Extended Stay America's (STAY) CEO Gerry Lopez on Q4 2016 Results - Earnings Call Transcript

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Extended Stay America, Inc. (NYSE:STAY) Q4 2016 Earnings Conference Call February 28, 2017 9:00 AM ET

Executives

Robert Ballew - Vice President, Investor Relations

Gerry Lopez - Chief Executive Officer

Jonathan Halkyard - Chief Financial Officer

Tom Bardenett - Chief Operating Officer

Analysts

Anthony Powell - Barclays

Shaun Kelley - Bank of America

Thomas Allen - Morgan Stanley

Chad Beynon - Macquarie Group

Stephen Grambling - Goldman Sachs

Chris Woronka - Deutsche Bank

Michael Bellisario - Baird

Operator

Greetings and welcome to the Extended Stay Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Robert Ballew, Vice President, Investor Relations for Extended Stay. Thank you. You may begin.

Robert Ballew

Good morning and welcome to Extended Stay America’s fourth quarter 2016 conference call. There is a fourth quarter earnings release and an accompanying presentation, are available on the Investor Relations portion of our website at esa.com, which you can access directly at aboutstay.com.

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

Before we begin today, I like to remind you that some of our discussions will contain forward-looking statements, including the discussion of our 2017 outlook. Actual results may differ materially from those indicated in the forward-looking statements. Forward-looking statements made today speak only as of today. The factors that could cause actual results to differ from those implied by the forward-looking statements are discussed in our Form 10-K filed with the SEC this morning.

In addition on today’s call, we will reference certain non-GAAP measures. More information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures are included in the earnings release and Form 10-K filed this morning with the SEC. Importantly, please note that unless otherwise stated all results commented on during this call reflect comparable hotel operating results.

With that, I will turn it over to Gerry.

Gerry Lopez

Thank you Rob, and thanks everyone for joining us early this morning to discuss our fourth quarter and full year 2016 results. As you can all imagine, we were very pleased with our fourth quarter performance, which exceeded the top end of our guidance and capped off a very strong financial performance for 2016.

The outstanding performance started at top line with our RevPAR for the fourth quarter growing a little better than 4%, or around a point better than the industry. The strong performance shows up throughout the rest of the P&L, with our operating teams skipping a lid on cost and delivering people digit flow-through, I could go on.

We have plenty to be proud of, but in the end the storyline of our fourth quarter is that above-average top line growth and tight operating disciplines combine to deliver our best quarterly adjusted EBITDA growth in three years.

It was not just a quarter that was strong as the full-year 2016 was a record year for the company in RevPAR, ADR, and adjusted EBITDA. In fact, our adjusted EBITDA results for 2016 were near the top end of our original guidance back last February. Yes, you heard that right, for all of the drama surrounding 2016, at the end of the day we came in at the high-end of our original guidance. What it means is that at a time of uncertainty in the industry, our guest [indiscernible] and our business model at safe harbor.

Our strong financial performance in 2016 allowed us to invest $225 million in CapEx during the year, including over $100 million in renovation capital as we near completion of this most important of initiatives over the last few years.

In 2016, we also returned $340 million to paired shareholders, mostly through dividends and share repurchases. This $340 million represents over $1.70 per share at the current number of shares outstanding or roughly 10% of our recent share price.

While we are investing in the business and returning significant capital to shareholders, we also manage to deliver the balance sheet down. In 2016, we paid down over $170 million in debt and completed the work we began in 2015 to refinance our entire balance sheet into long dated low-cost and flexible debt.

Combined, this adds up to around $735 million invested in CapEx, return to shareholders, and debt retiring just one year, which simply highlights the power of our operating model and its ability to generate free cash flow.

Now let me move on to some color and context about the quarter. As I mentioned a few minutes ago, we had strong RevPAR growth in the fourth quarter coming in at an increase of 4.1%. This was driven by a steady performance throughout the quarter with near 4% RevPAR growth in October and December, and just under 5% in November.

Our top performing regions continue to be in the south led by double-digit RevPAR growth in markets such as [indiscernible] Nashville, Jacksonville, and Charleston South Carolina. The West Coast hotels continue to rebound after early second quarter lows and grew RevPAR roughly in line with the company.

The East lagged the company by a couple of points, driven by softness in Boston, Baltimore, and Pittsburgh. Notably, 2016 was the first full-year benefiting from our investment in a centralized sales team and enhancements to our sales structure and processes help improve our focus and effectiveness throughout this last 12 months.

Throughout the year, we leveraged their efforts to get to the right business from our corporate clients into the right hotels at the right time, at the right price, and it worked. With business account revenue increasing through each quarter in 2016 and successfully shifting our guest mix in many markets to a more profitable blend.

Needless to say, we are pleased with our returns and results from this investment. We’ve built a strong foundation for our company this last five years and we’re seeing their results. It is not just a renovation. Out in the field, we have what we call Triangle teams: sales, operations, and revenue management.

Teams that are working together and are compensated together that we believe we only continue to grow in 2017. Their jobs are to generate demand, price it correctly, and serve it efficiently. This year, we will do that by focusing on specific vertical segment, the prime target for 2017 being healthcare, construction, and technology.

We did not fix these at random. We are ready to do substantial business in this segment and we are convinced that they will perform well for us over the long term. What we are and what we do is of high appeal to this guest and we believe that they can deliver a steady stable growth in the years ahead.

Now turning back to the fourth quarter of 2016, our adjusted EBITDA in the quarter grew 16.5% on hotel level flow-through of over 150%. The expense control measures we implemented in the second half of the year and we discussed since July have worked well. Some of these are one-time in savings in nature and others are expected to be ongoing.

The quarter’s strong numbers led to adjusted EBITDA of nearly $616 million for all of 2016, a 7.2% increase year-on-year, on roughly 70% flow-through and again well above the top end of our guidance from back in October.

While we focus on delivering financial results in the quarter and in 2016, we haven't lost sight of our growth initiatives that we announced last June. In the last couple of months, we’ve completed the value engineering work on our new prototypes and based on this work we feel very confident that we can deliver on new product types within the $85,000 to $95,000 per key construction cost that we discussed last year.

Along those lines, we expect to have between four and eight LOIs signed for land by the end of this year for our own development, including one or two in the next couple of months and potentially a handful of franchise deals signed by the end of the year. We expect the markets and return to these initial deals will be representative of the cost and returns that we expect for our sales and for our franchisees going forward.

We finished our leg work of developing our franchise offering, which will be both simpler than the complex fee models used by our competitors and the suspect less expenses reflecting the leaner business model for our hotels, and we will be ready to offer franchises in connection with the asset sales and new deals as market opportunities present themselves.

Lastly, we are actively staffing the asset in merchant and franchising teams we will need to execute in this next stage of Extended Stay's evolution. Turning to the overall industry, fourth quarter 2016 for the industry finished on a better note than many expected, with strong results in November lifting the quarter.

So far in 2017, we results from an industry seem fairly stable in the low single-digit RevPAR growth numbers. We believe recent limitations around international travel will have limited impact on the overall industry and any impact to be limited to certain urban core centers in the East and West Coast.

It’s worth noting that whether due to the potential travel restrictions or rising U.S. dollars. Extended Stay America has very limited travel exposure to urban core markets. Simply put, some of the circumstances affecting gateway cities have very limited impact on us.

Our biggest challenge in the first quarter frankly, is a 5% RevPAR growth that we enjoyed a year ago. It makes for a top overlap. With overall industry supply and economic growth expected to pick up only slightly in 2017 compared to 2016, we in turn expect that the industry to have a similar performance this year when compared to last year, that is to say we see low single-digit RevPAR growth in 2017, as well as the case in 2016.

The product growth forecast for the industry have remained stable with the vast majority of supply expected in the upper midscale, and upscale, chain scale. According to lodging the kind of metrics, economy, our chain scale, makes up 20% of hotel total supply, yet our chain scale represents only 5% or less of the forecasted industry supply growth in 2017 and 2018.

What it means is that our chain scale has supply growth rate of less than a quarter of the overall industry. To be clear, while the rest of the industry chases of upscale limited service or upper upscale business, we continue to focus on our unique guest in the economy segment that stay on average for almost a month and from what we believe we will see demand growth in the coming years.

In general, we are cautiously optimistic about the overall macro environment in 2017, and for the next couple of years, due to the potentially lower corporate taxes, incremental infrastructure spending, which generates construction related Extended Stay demand and the recent increases in reported consumer confidence.

Now turning specifically to Extended Stay in 2017, we remain committed to another strong financial performance year. Operationally, we will focus on the fundamentals of our guest experience. What we internally call clean, safe, and everything works. As we hope to turn and continue the positive momentum that was on 2016 would improve online reviews and net from order scores from our guest.

We aim to improve this, while keeping tight controls on expenses at the property level. This year, we will see a significant reduction in capital expenditures compared to 2016 as a result of completing our renovation program in the next couple of months. This, combined with reduced interest expense and high operating margins will yield significant free cash flow this year and again in 2018, even as we invest in ESA 2.0.

As such, there will be a heavy focus on capital returns and capital allocation, which Jonathan will discuss in detail in a few minutes. We also expect to make progress on ESA 2.0 with updates and announcements expected in each quarter of 2017. We will be making some modest overhead investments this year as we stand up our developmental organization. We expect to have seen all demands through tenants to support these efforts hired and in place within the next couple of months.

I will now turn the call over to Jonathan to provide more detail on our financial results, our capital allocation, and provide some commentary in our 2017 outlook. Jonathan?

Jonathan Halkyard

Thanks very much Gerry. We were very pleased with our strong performance and fiscal discipline in the fourth quarter and for the full year in 2016, and we certainly want to thank all of our colleagues here at Extended Stay for that performance. Our revenue for the quarter grew 4.2%, above the top end of our guidance range to $295.7 million.

Revenue for 2016 grew 4.4% to $1.27 billion. RevPAR increased 4.1% in the fourth quarter to $45.52, driven by ADR growth of 1.7% and an occupancy increase of 160 basis points. The increase in occupancy was aided by roughly 40 basis points from a decrease in rooms under renovation compared to the fourth quarter of 2015.

The increase in revenue in the fourth quarter came primarily from increased demand of shorter staying guests from OTAs as our revenue management system detected strong leisure demand all quarter, more than offsetting small declines in our 30 plus nice stay business.

However, the increase in OTA revenue did not increase our commission cost for the quarter, as we were able to improve our acquisition cost in this channel. RevPAR growth for 2016 was 3.9%, driven by an ADR increase of 3.4%, and an occupancy increase of 40 basis points.

So for the year, renovation destruction was approximately flat compared to 2015. Total company RevPAR grew 7.3% in 2016, driven by ADR growth of 6.8%, highlighting our improved asset quality brought about by the cross-line sale back in December of 2015.

Hotel operating margin expanded 430 basis points in the fourth quarter to 55.1% on 157% property level flow-through. The increase in hotel operating margin was driven by strong expense controls and a couple of one-time item. Real estate taxes in the quarter were $4 million lower than the prior year, due to successful appeals and lower-than-expected increases.

Room expenses were down 12%, during the fourth quarter, primarily due to tight expense controls and less usage of consumables by our guests during the quarter. Also aiding margin was $3 million decline in maintenance expense, compared to the fourth quarter of 2015. These declines though were partially offset by higher employee benefit cost.

For 2016, hotel operating margin increased 80 basis points to 55.1% for the year on 74% property level flow-through. Now while we certainly don't expect to have property flow-through over 100% every quarter, over the last two years, we’ve averaged approximately 80% property level flow-through, which we believe highlights our business model and operational discipline that have allowed significant margin expansion even with slightly slower RevPAR growth.

Corporate overhead expenses, excluding non-cash share-based compensation and secondary costs decreased 6.7% to $20.5 million in the fourth quarter. The decrease in corporate overhead was due to lower professional service fees, as well as reduced travel and entertainment expense.

Adjusted EBITDA increased 16.5% in the fourth quarter to $142.5 million, significantly above the top end of our guidance range. The growth in adjusted EBITDA was due to the strong revenue growth in property level flow-through. And for 2016, adjusted EBITDA increased 7.2% to $615.7 million, a new record for our company. This morning, we introduced the financial metrics, funds from operations and adjusted funds from operations or AFFO in our earnings release, in order to allow REIT focus investors to compare Extended Stay America more easily to other REIT.

In the fourth quarter, AFFO for the consolidated company was $80.5 million, compared to $66.8 million in the fourth quarter of 2015. AFFO per diluted paired share was $0.41 compared to $0.33 in the same period in 2015, an increase of 25%. For the entire year of 2016, AFFO was $359.3 million, compared to $338.9 million in 2015. AFFO per diluted paired share was $1.79, compared to $1.66 last year, an increase of 8%.

We believe our AFFO per diluted paired share growth and yield compare favorably to other option of REIT investors. Net interest expense during the quarter was $33.1 million, compared to $35.8 million in the fourth quarter of 2015. For 2016, net interest expense was $164.5 million, compared to $137.8 million in 2015.

Now the increase in interest expense for 2016 was due to debt extinguishment costs related to our refinancing activity in both the first and the third quarter. Our effective tax rate for the fourth quarter was 21.3% and was 17.4% for the full year of 2016.

Net income for the fourth quarter decreased to $30.1 million, due to a gain in the same period last year from the cross-line sale, as well as loss contribution from those properties and higher depreciation expense due to renovation. Net income for the year 2016 was $163.4 million. Our adjusted paired share income for paired share for the fourth quarter was $0.20, compared to $0.15 in the same quarter of 2015, an increase of 30%.

Adjusted paired share income increased 25% to $38.8 million. Adjusted paired share income for paired share for 2016 was $0.99 compared to $0.95 in 2015, and adjusted paired share income for 2016 was $199 million, compared to $194.7 million last year. Adjustments to paired share income are detailed in this morning's press release.

Capital expenditures for the fourth quarter were $58.9 million, including $25.7 million on renovation and $31.1 million in maintenance capital. During the quarter, we completed 37 hotel renovations bringing our total number of renovated hotels to 584 at year-end. We expect to be nearly complete with renovations by the time for next call in late April with a small handful carrying over until May.

Capital expenditures for 2016 totaled $225.3 million, slightly below the midpoint of our guidance. During the fourth quarter, the company repurchased approximately 4.8 million paired shares for $70.3 million. During the entire year, approximately 9.4 million paired shares were repurchased at an average cost of $14.86 per paired share for a total investment of $139.9 million.

These repurchases represented nearly 5% of shares outstanding at the beginning of 2016 and should provide a nice tailwind to earnings, free cash flow, and AFFO per paired share in 2017 and beyond.

During the first quarter of 2017, as of this morning, the company has repurchased about 600,000 paired shares for approximately $9.7 million. The company had $150.4 million in authorization remaining as of this morning. We ended the year with cash at $84.2 million.

Since the end of the year, we have reprised our $1.3 billion Term Loan B, which we expect to close tomorrow. This will reduce our interest expense on the Term Loan by 50 basis points and save us over $6 million in cash interest expense, annually.

In 2016, we paid down $171 million in debt and now have total debt outstanding of approximately $2.7 billion, including unamortized deferred financing cost and debt discount with an average maturity of 7.5 years. Upon completion of the reprising, our average cost of debt is approximately 4.4% with approximately two-thirds fixed, and one-third floating interest rate.

Our debt structure remains low cost, long dated, and flexible. Net debt was approximately $2.6 billion at the end of the quarter, and net debt to trailing 12-month adjusted EBITDA was 4.2 times. We expect to reduce this metric to approximately 3.5 times by the end of 2018.

This morning the Board of Directors of Extended Stay America Inc. and ESH Hospitality, Inc. declared cash distribution totaling $0.19 per paired share for the fourth quarter of 2016. These distributions include $0.15 per ESH Hospitality Class A and Class B common share, and $0.04 per Extended Stay America common share.

These distributions are payable on March 28, 2017 to shareholders of record as of March 14, 2017. As a reminder, ESH Hospitality expects to distribute approximately 100% of its taxable income.

Looking to 2017, we expect total revenue of $1.279 billion to $1.305 billion and RevPAR growth of 1% to 3%. We expect $620 million and $635 million in adjusted EBITDA. We expect the tax rate between 23% and 24% and net interest expense of approximately $130 million with net cash interest expense of approximately $120 million at current LIBOR levels.

We expect capital expenditures for the year to total $150 million to $180 million, which includes $30 million to $40 million and renovation capital in $10 million and $20 million on land acquisition and development capital. Our 2017 outlook does not reflect the announced hotel dispositions under contract, which we expect to close in the next three months, meaning the results of those hotels, are in our guidance; and our guidance assumes US GDP growth of approximately 2% for 2017.

Our free cash flow priorities for this year, including cash from our disposition begin with maintaining our current dividend and investing in our portfolio. After those, we believe share repurchases of today's trading levels represent a single best use of the company's free cash flow, as we believe our shares remain undervalued.

Despite our strong financial performance and balance sheet, as well as our high free cash flow, we currently trade at a two-turn discount to our peer set. Other capital priorities include potentially increasing the dividend this year. For the first quarter of 2017, we expect RevPAR growth of 0% to 2%, and adjusted EBITDA between $122 million and $127 million.

This outlook for the first quarter reflects a soft January, which say industry reported softness in both economy chain scale and especially in suburban markets were approximately 75% of our hotels are located, as well as comping against the tough first quarter in 2016 where our hotels grew RevPAR approximately 300 basis points faster than the economy chain scale.

We expect February RevPAR growth to be above January and March's outlook right now looks more reflective of the results that we saw in 2016. There will be minimal financial impact on our results if any from asset dispositions in the first quarter.

Lastly, Extended Stay will be participating at several upcoming industry events. Tomorrow we will be attending the JPMorgan Leverage Finance Conference in Miami, and later this week we will be at the JPMorgan Gaming, Lodging, Restaurant & Leisure conference in Las Vegas where our presentation will be webcast.

We can assure our other backing friends that we don't only attend JPMorgan Conferences. We will be at the Macquarie Consumer Conference on March 20 in New York City and on March 28 we will be attending the Morgan Stanley Consumer Access Conference also in New York City.

Operator, let’s now go to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Anthony Powell

Hi good morning everyone.

Gerry Lopez

Good morning, Anthony.

Anthony Powell

Quick question on the quarter, did you see any positive impact from Hurricane Matthew business in any of your regions?

Gerry Lopez

Very little, Anthony. We did get some in the south-east, but it was really very modest during the month of October. The month had plenty of momentum and they really manifested itself across the country, nicely. Matthew gave us a momentary lift and that was about it. So, rather modest I would call it.

Anthony Powell

Got it. Thank you. And just a broader question on potential infrastructure investment by the administration, have those plans changed to your view on restarting renovations say in 2018 or 2019 and how you are preparing for that potential boost to your business?

Gerry Lopez

It hasn't yet because we don't know any other details yet. We’re encouraged by what we hear. Couple of big questions of course out there regarding that which will be when, how much, and then of course where, but we haven't really baked any of those kind of forward-looking hopes into our projections. We don't traffic in hope in that manner. However, what we are doing to prepare is, a couple of different things Anthony, number one it’s a product type that we are developing for our new, for our new construction.

Many of the elements and many of the defined elements of that new product type, we are way into the process of figuring out how do we incorporate those back into the existing fleet. So we're not just going to strictly build new buildings that immediately obsolete the existing fleet, but we're going to look for ways to incorporate some of the amenities and some of the defined features of those new product types into the existing fleet, number one.

Number two, as we shape our investment strategy for land, clearly we are going to be focused on this guest segment that we serve so well for so many years that we think will be the beneficiary of a lot of that infrastructure spend. So, you will see us not shift gears and all of a sudden going to Urban or something that we are not now, you will see us continue to focus very, very strongly on that guest.

That’s why, during the prepared remarks I was very specifically focused on three segments, one of which is construction, because that we know we serve that guest segment really well and everything we do in terms of the new product type design, in terms of our site selection, even in terms of our operating procedures at the hotels as we [Audio Gap]

Operator

[Operator Instructions]

Gerry Lopez

We were talking about infrastructure needing some spending. So clearly - we got disconnected there, but Anthony I don’t know what was the last you heard, but the point that I was trying to make is, we are gearing not only our operating procedures as we reset them in the back half of the year, but our site selection and even our product type assigned into servicing the construction guest, which is one of our core segment.

Anthony Powell

Well I think I got a jest of it. Thank you.

Gerry Lopez

You bet.

Operator

Thank you. 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. I will just start with one for Jonathan and I apologize if I had missed this in the prepared remarks Jonathan, but as you give a, sort of your break down of CapEx for 2017 in terms of your outlook and break it out between growth and maintenance?

Jonathan Halkyard

Sure. Shaun, our maintenance or our CapEx guidance for 2017 includes $30 million to $40 million for renovation capital, and that’s simply the completion of the program, it includes about $90 million to $100 million in maintenance capital, which has been the zone that we have been spending over the past couple of years. And about $10 million to $20 million of corporate capital, which is usually in the IT area.

Shaun Kelley

Got it. So, we think that the land purchases pr anything you want to do for the franchising is going to be in addition to these budgets or is that contemplated in here too?

Jonathan Halkyard

Well it'll be, well both. It will be in addition to those numbers that I just described. In our guidance we are contemplating about $10 million to $20 million of development related to CapEx which will mostly be land purchases, but that is a number that is a bit speculative at this point, so each quarter we will just update that guidance, particularly, but I think it is a safe range.

Shaun Kelley

Okay, but to be clear the $10 million to $20 million is above the other three markets?

Jonathan Halkyard

Yes exactly. And I think it’s important to note that the $30 million to $40 million of renovation CapEx this coming year compares with $100 million in 2016. So, really does, I think demonstrate how the free cash flow of the business is going to improve nicely this year.

Shaun Kelley

Appreciate it. And then my follow up or sort of other question would just be, are you guys giving a lot of, some pretty good detail on to what you are seeing both for RevPAR trends and what you are expecting for the industry, but I guess, I was just curious on some of the January softness that you saw, anything you could drill down on that because I mean obviously we exited on a pretty strong trajectory relative to industry and industry seem to get a little bit of a bump in January, due to the inauguration, which probably didn't have as big of a benefit to your portfolio, but just kind of anything you are seeing in the consumer or the guest or kind of what - kind of why you think you saw that little soft patch?

Gerry Lopez

Shaun, I’ll start it and ask Jonathan and Tom who are here to pitch in, but you are exactly right, the inauguration kind of stopped the oxygen out, everything was about that and it kind of, obviously in scales and locations that are beyond our reach and know what we do, leisure, when it comes to the consumer, because you asked specifically, leisure frankly has continued strong, perhaps not as strong as we saw it in the fourth quarter because we were seeing some really, I mean obviously 30% kind of numbers in some of our leisure business in the fourth quarter, and it scaled back some, but it scaled back into the 20.

So it continues pretty strong. It’s on the corporate side that we are seeing some softness. And by softness I mean relative to prior of course a year ago it was growing at a double-digit cliff. So, it goes against that top overlap that we mentioned a couple of times. No particular surprises when it comes to the market mix. I'm not going to reveal any newness, when I tell you that South Texas, you know Houston in particular continues to be soft, nice bump around the Super Bowl short lived. And then some of the other markets that for us were somewhat softer in the fourth quarter have continued to be so into the first quarter, but no particular sign of weakness from the consumer at all, mostly on corporate and is deals little bit like people are keeping their powder dry more than anything else. No, detectable change in behavior that I can reasonably point to just yet. Jonathan, are you seeing anything different or Tom?

Jonathan Halkyard

No.

Gerry Lopez

Okay. Does that answer your question and Shaun?

Shaun Kelley

Yes, it is great. Really appreciate the kind of extra detail. Thanks guys.

Gerry Lopez

You bet.

Operator

Thank you. Our next question comes from the line of Harry Curtis with Nomura [ph]. Please proceed with your question.

Unidentified Analyst

Good morning everyone. Two quick questions, the first is, Jonathan can you just remind us what your target is for the possible proceeds of asset sales this year and can you give us a stance of what the multiple on trailing EBITDA range might look like?

Jonathan Halkyard

Well, are you talking about the asset sales that we have announced already or any ones that might come from the past that we described with the ESA 2.0?

Unidentified Analyst

Both.

Jonathan Halkyard

Okay. In terms of use of proceeds, our first priorities for those proceeds would be to use them in a way that’s tax efficient. So, if we can address any capital gain through the distribution of those proceeds to our paired shareholders that will be a top priority. After that, at these level, share repurchases are the second priority. I feel very…

Unidentified Analyst

I'm sorry. I think what I was after was, just a dollar amount that we might look forward to, I probably didn't ask the question very well.

Jonathan Halkyard

Okay, sorry I thought you were talking about priorities. The dollar amount of the asset sales that we have announced in Canada and in Austin, Texas is approximately US$100 million. I wouldn't want to commit at this point to additional asset sales this year, I think it’s possible, but when we described our path for asset sales, we described a five-year path over which time we would expect to dispose of approximately 150 hotels.

Our assumption in that was that we would sell them at a multiple of about nine times trailing EBITDA. I would expect that our threshold is going to be higher than that and that we would expect for those assets sales to occur to multiple premium to our trading multiple, which is right now 9.5 or 10 times.

Unidentified Analyst

Yes, okay. And then my second question is, you’ve had some higher mix of OTA business, can you talk about the impact that on your business because historically in the lodging industry it’s not necessarily positive to increase your OTA mix, is that different for you guys?

Gerry Lopez

Yes it is Harry. And I will start and Jonathan will join in, but we don't think of quite - of the OTA's quite the same way that perhaps some others do. For us OTA is both a distribution channel, but also a marketing channel. So, when we look at the relationship with them, first of all it is not nearly as confrontational or antagonistic as we may be for other companies in the lodging space. We work with them, frankly very well.

In the fourth quarter, we were able to drive the business while also holding the cost down, and that’s because we were able to shift some of our demand through the OTA distribution channel among some of the OTA players because we have that kind of relationship and that kind of flexibility.

Importantly, when we go into that channel, for us the way that we use it, and because of the way that our new RMS system enables our people to use it, to use that channel, we are winding up with ADR is that even after paying the commission, on average or at the average or above the average of our fleet, of our state, so we don't see the OTA channel, the way that others do because we don't see them coming through into our mix with a significant ADR discount that perhaps scares other folks.

For us, it actually comes in at the right price or even better and the demand presents itself a couple of days before arrival, so between the load management and the pricing and the fact that it’s not just distribution, but also marketing it’s a pretty good combo for us to work with.

Unidentified Analyst

That's helpful. Thank you very much.

Gerry Lopez

You bet.

Operator

Thank you. Our next question comes from the line of Thomas Allen with Morgan Stanley. Please proceed with your question.

Thomas Allen

Hi good morning. Can you just help us bridge your comparable RevPAR growth of 3.9% in 2016 to your 2017 guidance of 1% to 3%? Thank you.

Jonathan Halkyard

I’ll offer a couple of elements of the bridge, one is the leap year that we had, which is affecting the first quarter, I think on average probably over the course of the year that may be - going to be 50 basis points or so. Another element of the bridge is really just the way that we saw the first couple of months of this year come out a little bit slow for the reasons that we already described.

Beyond that, we see the year shaping up generally the way that last year did, but we try to go into the year with a bit of a conservative outlook and we’re here with January and February having been a little bit softer, so we’ve taken that into account in our guidance. I think our guidance last year at the beginning of the year was 2% to 4% RevPAR growth. We ended up getting towards the top end of that range or right at the top end to that range and so that’s pretty much the way we think about our guidance this year.

Gerry Lopez

We’re encouraged by a lot of what we year your and the energy that we feel that would detect out in our trips, in our hotel visit, but perhaps just little of it is concrete. And perhaps just little of it is real just yet. So, we are tempering our outlook with what’s real versus what is hopeful. And that’s why you see us land at 123 given, in fact we might expect to see the economy to do great. We are expecting it to do two points, right. So, which is kind of a trend with where it has been. So that’s why we land where we do as we temper the whole with the reality and we think it’s best to stick to that forecasting method.

Thomas Allen

And then just on renovations, should we assume that they hurt the first quarter and then benefit the third quarter, fourth quarter and then net out for the year, I mean how should we think about that. And then just my follow-up question on top of that just to throw it in there, is, are the fourth quarter EBITDA you guys be buy a lot, congratulations but where there any one time items, which the Extended Stay has made for 4Q 2017? Thank you.

Jonathan Halkyard

On the first question, the impact will be about even during the first and second quarter and then a benefit for the third and the fourth quarter as we wind down renovation this year when we - well of course have done last year, particularly in the fourth quarter, going to help us in the fourth quarter of 2017. On your second question, in our prepared remarks we called out two items that helped us this fourth quarter, one was just an extraordinary performance by our tax team in containing our real estate taxes, both through appeal, as well as the benefit of some lower assessment, so that contributed about a $4 million benefit towards to us in the fourth quarter. Some portion of that was in our guidance, but some of that it was not.

And the other was, maintenance costs were about $3 million lower than we had anticipated, that’s not uncommon, we have quarter-by-quarter, our maintenance cost will fluctuate, but, so that $7 million of benefit, now there were other things that went the other way of course, but those were two pretty significant help in the fourth quarter.

Thomas Allen

Helpful, thank you.

Jonathan Halkyard

Okay.

Operator

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

Chad Beynon

Great thanks for taking my question. Jonathan, just to carry on the back of that question, so your implied flow-through for 2017 EBITDA over revenue growth is in the high 40s, do we have low 50s, which is lower than what it has been, so is that lower implied flow-through really just a product of some of these one-timers or are you expecting higher real estate tax and insurance and company and personnel cost in 2017, above inflation? Thanks.

Jonathan Halkyard

Your math is certainly correct, and it’s two factors, one is we, we don't plan for some of the benefits and like I said the maintenance over the course of the year is going to be right on plan for us. Last year, I think it happened to be a bit high in the second quarter and we go a little bit lower in the fourth quarter, but we certainly, we try to be conservative on that front and then if we are forecasting or guiding to slightly lower RevPAR growth than that it makes it a bit more difficult to flow-through as highly as we might with higher RevPAR growth, but particularly in the back of the great performance in the fourth quarter we looked at, what we have done over the past three or four years and we have consistently flowed through 70% to 75% of revenue growth to the bottom line, but most of it is the impact of a lower, a slightly lower revenue guide, as well as being, I guess conservative of about some of the - on the cost side, and the one-time expense.

Tom Bardenett

We expect, just one final comment Chad, we expect cost this year to increase only 1% to 2.5% and that includes investments that we’re making and building our development team. So, we are really keeping the lid on expense growth and I’m comfortable we can do that while delivering as they clean everything or just because we continue to get better and better at the operations level delivering at lower cost.

Chad Beynon

Okay, thanks. That's helpful. Last follow-up is with respect to franchisee unit growth, you talked about some signings, your estimate by the end of the year, could you help us think about the timing to build and then just the rough number of units, may be some conversations you add and now let’s just kind of round out your 1 to 3 year plan on the franchisee growth?

Gerry Lopez

Not prepared to have to coming to any numbers you had because we are literally in the midst of conversation both with franchisees, as well as staffing up the team and in fact just last night one of the office we have extended to one of the team members got accepted. So we are still in the very early stage stages, we are proceeding very cautiously and deliberately as we build the team and as we entertain offers.

We announced, in the prepared remarks we made some comments about acquiring some land between four and eight LOIs and we think the handful of franchise agreements will be done. That will imply that perhaps, as early as 2018 we will have some new units operating that will be a push, it takes 16 months to 18 months to build the hotel from scratch, if it takes a day as you know, so we don't, we will be in a position to make announcements regarding some landmark and announcement regarding some franchise agreement, you know they may or may not include some asset sales, the truth is the units will expect will come online really in 2019. And that’s just construction timeline if it’s unencumbered by permits or any kind of delays on regulatory and on that front.

So, we are highly encouraged. Conversations at all this were all very positive. Frankly it is our own kind of deliberate progress on this that is slowing things down. We want to make sure that by the - when we hit the ground running, we do so well prepared and with an offer that is compelling both for the company and the franchisee group, not just having franchises in a kind of a scattered manner where people lose control of their assets, will lose control of the pace, and then you wake up two years from now and realize oh wow that wasn’t quite what we had in mind.

So, we’re in a, with the results being the way they are and uncertainty in the marketplace being what it is and enlist the bait as to where we are in the cycle, we are choosing to proceed with all deliberate caution rather than heading into the thing, head first with our regard to what the long-term applications may be. So does that help you?

Chad Beynon

Yes very much. Thank you very much and congrats on the quarter and the capital allocation.

Gerry Lopez

Thanks Chad.

Operator

Thank you. Our next question comes from the line of Joe Greff with JPMorgan. Please proceed with your question.

Unidentified Analyst

Good morning guys. This is Brent [ph] I’m on tour for Joe. How is RevPAR growth performance for the hotels that underwent platinum renovations two years ago, and what is contemplated in your 2017 RevPAR growth guidance for the hotel's that underwent renovations four months ago and what I’m trying to get at is just kind of the RevPAR premium you guys pencil in for hotels two years post-renovation.

Jonathan Halkyard

Our hotels that have undergone renovation in the past year and a quarter, year and a half, this past quarter grew RevPAR by 12%, about half of that was, a little more than half of it was rate and the rest was occupancy. So, and the whole renovated group of hotels in the fourth quarter, which is now the vast majority of our hotels grew over 5% RevPAR growth in the fourth quarter. And that includes that group of reasonably renovated hotels.

So needless to say, we are still feeling very good about our renovation program and its ability combined with the marketing of those hotels after they’re completed to drive renovation and you guys know our playbook is, once we renovate a hotel, we typically take rates are up about 10% through just price increases, as well as remixing the hotel. So for the relatively few hotels that remain to be renovated or under renovation our forecast for them is the same to grow RevPAR in the 10% range. So that’s the way that we, that's what we’ve been seeing and that’s the way we forecast these hotels.

Unidentified Analyst

Great. That's it from me.

Jonathan Halkyard

Thanks.

Operator

Thank you. Our next question comes from the line of Stephen Grambling with Goldman Sachs. Please proceed with your question.

Stephen Grambling

Hi thanks. As a follow up through the flow-through questions, you mentioned room expenses were down 12% in the fourth quarter yet you also continued to shift towards shorter night stays, what exactly are you doing to create these costs?

Tom Bardenett

So, we took some initiatives Stephen, this is Tom Bardenett, in regards to span a control we also - because of our proximity of our hotels, we have 70 hotels that actually fit in the same parking lot. So we are able to control expenses by having what we call multi-unit general managers and create Hispanic control of our district managers to travel across the country and then interact with our hotel.

In addition to, we really where very thoughtful in our approach on room expenses when it came to breakfast expenses, [indiscernible] and other things without taking too much away from the customer experience. As we predicted in Q3 and Q4, we did not clearly understand that RevPAR would be at the levels that we received on the leisure side.

So with those initiatives we felt very good about what we were able to do. And then as you know we always look at over time and things that we do on a regular basis and really tightened up the opportunities with our business model and felt very good about our flow-through and rooms, payroll, as well as expense.

Stephen Grambling

Thanks, that's helpful. And then I guess as a follow-up just changing gears, you mentioned the focus on healthcare construction and technology corporate accounts next year as being an opportunity can you just give us a little more color on how to seize the opportunity from tackling those segments? Thanks.

Gerry Lopez

Not really prepared to give you a lot of color on specific numbers and details, but what I can share is that those three segments are three largest for our corporate sales activities. And as we kind of scope out the landscape, they may perfect sense - perfect sense for us. We already have a variety of relationships established across those industries. Our hotels are well located either near health care centers or in the suburbs where a lot of the infrastructure will be required or where the people who will be handling the infrastructure in the urban core will be located during the projects, which really brings up the reason, kind of the underpinning reason for all of this.

As we understand our guest segments, and try to get it to them, more so every year that goes by. Two words jump out at it, one is projects and the other one is transition. And when it is healthcare, transitions pop-up because it’s not just the patients, but in many cases it is the caregiver on our folks who are undergoing treatment or folks who are in the profession, who are undergoing additional or retraining.

And the project size where the IT and the construction come in, because the project could be a bridge or hospital or building being put up, but if you are an IT, project could be and ERP implementation, or a new firewall or code that perhaps has been developed overseas that it is now going to be finished here in the onshore in the US.

The projects and transitions are really that things can kind of focus on work, our attention and as we look at these three channels they are clearly for a corporate work - at the top of the list. Getting into a lot of the details as to what percent of the mix they are, I will tell you that our corporate business is just under half of our business, in the high 40s and it is consistently so during the low and the high season, as it fluctuates from one part of the country to the other. So, these three are the most significant chunk - the most significant piece of that 40, call it 46% 48% of our business quarter-in, quarter-out.

Stephen Grambling

Okay that's helpful, thanks so much.

Gerry Lopez

You bet.

Operator

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

Chris Woronka

Hi good morning guys.

Gerry Lopez

Good morning.

Chris Woronka

Gerry want to ask you on the ancillary revenue opportunity, is that something where you have any new things on the agenda for 2017?

Gerry Lopez

We continue to focus on what we call other revenue. We have as you know the clean plus program, which continues to do well in spite of our standard offering now, we have chosen going into 2017 to focus on some very specific items. To be honest, guest laundry, pet fees and smoking fees are three biggest of the revenue contributors. We think that there is some opportunities there, particularly to drive convenience when it comes to the guest laundry and then it is distinguishing, or differing certain factors for a guest when it comes to the pets.

To be perfectly candid though Chris, at the end of the day we are, we are going to continue to be focused on room readiness. It is 98% plus, 97%, 98% of our business is where the biggest opportunities are. We look at the other revenue as a great source of just drugs right through to the bottom line, and we see it as a way to frankly service the guest and provide amenities that they need and they tell us they need and they want. It’s not going to be something that takes our focus away from the core business, which is the room. And that's what provides us frankly the kind of margins and the flow-throughs that you saw us achieve in 2016 and in the fourth quarter.

Chris Woronka

Sure, makes sense and just going back to kind of franchising the new prototype, I guess the two-part question, one is are you - do I recall that you guys are going to build one new prototype on balance sheet, and then the second part of that would be, do you think as you talk potential franchisees, are there any conversion opportunities out there or is that not something you're going to let them to?

Gerry Lopez

You’re remembering, about right. We're thinking that the first few, I think of the all-in-one, there may be two or three will be built on balance sheet number one because we want to prove out the concept. Number two, we suspect that most folks we know - that most folks that are going to want to build with us are going to want to see one or two done before they put their hotel capital at risk and that’s perfectly fine with us.

We know this prototype more than anybody else because we have been working on them for the better part of the year and a half. So, it won't be one, it will be probably a couple or three may be as many as four that we get going on before we see the franchisees starting to commit capital, number one. Number two - you know first part of your question. Second part of the question is, absolutely we see potential out there for some conversion.

The key amenity that keeps coming back to us in every piece of gas research and every piece of feedback and that we get from gas is the kitchen. So, the conversion opportunity is attractive and it is interesting, it is also somewhat limited because we're not going to start putting hotels into the banner that don't offer that key amenity. So, there are some opportunities out there, so I’m [indiscernible] those are in play. An opportunity that maybe just in the economy or the midscale segment wouldn't necessarily be in play unless it came with that kitchen. We’re going to be true to that element of that brand if nothing else.

Chris Woronka

Okay, very good, thanks Gerry.

Gerry Lopez

You bet.

Operator

Thank you. Our next question comes from the line of Michael Bellisario with Baird. Please proceed with your question.

Michael Bellisario

Good morning everyone, you guys compared results to the broader industry but wanted to dig down a little further and hoping you can give us the sense of your concert gains in both the fourth quarter in 2016 and how those trended as the year progress, so we can kind of see how your revenue management strategy in mix shifting or impacting growth, relative to the comp set in a more micro level?

Jonathan Halkyard

We outperformed the economy segment pretty much every quarter as we went through the year, and we have more detailed result market by market, which we don't report on, but generally what we have seen is an outperformance against the economy chain sale pretty much every quarter of 2016 with particular outperformance from the hotel that were renovated in each quarter. So, specifically we reported RevPAR growth of about 5% in the first quarter, 3.3% in the second, 3.7% in the third quarter, and now 4.1% in the fourth and in the first, third, and fourth quarters those were anywhere from 50 to 100 or even 300 basis points higher than the industry, and maybe 50 basis points to 70 basis points higher than the economy chain scale.

Michael Bellisario

I guess what I'm trying to get is, if you normalize for geography, if you are looking at a particular property in suburban or wonky for example, against its comp set, not comparing to the broader mid-scale or economy segment nationally that has impacted from geographic exposure and that’s kind of what I was trying to get at, can you provide any numbers on that?

Jonathan Halkyard

I mean no because we have - again we look at, as you would imagine every single asset, every district in region to, as to how it is comparing to its comp set, but other than looking at the portfolio as a whole, I’m not sure how to answer that question.

Gerry Lopez

It’s tough for us to triangulate between the economy and the extended stay. The true comps that doesn't really exist, so we try to put ourselves against the economy on the one side because we know you now on the lower half of the midscale, I would just kind of the change scale that we live, but then we try to triangulate what the other extended stay offerings are doing, even though the best LOIs that we can find them on those - among the comp side is less than a week and ours is close to a month.

So we have to, by almost necessary, go to broader geographic definitions, so that we can get good read and that’s what we’re reporting the way that we do rather than the individual Hotel against the individual, like the airport comp set, much near the airport, typically our hotels are the only ones offering this kind of product in the geographic they are located.

Jonathan Halkyard

And Michael the fact that where 50% of the midscale extended to STAY’s supply, very difficult to get a competitive set that has all of Extended Stay hotels in it. So that’s why we kind of look at the economy segment or in the area of two exits down where there is business that comes in for a week to a month, that’s where we really try to focus our attention.

Michael Bellisario

Yes, totally understand, perhaps just trying to normalize for geographic impact on that. And then secondly on the revenue management system upside from continued ramp, is there anything embedded in your 2017 guidance there and what you think the potential is for continued gains there, is that kind of laps the one-year of that introduction?

Jonathan Halkyard

The revenue management system has been in place now for about two years. We continue to improve in our use of the system and the skills of our revenue managers and using the system, it’s difficult to really disaggregate the impact that they are and that’s from the other parts of our business. I would say that our ability to really take advantage of what the OTA channels have offered us to drive RevPAR growth through increasing the mix of OTAs is absolutely a consequence of our revenue management system.

So our guidance for 2017, it does incorporate a continued improvement from the revenue management system, but as we get deeper into it, and it gets deeper into our aberration to still a bit more difficult to disaggregate it.

Michael Bellisario

Thank you very much.

Gerry Lopez

Thank you.

Operator

Thank you. Mr. Lopez, there are no further questions at this time. I’ll turn the floor back to you for final remarks.

Gerry Lopez

Thank you, Melissa. And thank you everyone for joining us this morning. We look forward to catching up with you at the various conferences that we’re planning to attend, and talking to you again in a group setting in April, when we get to report on our first quarter. Thank you again.

Operator

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

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