La Quinta Holdings' (LQ) CEO Keith Cline on Q4 2016 Results - Earnings Call Transcript

| About: La Quinta (LQ)

La Quinta Holdings, Inc. (NYSE:LQ)

Q4 2016 Results Earnings Conference Call

February 28, 2017, 05:00 PM ET

Executives

Kristin Hays - Senior Vice President, Investor Relations and Corporate Communicatons

Keith Cline - President and Chief Executive Officer

James Forson - Executive Vice President and Chief Financial Officer

Analysts

Chris Woronka - Deutsche Bank

Thomas Allen - Morgan Stanley

Smedes Rose - Citigroup

Shaun Kelley - Bank of America

Jared Shojaian - Wolfe Research

Bill Crow - Raymond James

Operator

Good day, ladies and gentlemen, and thank you for your patience. You have joined La Quinta Holdings fourth quarter and full year 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Senior Vice President of Investor Relations, Ms. Kristin Hays. Ma’am, you may begin.

Kristin Hays

Thank you. Good afternoon. And welcome to La Quinta Holdings fourth quarter and full year 2016 earnings conference call. As a reminder, this presentation this afternoon includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflects the company’s current view of future events and financial performance.

Words such as guidance, outlook, expect, will, plan, anticipate, believe and other similar expressions identify forward-looking statement. Any such forward-looking statements are subject to risks and uncertainties and the company’s future results of operation could differ materially from historical results or current expectations.

For more details, please refer to the company’s annual report on Form 10-K for the year ended December 31, 2016 and other SEC filings.

In additions, in today’s remarks, we will refer to certain non-GAAP financial measures. You can find a reconciliation of the historical non-GAAP financial measures discussed in today’s call to the most comparable measures calculated and presented in accordance with GAAP in our earnings press release, which may be found in the Investor Relations section of our website at www.lq.com.

Please note that no portion of this presentation may be rebroadcast or rewritten in any form without the prior written consent of La Quinta.

For those listening after February 28, 2017, please note that this presentation will not be updated and it is possible that the information is no longer current.

With that, I will now turn the call over to our President and CEO, Keith Cline.

Keith Cline

Thank you, Kristin. Good afternoon and welcome to La Quinta’s fourth quarter and full year 2016 earnings conference call. Joining me today is Jim Forson, our Chief Financial Officer.

On the call today, we will review La Quinta’s fourth quarter and full year performance, our development activity, update you on our progress as we continue to execute on the strategic priorities and initiatives we laid out at the beginning of 2016 and introduce our outlook for 2017.

I would like to start today by taking a few moments to highlight all that we accomplished over the past year. Looking back, 2016 was a year significant investment at La Quinta. We invested in our people and our properties and in laying the foundation for the future of our brand.

We made these investments because we believe they will propel us forward and position La Quinta for long-term growth and we are already starting to see the benefits of our hard work.

Last year, once again, we demonstrated the many strengths of our business. For example, we grew system-wide comparable RevPAR by 1.8% in the fourth quarter with both our franchise and owned segments of the business posting positive RevPAR growth, we grew our franchised and other fee-based revenue 7.2% for the fourth quarter and 6.4% for the full year, continue to see significant positive movement in our net promoter scores especially at our owned Inns & Suites where we saw a double-digit improvement year-over-year.

In addition, our franchised properties continue to generate net promoter scores above the average of our competitive set. And we accelerated the recapture of market share with a 108 basis point improvement in RevPAR index in the fourth quarter. We firmly believe that the continued and increasing momentum in our guest satisfaction scores and market share growth are positive indicators that investments in our properties and the guest experience are starting to take hold.

Also, during the fourth quarter, we began our accelerated renovation of approximately 50 hotels, which we intend to reposition within their respective markets in order to drive enhanced revenue through our geographic reach, with 12 new franchise openings, while expanding our pipeline to 248 locations and continue to generate strong cash flow.

As evidenced by these successes, I'm extremely proud that we continue to make significant progress on our key strategic priorities and initiatives, of driving consistency in our product, driving consistency in the delivery of an outstanding guest experience and driving engagement with our brand by investing in points of differentiation.

Before walking you through additional details of our performance and progress on our strategic initiatives, I’ll update you on our development activities during the quarter. As I mentioned previously, we grew our footprint during the fourth quarter with the opening of 12 franchised hotels, totaling over 1,000 rooms. For the full year, we opened 41 franchised hotels.

It’s important to note that at year-end, several new franchised locations were on track to open, but experienced unexpected delays. As of today, six of those hotels have opened in 2017. For the full year, our open and operating franchised unit base grew 4%, while the development pipeline increased by 9%. We also signed 35 new franchise agreements in the fourth quarter, including key locations in Indianapolis and Seattle. These new agreements bring our total pipeline to 248 hotels and approximately 23,100 rooms at the end of the quarter, our highest level since 2008.

Our pipeline is geographically diverse, improves the quality of our brand portfolio as new hotels come online and continues to expand our distribution into higher RevPAR markets.

Some highlights of our current pipeline include approximately 60% are locations outside of our top three states of Texas, Florida and California; approximately 19% on our urban locations; approximately 90% are new construction; 11% represent international locations in Mexico and Central and South America, including locations in Chile, Colombia, Guatemala, El Salvador and Nicaragua.

La Quinta continues to have a unique growth opportunity compared to others in our competitive set. Given that our brand is not yet represented in nearly one-third of the STR market tracks and still has room to expand in many of the markets where we do have a presence.

In fact, our pipeline puts us into 52 new STR market tracks, leaving one quarter of the STR tracks completely open to new growth for the La Quinta brand.

And now, I’ll call out a few highlights from our Q4 and full-year 2016 performance. Our system-wide comparable RevPAR increased 1.8% in the fourth quarter and our full year comparable RevPAR was flat to last year. Excluding the impact of properties located in the STR defined oil tracks, RevPAR increased 2.9% in the fourth quarter, an impact of 110 basis points.

The impact of the pullback in oil production once again moderated in the fourth quarter, continuing the trend we saw throughout 2016 and would expect to continue into 2017.

We saw several markets deliver double-digit RevPAR growth during the fourth quarter. Markets such as West Texas, Southern Louisiana, Southern California, the research triangle of North Carolina, Indianapolis and Idaho. Offsetting these strong performers were a handful of markets such as southern New Mexico, Oklahoma and Houston, the last of which continued to see a significant increase in share despite a decline in RevPAR year-over-year.

Our adjusted EBITDA was $69.9 million for the fourth quarter and $360.4 million for the full year. Given the challenging demand environment, we continued to tightly manage expenses across the organization, while not losing sight of our strategic initiatives to invest in driving consistency of product and an outstanding guest experience.

And now for a bit more detail. At the core of our first key strategic priority, driving consistency in our product, is the ongoing review of our real estate assets with the belief that these assets will follow one of three potential paths. One, the property is appropriately positioned within its market; two, the property should be a part of a second wave of incremental renovations; or three, the property should be disposed of and/or removed from the La Quinta brand, opening the market to potential new franchise development.

Since we launched this strategy in the first quarter of 2016, we have exited 25 franchised properties from the brand. In addition, over 100 franchised properties have either undergone or begun a renovation.

On the owned side of our business, we have disposed of 19 owned properties in the last year and approximately 50 are undergoing a significant renovation in 2017.

By the close of 2017, this strategy will have meaningfully impacted over 20% of our hotels, by either removing them from the chain or by significantly improving the property through renovations.

For the approximately 50 owned hotels identified for significant renovation, our belief is that with the appropriate scope of capital investment, these assets will have the opportunity to reposition upwards within the market, capturing occupancy and additional rate, while being measured against new higher-quality competitive sets. We have continued to refine our plans to reintroduce these hotels in the respective markets. Our operations team will coordinate closely with the sales and marketing teams to ensure that these properties are appropriately positioned within their marketplaces with an eye towards driving higher rate and occupancy and delivering appropriate returns on our capital investment.

We sequenced the timing of these renovations in an attempt to minimize this displacement and maximize readiness for peak demand seasons. Under the current timeline, we expect the first wave of hotels to come out of renovation during the second quarter of this year, with the remainder completing through the third and fourth quarters.

Moving on to our second key strategic priority, driving consistency in the delivery of an outstanding guest experience. During the fourth quarter, we continued to build upon several important changes last year that we believe better align our owned hotels operations to deliver on this initiative.

To briefly recap these changes, we hired John Cantele as our Chief Operating Officer nearly one year ago. John brought extensive experience across all aspects of select service hotels, both managed and franchise, and has been instrumental in the execution of our strategic initiatives to date.

We’ve reorganized our field leadership team and separated the operations group into two divisions, one with responsibility for the inns and the other with responsibility for the inns and suites. We also deployed additional sales resources against each asset type. This alignment enables our teams to better operate and market each of our properties on a day-to-day basis to drive revenue and deliver an outstanding guest experience.

We deployed additional sales leaders in key markets to drive revenue and market share growth at a local level. This effort will be especially valuable when we’re repositioning assets after renovation.

And we invested time and capital at the local level to ensure that our general managers are equipped to deliver a consistent and outstanding guest experience.

As a company, we are better aligned and more focused than ever before.

While our net promoter scores have already significantly improved, we believe these investments in talent and leadership will build upon that momentum.

Turning to our third key strategic priority, driving engagement with the La Quinta brand. Last year, La Quinta Returns was ranked in the top five by U.S. News & World Report as the best travel rewards program. We have launched several exciting and innovative enhancements to the La Quinta Returns loyalty program that include new ways for La Quinta Returns members to engage with the program and our brand on a regular basis.

In addition, new programs such as Redeem Away, an industry first, and Instant Free Nights as well as thousands of aspirational travel hotel choices were added to La Quinta Returns loyalty program, so that our repeat guests get rewarded for their loyalty with outstanding features and benefits and new guests will be attracted to the La Quinta brand.

With these new programs, we are encouraging our members to engage with the brand more frequently and to be able to enjoy their benefits as soon as their first day with La Quinta. We have a great deal of work ahead and our team is energized and committed.

La Quinta has a strong history and a loyal customer base. We believe that our focused efforts and investments in our key strategic initiatives will drive value and we are encouraged by the early positive results we’re seeing.

With that, I’ll turn the call over to Jim to give you more details on the company’s financial results. Jim?

James Forson

Thanks, Keith. During the fourth quarter of 2016, total revenue was $222.6 million compared to $228.9 million in the prior-year fourth quarter. For the full year 2016, total revenue was $1.006 billion compared to $1.03 billion in 2015.

Contributing to these changes was the sale of 12 owned hotels during 2015 and 19 owned hotels during 2016. These hotels contributed room revenues of approximately $9.4 million in Q4 2015 and $27 million for the full year of 2015, which did not recur in 2016.

For the fourth quarter, system-wide comparable RevPAR increased 1.8% as compared to the prior-year quarter, driven by a 2.6% increase in comparable RevPAR at our franchised hotels and a 1% increase in comparable RevPAR in the owned hotel portfolio.

For the full year 2016, system-wide comparable RevPAR was flat to last year, driven by a 70 basis point increase in comparable RevPAR at our franchised hotels and a 70 basis point decrease in comparable RevPAR in the owned hotel portfolio.

As Keith mentioned earlier, excluding the STR defined oil tracks, our fourth quarter system-wide comparable RevPAR would have been up 2.9% from the prior-year fourth quarter, an overall impact of 110 basis points, continuing a trend of moderation of the overall impact of the STR oil tracks on our overall RevPAR results.

The RevPAR increase for our owned hotels in the fourth quarter was driven by a 3.1% increase in ADR, offset by a 127 basis point decline in occupancy. The RevPAR increase for our franchised hotels in the fourth quarter was driven by a 1.2% increase in ADR and an 86 basis point improvement in occupancy.

Total adjusted EBITDA for the fourth quarter was $69.9 million compared to $78 million in the prior-year fourth quarter. Total adjusted EBITDA for the full-year 2016 was $360.4 million, which compares to total adjusted EBITDA of $394 million for the full-year 2015.

Contributing to these changes was the sale of hotels in 2015 and 2016 that I mentioned earlier. These hotels contributed EBITDA of approximately $3 million in Q4 2015 and $8 million for the full year 2015, which did not recur in 2016.

Adjusted EBITDA also was impacted year-on-year by the elevated presence of OTAs in our channel mix and our investment in customer-facing areas in order to fully support our key strategic priority of consistently delivering an outstanding guest experience.

Despite the near-term pressure on EBITDA margins, these investments have begun to benefit our results as evidenced by the increased net promoter scores Keith mentioned. We continue to strongly believe that these near-term investments in the guest experience will result in greater customer satisfaction, loyalty, revenues and long-term profitability.

Total adjusted EBITDA margin for the fourth quarter was 31.4% compared to 34.1% in the prior-year fourth quarter. For the full-year 2016, total adjusted EBITDA margin was 35.8% versus 38.3% in 2015. The pressure on adjusted EBITDA margin was primarily a result of a difficult topline environment, as well as the expense items I just described.

For the fourth quarter of 2016, adjusted net income was approximately $900,000 compared to $11.3 million in the prior-year fourth quarter and GAAP net income was just below breakeven compared to $7.8 million in the prior-year fourth quarter.

Adjusted earnings per share for the fourth quarter of 2016 was $0.01 compared to the prior-year quarter at $0.09 per share. And GAAP earnings per share showed breakeven compared to $0.06 per share in the prior-year fourth quarter.

For the full year, adjusted net income was $58.3 million compared to $70.1 million in 2015. GAAP net loss for 2016 was $1.3 million compared to net income of $26.4 million in the prior year.

Adjusted earnings per share for 2016 was $0.49 per share compared to the prior year at $0.54 per share and GAAP loss was $0.01 per share compared to earnings per share of $0.20 in 2015.

It’s important to note that the Q4 and full-year 2016 net income and earnings per share amounts were negatively impacted by non-cash impairment charges associated with the identification and closing of the sales of owned hotel assets. These charges totaled $4 million in the fourth quarter and $104 million for the full year 2016.

With respect to our balance sheet, as of the end of the quarter, the ratio of our total debt less cash – or net debt – to our trailing 12-month adjusted EBITDA was approximately 4.3 times. We continue to believe that our flexible debt structure, strong cash flow and an undrawn revolving credit facility position us well to support our operations and the planned investments in our business.

For 2016, total capital expenditures were $144 million. As Keith discussed earlier, we have now begun renovations on approximately 50 hotels that we believe have the opportunity to reposition upwards within their local markets, with completion dates that are scheduled to occur throughout the second, third and fourth quarters of 2017.

Fourth quarter 2016 capital expenditures actualized lower than expected due to a shift in commencement date for some of the owned hotel renovations as a result of additional time needed for permitting as well as some intentional deferrals in order to minimize displacement.

We continue to expect the total incremental spend associated with these projects to be in a range of approximately $140 million to $160 million. Of this amount, $30 million occurred in 2016 and we currently expect the balance of this incremental amount to occur during 2017.

Turning to guidance. As we constructed our 2017 outlook, we considered several items, which will be different in 2017 versus 2016.

The most significant of these were: Our 2017 results will not include revenue or EBITDA from the 19 properties that were sold in 2016, as well as from the five properties held for sale at the end of 2016 after the close of those sales in 2017. These properties contributed revenues of approximately $29 million and EBITDA of approximately $9 million to our 2016 results.

2017 will include the full-year impact of expense increases experienced through 2016, including payroll costs due to competitive wage pressures, increased presence of OTAs in our channel mix, as well as investments we are making and the consistent delivery of an outstanding guest experience.

The benefit of certain positive insurance reserve adjustments and recoveries realized in 2016 that we do not expect to recur in 2017.

And finally, the fact that bonus payouts were once again below target in 2016, commensurate with our performance against bonus targets set at the beginning of the year. Our 2017 outlook contemplates bonus payouts at a normalized or target level of performance.

I will also point out that this outlook does not reflect the impact of any additional sales of owned hotels beyond the five assets that were held for sale on our balance sheet at the end of 2016.

With that, in 2017, we expect that system-wide comparable RevPAR change will be in a range of 0% to 2% and we expect total adjusted EBITDA to be in a range of $320 million to $340 million.

Now, I will turn the call back over to Keith for some closing comments.

Keith Cline

Thank you, Jim. As many of know, last month, we announced plans to pursue the separation of our owned real estate business from our franchise and management businesses. As we said, this could involve spinning out the company's owned real estate assets into a separate company where La Quinta Holdings, Inc., the current public traded company, would continue to remain the home of our franchising and management businesses.

We believe that such a separation could be the most logical next step as we continue to execute on our key strategic initiatives and create value for our stakeholders. We have made great strides over the past year and believe we are well-positioned to consider this opportunity which could further enhance the La Quinta brand.

We remain positive on the long-term growth attributes of the upper midscale and midscale segments of limited service as well as our ability to realize the benefits of the proactive steps we’re taking to enhance our brand. We also believe that this kind of strategic split could be the best path to maximizing return on investments in capital and people.

At this point, we cannot provide many additional details on the proposed separation transaction. Our team is working diligently on preparing the necessary Form 10 and we currently anticipate that a filing could occur early in the second quarter. The Form 10 would include historical and certain pro forma information around the strategy and the financial performance of our real estate business.

In the event that we move towards making this benefactive, it would be our intent to also provide similar information about the fee-based or opco business during an investor update.

I will close by saying that one of our biggest competitive advantages at La Quinta is our people, and all of our people are dedicated to delivering an outstanding guest experience. And we believe we’ve put the right leadership and right teams in place to propel our brand forward. I will take this opportunity to thank our thousands of employees for their hard work and dedication to La Quinta.

With that, we’ll open the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Our first question comes from the line of Chris Woronka of Deutsche Bank. Your question, please.

Chris Woronka

Hey, good afternoon, guys.

Keith Cline

Hey, Chris.

Chris Woronka

Just wanted to ask you about your expectations for unit growth, I guess, on the franchise side in 2017. I know sometimes in the past you’ve provided that with the initial guidance and didn't see it this time. So, any commentary there would be helpful.

Keith Cline

Sure. Obviously, for a period of time after going public, we guided development activity because we didn’t have a long history as a public company for the market to rely on for modeling purposes. Now, if you take a look backwards over the past couple of years, I think the market should have a pretty good read on the cadence of our openings. So, last year, we opened 41, hand a handful that slid for a variety of reasons including delays in getting occupancy certificates, as Jim had mentioned. As of today, six of those have opened and we anticipate several more to come.

And if you think about opening for the remainder of 2017, we would expect the cadence of those openings to be fairly consistent with prior years. So, I think we’re at a point where if you use the pipeline size at the year-end and the openings that occurred in the subsequent 12 months, that’s a pretty good relationship to use for the cadence of openings as we go forward.

Chris Woronka

Okay, thanks. That's helpful. And then, maybe we could drill a little bit deeper on the OTA mix, if you could just maybe give us a little more color on what changed throughout the year, whether that meant more third-party or opaque stuff and how you see that trending in 2017.

Keith Cline

Sure. If you think OTAs this year, what we did notice primarily in the second half of the year as the demand environment in lodging tightened up a bit. We did see incremental activity around marketing, the buying of branded and non-branded search terms by the OTAs to try to drive demand to their channels increased through the second half. As you know, the OTAs are giant marketing and technology organizations. So, as they shifted their spend in that digital space, we did see some shift, right? And if you think about that increased penetration in the OTAs as a percent of our channel mix, as Jim mentioned in prepared comments, it did have some impact and pressure on our adjusted EBITDA throughout the year.

And as we’ve consistently said, there’s really no free distribution channel out there. It’s all about increasing the effectiveness and efficiency of how we acquire customers at the lowest possible cost. And that really gets back to the cornerstone of the third strategy for our business, which is driving engagement in the brand through investing in points of differentiation. And we put a lot of effort around relaunching our loyalty program over the end of 2016 and early 2017 and we believe we’ve made the right kind of investments there to help bring customers directly to our brand in 2017.

Chris Woronka

Okay, very good. Thanks, guys.

James Forson

Thanks, Chris.

Operator

Thank you. Our next question comes from Thomas Allen of Morgan Stanley. Your line is open.

Thomas Allen

Can you help us think about the RevPAR and EBITDA disruption from the renovations we’re doing in 2017? Thanks.

James Forson

Yes. Thomas, so as we talked about, the work on these hotels that we’ve started began late in Q4 2016. We had a little bit of a slide in the start dates of some of them, which caused our CapEx to be a little bit under what we were previously thinking for Q4, but that will spill into 2017. We’re doing it during this time period in order to take advantage of naturally lower occupancy period, trying to minimize that displacement. We do a lot of other things to compress things, compress the time as much as possible, work on one floor at a time, touch each room only once, we do the lobby at the very end. We’re doing everything we can to remove the outward visibility that a renovation is going on.

But all that being said, based on current sequencing of the projects that we’ve got in place, we think that the impact of the system for the full year is probably in the neighborhood of 50 to 75 basis points.

Thomas Allen

That’s on RevPAR and then on…

James Forson

I’m sorry, you broke up, Thomas.

Thomas Allen

Sorry. That was on RevPAR. But then on EBITDA, is there going to be an EBITDA impact too?

James Forson

Certainly. Yeah, RevPAR displacement is going to translate to EBITDA. We’re estimating at the RevPAR level at this point, we can do the math to roll it through down to EBITDA based on assumptions.

Thomas Allen

Okay. And then, just thinking about the quarterly trajectory of RevPAR growth in 2017, any kind of one-time items that you want to highlight for us just to think about kind of 1Q versus 2Q versus 3Q versus 4Q would be helpful? Thank you.

Keith Cline

If you think about it, Thomas, the most significant impact of the strategy that we’re deploying is going to be felt by our owned hotels. That’s where a lot of the renovation work is occurring. So, we believe that as you make progress on this deployment, we’ll see performance at the owned hotels sequentially improve as we move through 2017.

Another wildcard for us is really demand in the oil tracks. And as we mentioned in the prepared comments, we’re continuing to see that demand stabilize and moderate. If that stabilization continues or even accelerates, it could provide us with some lift as the year moves on.

So, really, the things we’re watching closely that affect the cadence are renovations, which are going to impact the first half of the year and the sequential improvement in the oil markets as we move throughout 2017.

Thomas Allen

And any, like, data points you can highlight around oil market kind of stabilization? That would be helpful. Thank you.

James Forson

Yeah. So, in the fourth quarter, I think we called out the impact on the total system RevPAR was 110 basis points. As you know, that’s a sequential lessening of impact over the course of the year. I think Q3 was 120, so down to 110. Your expectation, as we come into 2017, we did start to hear anecdotally, coming from our sales team, more inbound calls coming from petrochem companies that we haven’t heard from in a while. So, some booking pick up there. And then rig count, which is, of course, a metric that we watch pretty closely since we’re dependent on production of oil, has actually been increasing over the past several months. So, we’re encouraged by that.

So, as we go through the year, assuming that trend continues, you would expect sequential improvement.

Thomas Allen

Thank you.

Keith Cline

Thanks, Thomas.

Operator

Thank you. The next question comes from Smedes Rose of Citi. Your line is open.

Smedes Rose

Hi, thanks. I just wanted to ask you on the oil impact as well. So, what was the RevPAR change for the markets that you carve out as oil related?

James Forson

For full-year?

Smedes Rose

Well, sure. How about for fourth quarter and for full-year?

James Forson

Well, in the fourth quarter, the impact was 110 basis points to the system. And then full year, I actually don’t have right in front of me, Smedes.

Keith Cline

So, if you’ve got another area, Jim can open those files up and get you the details on it. We provide [indiscernible].

Smedes Rose

Okay. So, you said 2.9 without the oil impact, 1.8 with it. I was just wondering what was the actual RevPAR change in the oil markets…

Keith Cline

Yeah. He’s just pulling those schedules up for you.

Smedes Rose

Okay. And my other question was, now that you've been rolling out on your pipeline for a couple years now since going public, what percent of your installed base now would you say is competing like in the midscale sector and then in the upper midscale sector and then the economy sector?

Keith Cline

Well, so as you think about the pipeline, the pipeline is all franchised, the pipeline is firmly upper midscale in terms of pricing and asset quality as is the open portion of our franchising business, which is roughly 60% of the chain. Now, if you go to our public filings, we do display in there the split between interior corridor and exterior corridor assets. So, with the 10-K that you’ll be seeing coming through, you can take a look at the asset summary there. And the presumption would be that, in most cases, exterior corridor is probably going to be a lower-priced market. So, the exterior corridor would primarily be made up of kind of lower midscale price points, and in some case economy. I don’t have the splits in front of me, but an overwhelming majority of the assets in our system are upper midscale priced.

Smedes Rose

And then, just finally, I know you’re not to going to give the pipeline outlook, but, I guess, we can kind of figure it out. But would you also look for a similar level of terminations in 2017 or would you expect those to start slowing down now?

Keith Cline

So, as we think about the strategy of driving product consistency, as I mentioned in the prepared comments, we had more than 20 franchised properties that left the system. And we resold those markets. I would assume, in 2017, a consistent number of franchised properties, as it sits today, to exit and resell those markets unless we come to a place where we could functionally agree with our franchise partners to reposition those. As of now, I would plan for a similar number of franchised properties to leave the system in 2017.

Smedes Rose

Great. Okay, thank you.

James Forson

And then, Smedes, back on your oil question, I got this massive file open. So just for point of reference, Q3, our system properties in STR oil markets were down about 11%; in Q4, it was down about 7%; and then full year was down about 12%.

Smedes Rose

Great, thank you. Appreciate it.

Keith Cline

Thanks, Smedes.

Operator

Thank you. Our next question comes from Shaun Kelley of Bank of America. Your question, please.

Shaun Kelley

Thanks. Keith, maybe to follow up on sort of that last line. Just wanted to think about the sort of the net unit growth impact that you’re seeing from the terminations or the system exits. So, could you just give us your sort of expected kind of total room growth for 2017? Have you given us that on a gross and net basis? And if not, can you?

Keith Cline

So, as we talked about, right, if you look at history as a good predictor of the future as it relates to our franchising business, I think 2016 growth is a good baseline to use because you see a mix of hotels on the franchise side coming out, markets being resold, you see assets coming out on the owned side of the business to drive product consistency. And in those cases – once again, in many cases, we’re reselling those markets as franchise units. I think you can take 2016 results and use that as a proxy for a good baseline assumption for 2017.

James Forson

And in 2016, I’ll point – you may remember in the press release, we do have a development paragraph in the press release where we try to give quite a bit of detail. And that was just 2016, not 2017. The 2016, on the activity of ins and outs in that regard.

Shaun Kelley

Okay, great. Appreciate that. And then, on – obviously, you had, I guess, what, five additional sales. I think this is the first time we’re hearing about. Can you give us a sense on pricing for those dispositions that you're able to get?

James Forson

Yeah. So, what I can tell you for the 19 hotels that we closed sales on in 2016, so you'll see castles in the cash flow statement, once the K comes across, proceeds of $71 million, revenue multiple is around 2.1. The EBITDA varied by asset, but most of it was falling in a range of eight to ten times.

Shaun Kelley

And is it directionally similar for the five that you are – I guess, not all of those are close, but a couple of them sounded like they directionally similar for what you have remaining?

James Forson

That’s fair, yes.

Shaun Kelley

Okay. And is the 9 million people of EBITDA – around that same – I think in the same remarks, you mentioned it was just $29 million of revenue and $9 million of EBITDA. Is that just for the five remaining or does that include the $19 million? And I could probably figure that out, but…

James Forson

Yeah. So, what I was trying to do was give you a read on anything that contributed to 2015 – well, you’re talking 2016 to 2017. Sorry, right. That contributed to 2016 that won't be there in 2017.

Shaun Kelley

So, that includes both the 19 and the 5.

James Forson

Got it.

Shaun Kelley

Okay, great. That’s it from me. Thank you very much.

Keith Cline

Thanks, Shaun.

Operator

Thank you. Our next question comes from Jared Shojaian of Wolfe Research. Your question please.

Jared Shojaian

Hi. Good afternoon. Thanks for taking my question. So, the fourth quarter RevPAR came in better than expected. Was that just mix related from eliminating the additional hotels? And then, if you're growing, say, 2% in fourth quarter on RevPAR, then the midpoint of your guide for 2017 assumes things get softer from here. Can you just help me think about that a little bit?

Keith Cline

So, obviously, in terms of Q4, right, fourth quarter was towards the higher end of our expectation despite the fact that we did have some continued pressure in the oil market. As we think about the cadence for RevPAR for 2017, as I mentioned, as we moved into late 2016, we are putting some hotels under renovation on the owned side, quite a few actually that will, in terms of a weighted impact on RevPAR, impact the first half a lot more than the second half. So, we would expect that our results in 2017, which show, versus the total guidance, an improvement throughout the year quarterly.

Jared Shojaian

Okay, thanks. And then if I can just follow up on the asset sale question. So, Jim, the $71 million in net proceeds implies somewhere around $30,000 per key on the sale. Is there anything unique about why we can't just extrapolate that out to the rest of your portfolio?

James Forson

Yeah. Actually – so, these assets that we’ve been removing from the system last year and the year before and even before that, these are really the lower performing assets in our system, the ones that we believe are not consistent with the La Quinta brand long-term. And so, I think to extrapolate that type of pricing to the rest of the fleet, it just – it wouldn’t work.

Keith Cline

It’s not representative. As we think – those things that we outlined around our asset strategy, i.e. the asset is properly positioned and just needs some renovations. Secondly, it could be eligible for a repositioning upward. Or third, it may not meet the future criteria for the brand and needs to be removed, right?

These assets fall into that third bucket. So, I think using them as a representation of the value of the brand on a per key basis would lead you to the wrong answer.

Jared Shojaian

Okay. And if I could just follow-up on that quickly, can give us a sense as to what markets these would be isolated to? Are they big urban markets, more rural markets, that would be helpful? Thanks.

Keith Cline

It’s pretty geographically diverse. It’s not any particular concentration in a state, in a market. The similarities would be age of asset, mostly exterior corridor. So, these are markets where the center of demand may have shifted over time and these are markets that we’d like to sell the asset, remove the flag and reopen those markets for a brand-new franchise location on the right street corner. So, it is geographically diverse.

Jared Shojaian

Okay, thank you.

Operator

Thank you. And our final question for the session comes from Bill Crow, Raymond James. Your line is open.

Bill Crow

Hey, good afternoon, guys. It feels like there’s a few more positives here, a little bit more will at your back. So, I want to dig in on a couple of topics. On the RevPAR growth outlook of 0% to 2%, how much – maybe you quantified this and I missed it, but how much impact from the construction and renovation disruption will there be?

James Forson

Yeah. Based on – I’m sorry, Bill. Go ahead.

Bill Crow

Go ahead, go ahead. I’m sorry.

James Forson

Based on the way we’re currently scheduling the projects out, we’re estimating the impact for the year to be in a range of 50 to 75 bps for the system as a whole. And as Keith mentioned, that'll be front-loaded because many of the projects are going on in the first half.

Keith Cline

And a larger impact on the owned. That’s on the system. So, as these relate to owned hotels, you’ll see a larger percent impact on owned.

Bill Crow

So, should we be happy with, let’s call it, 50 basis points to 2.5% or 75 basis points to – should we be happy with that number, given the relatively easy comps from a year ago and some of the tailwinds from the recovery? And then, how do you judge that number in the guidance?

Keith Cline

Obviously, we take a look at a lot of metrics in terms of setting overall expectations for the year, everything from GDP to consumer sentiment to business and leisure travel indices, credit card spending etc. So, as we all know, there’s a lot of variables at play.

When you look at demand in general and look at just business and leisure travel indices, they’ve generally trended downward over the past couple of years. And absent any kind of a catalyst on business and leisure demand, we would expect a little bit of that slope to continue.

Now, there are things you need La Quinta to provide a catalyst, things like the fact that we’re renovating – although there is displacement in the first half, but we expect some upside in the second half. Oil continues to be a unique catalyst for us as those markets continue to improve. And, obviously, we’re expectations that are fairly consistent with the overall demand environment that we’re experiencing and seeing not only with some of our competitors’ calls, but also the information that comes out of STR.

So, this, to me, feels very consistent. But I do believe there’s some unique catalyst to La Quinta as we move throughout the year and we need to see how these hotels come out of renovation in the second half.

Bill Crow

All right. That’s helpful. And the franchise business, not looking for a number here. We’ve kind of beaten that horse a little bit. But we’re really focused on some of the inflation that we’re seeing in the cost of build, cost of land and labor etc., etc. So, what are seeing from your franchisees’ perspective? How difficult is it to get new deals to pencil out in a flattish RevPAR growth, flattish ADR sort of environment with the inflation in the construction costs?

Keith Cline

That’s a great question. So, if you look at our business on the franchising side, when you think about the opportunity of partners to enter the La Quinta network, we continue to have a pretty unique position compared to our competitors, given the fact that we’re not fully penetrated in STR’s market tracks. In fact, we’re not in one-third. And if you think about our pipeline today, that puts us in another roughly 52 market tracks. So even post the opening of the entire pipeline, we’d still have about 25% of the US market tracks that are open for development. So, if you think the attractiveness of our space to consumers from a price value proposition and the attractiveness of the cash on cash returns, even despite increasing construction costs of the midscale, upper midscale select service space, it’s still very attractive for a developer.

Now, what we are hearing is that there is some tightening in the financing markets, right? People are offering lower LTVs, some personal guarantees etc. But we still feel that what we did in 2016 is at least directional with how we think 2017 could play out, even with some pressures on construction costs.

Bill Crow

Let me try one slight twist on that. How much cost inflation would there have to be before you kind of moved into a different competitive set? In other words, in order to make the numbers work, the ADR has to go up enough, so that your traditional brand competitors have changed and you're now going up against a different group of properties? Do you have runway here or are you challenged by that?

Keith Cline

No, we have runway. If you think about the average – and this is based on last year's franchise disclosure document, right? The average cost on a per room basis, absent land, to build an [indiscernible] roughly $85,000 per key excluding the cost of land. If you go and compare the FDD cost per room from many of our competitors in the upper midscale space, you’ll find that there is certainly some runway between us and several of our higher-priced competitors in this chain scale. So, I think the bigger impact on the slowing of the development environment is financing in the near-term. I think there’s runway from a cost of construction before we really butt up against any theoretical ceiling.

Bill Crow

Okay. That’s helpful. Thanks.

Keith Cline

Thanks, Bill.

Operator

Thank you. At this time, I’d like to turn the call over to management for any closing remarks.

Keith Cline

Well, great. Thank you for all of your time today. Certainly, we appreciate your ongoing interest in our brands and have a great day. Thank you.

Operator

Thank you, sir. And thank you, ladies and gentlemen, for your participants. That does conclude La Quinta Holdings Q4 2016. You may disconnect your lines at this time. Have a great day.

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