In part because we’ve never franchised and people are intrigued by the possibility and in part by something that you just touched on -- even looking at the first quarter results, the fact is that our margins are above 60%, are not a lot of these developers and operators are used to seeing from other companies out there.

So, they see it as a way of bringing some diversity and some balance to their portfolio property. So even though we have not formally announced anything, even though we are still very much in the drawing room stage of things and we are kicking in around all sorts of different ideas and whatnot, all of which or most of which, we hope -- we are looking forward to sharing with everyone on June 2nd. The fact is folks are calling and we are answering and as to what may come, we will have to see. But we are encouraged by the possibilities and frankly the enthusiasm that some have demonstrated even at the very early stage of things.

Harry Curtis

Yeah. So that’s last question is really a follow-up on that. Have you got any sense of what the ROIC would be to an Extended Stay developer versus other limited service brands?

Gerry Lopez

Way too early. We hope to have some early cuts on June 2nd but it is way too early, Harry, to be honest. Anything I would tell you know would be guessing a speculation. That’s not the way we like to operate.

Harry Curtis

Okay. Appreciate it. Thank you.

Operator

Our next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Chris Woronka

Hey. Good morning, guys. Quick question for you on the revenue. It seems like you’ve gotten a pretty large increase in the other non-room related revenue and I know that Clean Plus goes in the room revenue. So, Gerry, maybe you can talk about, are these some of their early initiatives on the ancillary revenue coming through or is something else?

Gerry Lopez

Tom is going to give you some perspective on that.

Tom Seddon

Yeah. Chris, we continued to be pleased with what we’ve seen in terms of selling the upgrades extra cleaning and we actually have a focus on a number of other items, the revenue. None of which would actually appear very glamorous or dramatic. We just realize there is a lot of things around the way that we collect things like parking revenue and laundry revenue and some of stuff is not really very big picture but for us to make quite a lot of difference. So that’s what you are seeing flowing through but Clean Plus is one of the more customer facing ones and certainly there is many other things we have in the upper two but we just going to go after them peak by peak and they actually add up to nice chunk of change as you noted.

Chris Woronka

Okay. Great. And then just to -- can we get an update, I apologize if I missed it on the kind of the buckets of customers and did that changed much during the quarter, the short stay, long stay?

Gerry Lopez

Yeah. What we saw in the first quarter was an increase in percentage of business from short stay customers. We added about 3 points. So, we are now around 35%, one to six nights, around 23%, 7 to 29 and 42%, 30 plus. So it’s still kind of in the general mix of business that we’ve been shooting for. I think one of the things I would kind of call out is some of what we’ve seen from our revenue management system is actually an ability to fit more of those short stay customers in because we can be more precise about filling in little values around peak demand night than we have been in the past but it’s quite difficult to do in the old manual systems. So that’s part of what’s driving that short stay business plus some very nice late growth that we’ve seen in the third-party travel agents segment as well. So those are a couple of things that’s driving that short stay but it’s -- I would say more evolution in the continued change rather than anything dramatic.

Chris Woronka

Okay. Great. And then just on the share repurchased you guys started during the quarter. You have still quite a bit of authorization I think 171 million.

Gerry Lopez

That’s right.

Chris Woronka

Should we think about that as being more problematic or more kind of opportunistic going forward?

Jonathan Halkyard

Good question, Chris. Bit of both but first, I would say more opportunistic. We have continued to be in the market. We probably are not establishing President by saying that’s among CFOs. We think our share prices undervalued and we think it represents a good value to repurchase our shares in the market. That being said, our company is putting up nice revenue growth. We have very high margins.

We have a very low tax rates, ample free cash flow and despite having increased our dividends and of course deploying CapEx in these high return investment opportunities in our renovation, we have the ability to return capital to shareholders through share repurchase program. So, I expect we will continue to do that so long as our Board maintains our authorization and in that sense a bit of it is problematic as well. But I think on balance it’s really an opportunistic investment for us.

Chris Woronka

Okay. Very good. Thanks guys.

Gerry Lopez

Thank you, Chris.

Operator

Our next question comes from the line of Chad Beynon with Macquarie Group. Please proceed with your question.

Chad Beynon

Good morning. Thanks for taking my questions. First wanted to just focus on the renovated versus unrenovated. I know you gave the break down in the quarter but as you had given us in the past, could you give us a better sense of what’s happening to the different rollouts of the phases kind of the cadence of RevPAR declines, whether it’s 12/24, 36 months our, just trying to get a good sense of what’s happening with RevPAR change? Thanks.

Jonathan Halkyard

Well, what we typically see, Chad is that when our hotels undergo renovation, they experience a fairly significant occupancy decline in the past quarter about 1,200 basis points and that is sustained during the period of renovation. And then over the next three months the occupancy in those hotels recovers along with roughly 10% increase in RevPAR. And then it takes about another three months or so for that level to stabilize, our occupancy to stabilize at the higher level of RevPAR. So, six months -- roughly six months after the start of renovation, we return to pre-renovation occupancy levels at higher ADR.

And that curve has not really changed much, at least the expected curve since we begin the program. What we do see certainly is certain hotels for various reasons deviate from that curve. And if they deviate negatively, we are all over it get them back on that curve. So having done this now 500 times, we know what it needs to look like when a hotel goes through renovations and I’m pleased to say that what we call phase nine, internally, is performing well against that curve.

Gerry Lopez

One of the things, Chad, to keep in mind about our renovation is that unique in the industry, they are not exclusively about a physical planned change. It’s not just about what happens to the bricks and mortar on the ceiling and grooves and floors and carpets and whatnot. There is also a shift in the clientele. So, our renovations are usually accompanied by moving out some of our longer tenured guests where the rates had been significantly lower than those that we aspire to on the other side of the renovation. So, you are not just changing the appearance of the building itself but in fact, the occupancy moves not just in the numbers but it moves in the rates and the clientele that is out there.

That what’s giving room to some of our corporate business that I mentioned before that we’ve seen grow so nicely. There is a renovation not just for the clients but of the clientele as well and that’s why that window of time works out the way that it has. As Jonathan mentioned, having done a 490 some uptimes by now, we’ve seen it happened time and time again. There will be the occasional building that is an outlier and we’ve seen some of that and we have the team all over that because we know what to do. But it’s important that it is not quite the same industry pattern behind these renovations that you will see perhaps from other players.

Chad Beynon

Okay. Thanks. And that leads me into my second question. Given that you noted that your guests experience scores were at record highs since the IPO, do you have a sense of what’s happened with RPIs for you versus your peers and if the guest scores continue to move up, does that give you more confidence to raise prices in the back half of the year and beyond? Thanks.

Tom Seddon

Yeah. I would say that we definitely see a correlation across our systems between the guest satisfaction scores that we achieve in a particular hotel and the ability to drive rate, especially when we look at the public facing review. We have two ways of looking at this. We can look at our internal surveys and we can look at external reviews. And as you would expect, people saying nice things about particular property, it tends to help the sales and conversion activities on that property. So, for sure and as Gerry said, I think we have actually got still some runway to go in terms of improving that customer perception further.

And as we complete the full renovations of the system, we also expect to see continued network effect because we are only at 80% now. Once we are at 100%, then we will really be in a great shape, particularly like us in new place or new city to be very confident in what they are going to get somewhere else. So, we’ve only just started to experience that. Up to this point, most of the renovation impact has been about individual side-by-side benefit rather than network benefit. So, we see some network benefit ahead as we complete this renovation activity.

Gerry Lopez

Much room to grow, Chad. We are in the early stages of this journey. Encouraged by what we’ve seen the movement of the last, call it nine months or so has been fantastic. All pointed into right direction. The team is getting right behind it. But we are in the early stages. There is a lot that we can do and we intend to do it yet.

Chad Beynon

Okay. Great. Thanks. Best of luck.

Gerry Lopez

You bet. Thank you.

Operator

Our next question comes from the line of Joseph Greff with JPMorgan. Please proceed with your question.

Gerry Lopez

Joe? Joe? Okay. He will come back.

Operator

Okay. Our next question comes from the line of David Loeb with Robert W. Baird. Please proceed with your question.

David Loeb

I’m here.

Gerry Lopez

Yes, David.

David Loeb

I want to come back to operations a little bit and just ask about the OTA contribution. That looks like it’s been increasing in the last several quarters, building pretty consistently. What’s behind that? Is it renovated hotels, unrenovated, under renovation, all of the above and what’s the strategy with regards to that going forward?

Gerry Lopez

Yeah. It’s a little bit of renovation but it’s actually more about our ability or improved ability to drive sales in conversions in that channel and actually particularly, we’ve been very pleased with our ability to grow rate. So, if you look at the first quarter this year versus last year, we saw our revenue mix from OTAs increased by about 3 points but actually our occupancy mix was only up about a point. So, a really large part of that revenue mix what you are identifying is coming from our ability to drive stronger rate from these channels and part of that is the renovations and the stuff that we were just discussing around improved guest satisfaction but a very significant part as well is just our ability to merchandising those channel and fit some of that business in.

With our revenue management system, we are now able to be more nimble picking in some of that shorter booking window, shorter stay, high rated business where we need and it’s always going to be a bit of a challenging game to do that manually because we don’t want to block out long stay business when we do that. But we are now much more able to do that and bring it in a strong rate growth. So, you are seeing more apparent revenue growth trend than you are seeing in occupancy share trends.

Tom Seddon

Yeah. It’s important to know, David, there has been about a 3 point shift from our property, from our proprietary channels towards the OTA. The way I think about it is that we are trading some three months guests or three night guests. Properly balance that, that will be just fine because it comes point, the rates that come with a three night guest is significantly dependent on the rate that comes with a three month guests. So it’s a question of balance and having it full in place RMS that allows you to maximize.

David Loeb

So, just to go further then, so even though it’s more expensive revenue the net revenue is higher as a result of that trade-off?

Tom Seddon

That’s right, the net dollar revenue. We think about what’s the net dollar revenue delivered even after we pay close to that same optimization costs and still very attractive. But it’s all about managing that mix as Gerry said, on a night by night, hotel over hotel basis. If we’ve got a hotel we know is going to run really full anyway and we don’t need that business then we can yield it out.

If we are on the other hand looking and saying, hey that Friday is going to have five rooms empty anyway then we can let that in. And we can just be a lot more nimble of doing that now on a -- as you said sitting in from a net profit contribution point of view. But in general that short stay business even with the costs associated is very attractive for us from a net profit point of view.

Gerry Lopez

That’s very different I suspect, David from other players in the industry where they are trading three night guests for three night guests and then it becomes kind of a rate gain. Very different for us and that’s why our decision towards OTA is perhaps not as acrimonious or as confrontational as you’ve seen from others is that for us it’s about the net rate that you get or the net revenues that you get and we have some flexibility and finally the way to exercise that flexibility that we think works out just fine.

David Loeb

And can I just quickly follow-up of my follow-up? Longer term, do you see a way of taking those customers through the royalty program or the experience that they’ve had and essentially reducing your OTA dependence by accessing these same customers more directly?

Tom Seddon

I think I see some of that where we get somebody we would like for some individual hotels. But building on Gerry’s point, one of the reasons why for us these OTA distributions shelves are not as cannibalistic of our regular business is we aren’t necessarily the first place someone thinks of for a short stay leisure business although as we are seeing, we can actually merchandise and sell ourselves quite well for that business when we are on the shelves.

So, we’ll continue to experiment and play around with it but there is probably a certain amount of that infrequent short stay, leisure customer that we always may want to access on those shows because that’s just where they are going to find us and otherwise not going to think of us top of mind. But when someone becomes like us and we can do what we can do, convert them to book through a cheaper channel. But it’s really not the same issue for us, as it is for -- these are the hotels, which are essentially build entirely around short stay leisure business where that is very cannibalistic.

David Loeb

That’s very helpful. Thank you.

Gerry Lopez

Thank you.

Operator

Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question.

Shaun Kelley

Hi. Good morning, guys. You’ve covered a lot of ground on the call so just probably one on the future CapEx. I don’t want to steel any thunder from June but just as we move through the renovation cycle, can you just remind us on sort of where you sit for next year in terms of growth capital or renovation capital needs and what any of the other non-maintenance CapEx might need to be for in 2017?

Jonathan Halkyard

Hey Shaun. It’s Jonathan. We have at the end of the first quarter that we have advanced a little bit since then we had roughly a 120 hotels yet to renovate. We will complete about 80 of those by the end of the year. So that will leave 40 for us, roughly 35 to 40 for us to complete in the first quarter. So in 2017, we will have roughly $40 million of renovation capital and then I would expect somewhere around $90 million to $100 million of other capital, which would be maintenance and corporate capital, but will be a little bit less than this year because last year and this year we have been addressing some of the items kind of the longer lived assets in the portfolio. But that’s what we would have. It is possible that we could do some fast improvements in some of our hotels, some of our higher EBITDA hotels in 2017. But I think that’s probably unlikely. So, as we usually do, we will be providing guidance for 2017 CapEx early in 2017 but that hopefully gives you an idea of what lies ahead.

Shaun Kelley

That’s really helpful, Jonathan. Thanks. And then just the follow-up would be on -- as we think about I think your answer to an earlier question regarding some of the possible growth avenues including franchising. Just at a high level, are there start-up costs or things that we should think about that you guys need to kind of add into to just kind of expand into this as a new core competency or do you think these things are primarily things? Any of the different growth avenues you are looking at, or things that you can primarily leverage existing overhead without material, let’s call it operating expense movement?

Jonathan Halkyard

I will offer something and then invite Gerry to add to it. Our guidance for this year including our overhead expense guidance includes spending related to our growth plans and that includes things like architectural design fees, some customer research and brand research that we have been conducting as well as some capital investment to build prototype rooms and the like later on this year. So that is all included in the guidance. And I hope everybody will attend on June 2nd so they could see some of the fruits of that work. As it relates to any future expenses, maybe I will ask Gerry to comment a little bit on that.

Gerry Lopez

Yeah. We are still early in the aspiration, Shaun. What I would tell you is that as is our custom, we will be as transparent as we can be. We will identify those costs, those costs are standing up of the organization to support these initiative. The 2016 costs that we could foreseen back in October, November, when we put the plans of this year together are all baked in. Everything is included in the guidance. The guidance that we reaffirm for 2016 today is fully understanding and is all in there.

As to how we may manifest itself going forward, that’s part of what we hope to share with everyone on June 2nd. There are some skill sets that clearly we will need to add and we will do so. Some of that addition will be in the house. Some of it will be outsourced and contracted. Some of that will be one-time. Some of it will be ongoing. Your suspicions are probably all correct and that this is a new avenue of growth for us and with it will come some additional costs. But yeah, no doubt but if we didn’t think that we could get a return, we wouldn’t be doing it. And we will provide you with as much of transparency as we can and as we know -- as we not only [Indiscernible] as we go forward from there.

We are excited about it, their skill sets, their bodies will have to be added. A lot, however, I want to be clear. A lot of what we are intending to do, this management team has done elsewhere. So it will be new to Extended Stay. It will not be new to the team. We all come from places where franchisees are way of life, even if it’s that part of our experience that we obtain elsewhere. Does that help you, Shaun? Does that answer your question?

Shaun Kelley

That’s great. It’s plenty of color and look forward to hearing more in June, So, thank you very much.

Gerry Lopez

Excellent.

Operator

There are no further questions at this time. I would like to turn the call back over to Gerry Lopez for closing comments.

Gerry Lopez

Thank you, Michelle and thank you everyone for joining us this morning. We are pleased. We hope you can tell from our first quarter numbers and the results we will remain optimistic about 2016 and beyond. We look forward to speaking with all of you again at June 2nd, our investor day to be held in Manhattan at the Harvard Club. We will see you then. Have a good day.

Operator

This concludes today’s teleconference. Thank you for your participation. And you may disconnect your lines at this time.

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