Extended Stay America, Inc.
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Greetings, and welcome to the Extended Stay America’s Fourth Quarter and Full Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rob Ballew, Vice President of Finance and Investor Relations. Please go ahead.

[Rob Ballew:]

Good morning and welcome to the Extended Stay America’s fourth quarter 2020 conference call. The 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 www.aboutstay.com. The accompanying presentation has supplemental data on recent trends and comparison to recent industry and segment results, as well as information about our 2021 strategic priorities.

[Bruce Haase:]

Thanks, Rob, and good morning, everyone. It’s a pleasure to be with you here today. As we report positive financial results during a very difficult lodging environment in 2020. While we are proud to report that extended Stay America significantly outperformed our competitive sets and our mid-scale extended stay competitors last year. We even more pleased to report that we have made significant progress executing on many of our long-term strategies during 2020. I’ll briefly cover the status of these strategic initiatives this morning. More now than ever, Extended Stay America is focused on maximizing the value of our dominant position in the extended stay segment to drive long-term value for our shareholders. We are a pure play in extended stay and I believe that is a significant competitive advantage. The extended stay segment business model is unique and the profit maximization strategies and tactics are materially different from other lodging segments. None of our competitors can match our experience in extended stay. The company’s marketing; distribution and operational resources are dedicated and optimized for the extended stay consumer. During 2020, the value of our focus on the segment together with our segment experienced management team was very evident in our financial performance. No one knows the needs of the extended stay traveler better than our management team, and our 7,500 associates all over the country.

[David Clarkson:]

Thank you, Bruce, and thank you to each of my ESA colleagues for their hard work and strong finish to the year. in the fourth quarter, comparable system-wide RevPAR declined 9.4% due to the COVID-19 pandemic compared to the same period in 2019, driven by a 7.3% decline in ADR, as well as a 170 basis point decline in occupancy. Our RevPAR index in the fourth quarter climbed to 140, a 40% increase. And as of last week, we have now seen a remarkable 65 consecutive weeks of RevPAR index gains. As we anticipated RevPAR was stronger year-over-year during the seasonally lower occupancy weeks in late November and December, and it was actually flat to slightly positive during the final three weeks of the year. The decrease in RevPAR during the fourth quarter was driven by a 43% decrease in nightly transient revenue and a 2% decrease in our weekly revenue, partially offset by a strong 18% increase in our monthly plus business. The strength in our 30 plus business was driven by a 21% increase in room nights. I’m pleased with the ADR trends for our monthly guests, which was down only 3% in Q4 compared to a 15% decline earlier in the pandemic. Consequently, we were able to be more aggressive increasing rates in many markets due to stronger occupancy. In fact, in each of our top 25 largest markets, we had positive index gains relative to our competitive set in both ADR and RevPAR. in total, revenue from our core extended stay guests increased 12% in the quarter highlighting the strength of our commercial engine, the effectiveness of our field sales team and the benefit of our unique focus on this segment of the industry. for the full year 2020, comparable system-wide RevPAR declined 15%, driven by an 11.6% decrease in ADR. revenue from third-party channels declined 40% during the quarter, predominantly from OTAs while revenue from ESA’s proprietary channels increased 4%. As Bruce highlighted, we are just beginning to realize the improvements from our commercial engine as we continue to execute on these initiatives, and there’s more and higher-rated sources of demand return we expect the impacts to continue to grow. We’ve talked a lot about the resiliency of our business model and rightly so, but we are not just a defensive play. We can and have outperformed in an up-cycle as well. Between 2009 and 2019 RevPAR for our portfolio of currently-owned hotels is up 69%, ahead of each of the chain scales up to and including upper upscale. hotel operating margin declined 580 basis points in the fourth quarter to 42.5%, compared to the same period in 2019, driven by the decline in RevPAR and flat comparable hotel operating expenses. Among our property expenses, we continue to see elevated levels of expense from guests’ non-payment and PPE for our field associates, as well as increases in property insurance, largely offset by decreases in marketing expense, namely OTA commissions and room expenses. hotel operating margin for the full year 2020 declined 730 basis points, the 44.5% highlighting that even during a global pandemic; we continue to maintain very high operating margins. Margins are much higher than the industry reports during normal times. corporate overhead expense, excluding share-based compensation was $20.1 million in the fourth quarter of 2020, down $6.7 million from the same period in 2019. adjusted for the CEO transition expense in the fourth quarter of 2019, net overhead decreased approximately $3.5 million this past quarter. adjusted EBITDA in the fourth quarter was $89.3 million above our expectations driven by stronger RevPAR and down from $108.8 million a year ago. The decline in adjusted EBITDA during the quarter compared to 2019 was driven by the decline in RevPAR partially offset by a decrease in corporate overhead expense. Adjusted EBITDA for the full year 2020 was $374.1 million, compared to $535 million in 2019, a decrease of 30%, which I think is remarkable given the industry in country backdrop. Net interest expense during the quarter decreased slightly by $0.3 million to $31.6 million compared to the same period in 2019 due to a lower LIBOR rate. the company had an income tax benefit of approximately $12.4 million in the fourth quarter, compared to a $1.4 million income tax expense in the same period of 2019. for the full year 2020, we had an income tax benefit of $24.5 million, compared to income tax expense of $29.3 million in the prior year. of note, while our cash and financial statement taxes are usually reasonably close in 2020 and 2021 that will not be the case. For example, despite booking an income tax benefit for 2020, we had a cash outlay for taxes during the year. and in 2021, while we expect our financial statement tax rate to return closer to our historical norm, and we expect to pay federal taxes on 2021 activity, we expect to receive a federal tax refund of between $70 million and $75 million in mid-2021. The anticipated federal tax refund is related to certain taxable losses in 2020 in the CARES Act loss carryback rules. This should result in a positive cash inflow from taxes for the year on a consolidated basis in 2021. we continue to monitor legislative activities to see if there will be any changes to 2020 or 2021 tax laws, which could affect our taxes this year or in future years. adjusted FFO per diluted paired share declined $0.01 in the fourth quarter to $0.36 per paired share compared to the same period in 2019. The decline in adjusted FFO per diluted paired share was driven by a decline in comparable system-wide RevPAR, partially offset by income tax benefit, decrease in corporate expenses and a reduction in paired shares outstanding. adjusted FFO per diluted paired share for the full year 2020 was a $1.24 compared to a $1.81 in 2019. the company had net income of $65.7 million during the fourth quarter compared to net income of $23.8 million in the same period of 2019. the increase in net income was driven by a $52.5 million gain on an asset sale, and income tax benefit and a decrease in corporate overhead, partially offset by a decline in RevPAR. the company had net income of $96.3 million for the full year 2020, compared to net income of $165.1 million for the full year 2019. adjusted paired share income per diluted paired share in the quarter was $0.16, an increase of $0.02 from the same period in 2019. the increase was due primarily from an income tax benefit, the decrease in corporate overhead and a reduction in paired shares outstanding, partially offset by a decrease in RevPAR. adjusted paired share income per diluted pair share for the full year 2020 was $0.37 compared to $0.95 in the same period in 2019. the company ended the fourth quarter with $410 million in cash and restricted cash, an increase of $14 million from the end of the third quarter and had total debt outstanding of approximately $2.7 billion. The company anticipates paying down its $50 million revolver at the C-Corp during the first half of 2021. Capital expenditures in the fourth quarter totaled $47.7 million, including $7.3 million for renovation capital and $13.9 million for new hotel development. for the full year, capital expenditures totaled $192.7 million, including $72.4 million of new hotel development and $20.9 million in renovations. at year-end, we had four owned hotels under construction with cost to complete between $10 million and $15 million. While the capital investment associated with our on balance sheet development is now nearly complete. The earnings from that investment will continue to ramp up, and provide a tailwind to our growth and revenue and EBITDA. In the fourth quarter, the company opened two hotels while our franchisees opened seven hotels. for the full year 2020, the company opened seven hotels while our franchisees open 10 for net unit growth of approximately 2.5%. Our total pipeline stood at 56 hotels at the end of 2020. the management team and the board is continue to frequently review capital returns to shareholders. As you may recall, we declared a special $0.35 per share dividend in December that was paid in January, making the total amount of capital declared or return to shareholders $140 million during the year. yesterday, the board of directors of ESH Hospitality, Inc. declared a $0.09 dividend per share payable on March 26, 2021, to Extended Stay America, Inc. and paired shareholders of record on March 12, which indicates and apply to annualized yield of approximately 2.25% well above our hotel peers. We continue to anticipate that our REIT will pay out close to 100% of its pretax income, including any gains on asset dispositions. We are pleased to be in a position to resume paying the meaningful dividend each quarter. The company did not repurchase any paired shares during the fourth quarter and continues to have a $101.1 million in authorization remaining. We expect share repurchases through at least the first half of 2021, to be limited as we invest in our company’s growth and we are mindful of our long-term net leverage target of between three and a half and four times. turning to the first quarter of 2021, we expect comparable system-wide RevPAR to decline by 3% to 6% compared to 2020, which corresponds to a 9% to 12% decrease compared to the first quarter of 2019. We expect adjusted EBITDA of between $78 million and $84 million in the quarter. in January, our RevPAR was down approximately 4%. as I mentioned, because of our higher current mix of long state business, our RevPAR change versus the prior year has been better in traditionally lower demand months, which was the case in January. And so while the year-over-year RevPAR decline will be larger in February, down in the range of 10% to 12% to our pre-pandemic levels. Our absolute RevPAR is increasing month-to-month, which I also expect to be the case in March. Like many of our peers, we are optimistic that recent progress with the development and rollout of COVID vaccines and declining COVID case counts will translate to increase economic activity, travel and lodging demand. However, given the uncertainty with respect to the timing and pace of this recovery, we don’t think full-year guidance for RevPAR, adjusted EBITDA or net income or warranted at this point. for the full year, we expect capital expenditures in the range of $155 million to $175 million. We expect net interest expense of between $126 million and $130 million, the tax rate between 10% and 12%, and depreciation expense that between $202 million and $207 million. operator, let’s now go to questions.

[Operator:]

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

[Chris Woronka:]

Hey, good morning, guys and thanks for all the details on the new, on the brand extension and such. my question is how the new brand, the premier suites might look from a margin perspective. Obviously, you’re expecting higher rates, and it seems as if the incremental ongoing expenses are not that different, you have breakfast and then maybe, a few other things, but how do you look at the margin potential of those of those assets?

[Bruce Haase:]

Sure. This is Bruce. I’ll start off. Thanks Chris, for your question. Just have a little background; we did a lot of research in putting this together. We did a lot of research on our brand and what was really – we knew the brand was strong. But I guess what surprised us a little bit is how strongest brands is at higher price points, really across the entire segment. We’ve got a lot of equity in terms of not just awareness, but in terms of trial, in terms of use, in terms of consideration. So, we really saw an opportunity to marry that strong brand with some white space. We see in the industry sort of between, where we sit today and we’re candle what is, which is a pretty wide gap and marry that up with the footprint of assets that we have in high RevPAR markets with good corporate demand. So that was sort of the thesis for putting this together, but you’re correct. In terms of designing the brand, we didn’t want to go too far. We want to innovate around our core and not become something that we’re not. So, we really very carefully, talk to B2B buyers, corporate accounts that help literally thousands of extended stay consumers and ask them what they really wanted and it came down to a really, a much more limited menu of amenities and services. We started out thinking; maybe, we have to have more common space or a breakfast room. but we found out that the customers that we were targeting really didn’t want that. they wanted upgraded bedding, they wanted a better breakfast, they wanted a better TV, they wanted a fresh, clean product. So that’s what we’re trying to deliver and we’ve leaguers, we have some assets now, which are we take is going to – are going to benefit from that new branding that are already meeting that criteria. The new branding is certainly going to help differentiate them from the rest of the estate. And you’re correct that the costs are minimal to flow through, the incremental flow through should be higher. And David, you can probably give some more color on how we’re thinking about that issue.

[David Clarkson:]

Yes. thanks and good morning, Chris. Yes. as you said, it’s – there will be some incremental expense associated with the amenities that we expect to offer a little bit of labor and breakfast are the primary adds there. We do think that the revenue will flow through at a higher rate than our existing margins, something in the 60% to 75% flow through range on that incremental revenue. So, it should expand margins by – I don’t know, somewhere between 200 basis points and 300 basis points at those properties, which get the Premier Suites brand.

[Chris Woronka:]

Okay. very helpful. And then as a follow-up, given that you put a lot more focus on the 30 plus nights stays in 2020 and rightfully. So, the question is how quickly can you pivot away from those, if you do see the transient some of the corporate and other transient demand coming back, I guess, to be more specific, what percentage of an average hotel is spoken for 30 days, 60 days, or 90 days out?

[Bruce Haase:]

Yes, sure. It’s – we’ve already begun pivoting from some of our very highly discounted rates. as we noted in the call, we are not at a point, where we’re still trying to reach for occupancy. We’ve pretty much gotten back to the pre-pandemic levels, and now, we’re taking the opportunity and we have actually for the last few months taking the opportunity to try to drive rate and we’re really not locked in. Every hotel is different, but in general, we’re not locked into long-term commitments at low rates that we can’t get out of and our revenue management function works on a market-by-market, a hotel-by-hotel basis to set those rates such that we can respond to improving demand environment, which you never see in some markets now. We’ve already taken off some of the highly discounted 60-day plus rates that we offered during the height of the pandemic to fill up our properties and we’ll continue to do so as we see demand improving.

[Chris Woronka:]

Okay. Very helpful. Thanks, guys and a terrific job in 2020.

[Bruce Haase:]

Thanks, Chris. Appreciate it.

[Operator:]

The next question is from a Joe Greff from JPMorgan. Please go ahead.

[Joe Greff:]

Good morning, guys. You kind of talked about this in a couple of different ways that I just wanted to simplify it maybe, further in terms of understanding your operating leverage as we go throughout the course of the year and how you’re thinking about one point of RevPAR sensitivity to EBITDA and profitability.

[Bruce Haase:]

David, would you like to take that one?

[David Clarkson:]

Sure. So, one point of RevPAR growth, generally equates to about $6 million to $8 million of incremental EBITDA for us on an annual basis. But that’s sort of incremental RevPAR growth on a year-over-year basis. Of course, there’s inflation with the – on the expense base. So, that same 1% of RevPAR growth to $6 million to $8 million of EBITDA doesn’t hold, but on an incremental basis, 1% of RevPAR is $6 million to $8 million in EBITDA.

[Joe Greff:]

Got it. And then just been picturing that, holding you to any kind of sort of guidance beyond the 1Q. But when you look at your portfolio and how the portfolio outperformed over the last 12 months, do you think you get back to 2019 RevPAR, absolute RevPAR levels in the second half of 2021? what would be the impediment for that to happen or not to happen rather?

[Bruce Haase:]

Well, I’ll start with and let David fill in some details. We do see an improving demand environment. Our occupancy is largely flat with last year, year-over-year ADR has consistently improved since the beginning of may. Looking at some of our proprietary channels, using our call center, for example, we continue to see year-over-year ADR growth for the last few months at our call center, we’re seeing monthly bookings up on a year-over-year basis. January bookings were a little bit ahead of our budget. So, we are seeing some improvements. We have a lot of initiatives as we described in the call with regard to our commercial engine, improving our call center productivity including our website. But we’re still operating in an environment where competing against transient hotels that are down substantially more than we do. So, we have to operate within that environment. I think to the extent that transient business comes back in the second half of the year, and it starts filling up some of those transient hotels with business that is not necessarily a good fit for us. the ADR environment could improve a bit and we could see some further upside from what we’re currently – what we’re currently, because I would hope conservatively budgeting internally. So, I don’t want to go too far out of limb, but I think there’s a shot of that. But it’s not something, we want to guide to at this point. but David, perhaps you have some more thoughts.

[David Clarkson:]

Yes. I mean, I think that, I think that answers it well.

[Joe Greff:]

thank you.

[Operator:]

The next question is from Smedes Rose from citigroup. please go ahead.

[Smedes Rose:]

Hi, thanks. I just wanted to ask for the Premier Suites and I think you announce several that are coming under construction or any of those on balance sheet, or those are all third-party developers.

[Bruce Haase:]

No. What we’re doing now is we have 32 hotels that are on balance sheet that are either new construction that are recently opened, new construction that are soon to be opened or existing hotels in our States that we have previously performed, we call it a transformational renovation on. So, the brands will be launched with those assets that are on our balance sheet. We have had discussions with franchisees and we expect additional growth going forward will be from the franchise community. There may be some repositionings from existing franchise assets as well, but we’re launching the brand with our assets and our capital in terms of the modest amounts required to change the signage.

[Smedes Rose:]

Okay. And then I just wanted to ask, and I know this is probably going back a few years. So, I may not be remembering correctly that if I recall extended stay launched kind of a multi-tiered renovation program, whether it’s like a platinum room renovation and a gold renovation, and they were supposed to kind of price, differentiate across different price points at various markets. And then the company had to pull back from that a little bit. And I guess my question is, we’ve seen in the past, it’s easy for – easier for brands to kind of work down into offering lower price point products. And it’s more difficult to offer higher price point products when you’re coming from a lower base. And just kind of, you talked a lot about the customer research, but I guess what kind of gives you confidence that you can introduce a product at such a significant premium to where you are now?

[Bruce Haase:]

Yes. well, I think, what we’ve already seen with some of the highly renovated product and the new builds that we have, they’re going to position into the brand. We are seeing even during the pandemic, we’re seeing positive performance in those hotels; we’re seeing rate performance improvements in those hotels. And we think the branding and our ability to differentiate those products with our sales force and through our distribution channels is going to continue to improve the performance. But we’re being very disciplined in how we look at it. We really have to – we’re looking at markets, where there’s sort of a cross-section of higher-rated corporate demand, higher RevPAR markets and product that we have that we believe will set the brand. So, we’re being disciplined about it. We’re being disciplined about the markets that we’re going after. And our commercial engine and our sales force is anxious for this, because they have been trying to price discriminate between assets of different quality within a single brand, which is very difficult to do. So, this really gives us – this branding really gives us permission – gives permission to our sales force to ask for more, it’s an easy way to explain to the consumer why it’s a better product, why they should pay more for it. And when we get customers into our distribution channels, into our website, into our call center, it gives another opportunity to sell a product that is more appropriate for a customer that wants something more. So, we’re not – as you said, we’re not reaching for an upscale or even an upper midscale, maybe slightly upper mid-scale segment, but we’re not reaching too far here. So, if we were going head-to-head against Town Place or some of those competitors of those price points, I would be sharing your concern. But I think this is an innovation closer to home that I think will be very successful.

[Smedes Rose:]

Okay. Thank you. I appreciate the detail.

[Bruce Haase:]

Thank you.

[Operator:]

Next question is from Brian Dobson from Jefferies. Please go ahead.

[Brian Dobson:]

Hi, good morning. I figured the goal of 5% to 7% net unit growth. I mean, that’s impressive that would place you at the high end of the peer group. Could you expand a little bit on how much of that growth could be driven by your new brand compared with the organic growth in your legacy product?

[Bruce Haase:]

Yes. I think our growth will be driven by franchising going forward. And if you look at our base of roughly 650 properties throughout the country, and a 5% to 7% translates into 30 to 40 executed franchise agreements per year. I think that is very doable. I think it’s even more doable now that we have a segmented approach to the market. We have – while it won’t be pure, we have a conversion brand and we have a new construction brand. I think that gives franchisees some more comfort that are developing with us. And once the credit markets continue as we said are continue to improve, and once we get to more of a stabilized environment, there’s no reason that this company can execute 30 to 45 franchise agreements per year. when I was at Woodspring, which was a unknown brand with a commercial engine that pales in comparison to what we had, we were close to those levels obviously, before it was acquired by choice and with the value proposition that we have at Extended Stay America and the power of this brand, I’m highly confident we can get to those levels over the course of the next couple of years.

[Brian Dobson:]

That’s great. And then just – I guess, looking in the rear view mirror at the fourth quarter, could you give us a little bit more color on the type of sequential RevPAR improvement that you saw during that quarter, and maybe, what you think the driver that’s control improvement was?

[Bruce Haase:]

David, would you like to take that please?

[David Clarkson:]

Sure. yes, so I think we’ve talked about this on each of the last couple of calls, but we’ve got certainly, a larger base of extended state business now than we had a year ago. And that was a big benefit to us in what are traditionally the lower demand weeks and months of the year. And so as we move through Q4, our RevPAR growth improved sequentially from down 13 to down 10 and then down 6; in January, was better still at down 4. now that we’re kind of entering the months, where typically, there’s more transient demand and RevPAR is picking up month-to-month. I think our year-over-year RevPAR growth will start going the other way a little bit; in February, expected to be in the down 10% to 12% range. So, it’s really been a story of long state business providing us a good base of occupancy. as we’ve moved through 2020, we were able to push rate more and more on each of our length of stay buckets and expect to be able to continue to do that as we move through 2021. But really, December and January have been the best months on a year-over-year basis, because of the copying against the lower demand period in the prior year.

[Brian Dobson:]

Great. Thanks very much.

[Bruce Haase:]

Thank you.

[Operator:]

The next question is from Michael Bellisario from Baird. Please go ahead.

[Michael Bellisario:]

Good morning, everyone.

[Bruce Haase:]

Good morning.

[Bruce Haase:]

Good morning.

[Michael Bellisario:]

Bruce, just back to the Premier Suites brand, how did you guys evaluate how big the white space was in terms of number of hotels? Because it sounds like it’s – that the brand has a little bit more market specific or market focused. So, how were you thinking about, is it a 100 hotels? Is this several hundred hotels? What’s really the longer term target or opportunity side for this particular brand?

[Bruce Haase:]

We’re not – we had certainly gone through our portfolio of REIT assets, which we continue to go through and sort of match up our product that we have in certain markets, where we think it will work very well in terms of the demand drivers and that’s certainly the opportunity set there for our own estate is substantial. Not that we will do all of them, because as I said, we’re going to be pretty disciplined in terms of capital and some of the underwritings might not work out as well as we think they will right now, but there’s a substantial portion of our own estate, which we think has the potential to be repositioned, should the numbers work out. And when we look at the segmentation opportunity and you look at the impact that we have with our existing estate, and if we can be successful, in separating the ADR and the customer mix between our existing state and the Premier Suites brand that opens up a lot more territory for development. So, we think it’s substantial minutes, the many hundreds, not the tens or the thirties.

[Michael Bellisario:]

Got it. That’s helpful. And then back to one of the prior questions, previously, the company, maybe even before your time on the board on again, off again, explored moving downstream for some of the lower quality properties. What’s your latest thinking there? Is this off the table for now?

[Bruce Haase:]

Yes. Well, it’s off the table for now. We’d looked at it. And that was to be quite honest that was a consideration that I thought warranted investigation when I first got here. But what we found was that our brand is so strong, those lower-tier properties actually disproportionately benefit from their association with us. So, the analysis that we went through was that we take the ESA brand off at some of those lower properties and make up another name performance is going to decrease. So, we’ve really taken a different approach. So, those lower-tier properties as we described in the call today, we’re really looking to create value from those lower-tier properties, not by rebranding of as something else that risk performance degradation, but through our disposal program. And that’s really where our asset disposition programs focused right now, it’s on that lower tier. And we think that we have an opportunity to create a lot of value, clean up the REIT portfolio, improve our RevPAR, improve the brand, improve franchise opportunities if we can really transact with that segment of the estate that isn’t a good fit for the brand. And fortunately, we think we have some opportunities to do that. They won’t be to lodging buyers. They’ll be to buyers that have alternative uses for the property, where we believe we can try to do accretive models. So long answer to your question, but yes, creating a down brand is off the table.

[Michael Bellisario:]

Thank you.

[Operator:]

The next question is from Dany Asad from Bank of America. Please go ahead.

[Dany Asad:]

Hey, good morning, everybody. Bruce, just to follow up on that last question. So, your strategy of maximizing the value of the REIT assets like has been working, but is the expectation going forward that you’ll be taking a bit more of an active approach with hiring brokers and all for these assets sales, or is it just because of the nature of these assets that you’ll rely more on as a one-off transactions and reverse equities, and going down there?

[Bruce Haase:]

Well, I think we go down – we’re going down both paths. We’re trying to be disciplined about how we do it. We do get a lot of inquiries. We have a lot of good relationships with brokers. We have a very talented Chief Investment Officer that’s that works for me that works on these dispositions every day and I think we have a lot of activity. We obviously closed in the fourth quarter, which was not a lower end asset. it was an asset that was what we call a value, such a large value to this location that it made sense to transact on that asset. But we’re really focusing; as I said on sort of this group of assets that we’ve identified that are generally, lower EBITDA per key. They probably won’t benefit as much from the improvements in the commercial launch in the higher CapEx requirements relative to their EBITDA than the rest of the estate and that’s where really focusing our activity. And we think obviously, if we sold those assets to hotel buyers, we would get sort of a market multiple for them, because franchisee is not going to pay more for those than what they’re worth as a hotel, but we believe there’s a number of pockets of demand in the real estate market right now, where we can transact those assets at substantially higher multiples than the overall trading multiple company and that’s really what we’re focused on there. We have a couple of them of such assets in terms of groups of assets under contract right now. hopefully, we’ll have one completion to announce before our next call. we have a number of other transactions that are in various stages of completion. So, there are multiple transactions and multiple opportunities that we’re pursuing now to make that happen.

[Dany Asad:]

Got it. And then just for my follow-up, I know it’s still early days, but do you have a sense for like of the owned assets, how much like either if it’s a mix or a number or any – give us any direction on like how many assets could be kind of fall into this bucket of opportunistic value creation, where like on a per key basis, they could be just trading differently than where it kind of the stock currently trades.

[Bruce Haase:]

Yes. That’s not something we’re comfortable in disclosing right now. I think I’ll leave it as we have multiple transactions consisting of multiple properties that are under either contract or in various stages of completion at this time.

[Dany Asad:]

Got it. Thank you.

[Bruce Haase:]

Thank you.

[Operator:]

The next question is from Stephen Grambling from Goldman Sachs. Please go ahead.

[Stephen Grambling:]

Hey, good morning. Apologies if I may ask to comment on this. but as you said, a lot of your peers have talked about cost cuts and better margins, as a result of the pandemic and some of the learnings and even when Bruce, you came in, you kind of alluded to some margin opportunities through some of the changes you were making in the business. Can you help us think through maybe, the longer term how the model is changing? How that could influence margins? And maybe, tie into that? I think you said in the opening remarks that your mix of OTAs was flat, how do you think about the distribution going forward and how that will input?

[Bruce Haase:]

Yes. I’ll let David answer more step up, yes, the mix of OTA is lower. I mean, that’s a substantial, I think, permanent margin improvement opportunity for us. Our relative proportion with OTAs is down in the 20s rather than sort of the high 30s to the 40s before when we were chasing that business before. But so I think not necessarily related to the pandemic, but it’s related to how we run the business. Our OTA business will be lower going forward, which is obviously, a very expensive channel, but I’ll let David expand on some of the other drivers of margin and costs.

[David Clarkson:]

Yes, sure. So, in 2020 and into 2021, there have been a handful of expenses that are quite a bit different as a result of the pandemic between breakfast, OTA commissions, as you mentioned higher cash credit expense from guests, non-paying, et cetera. So, I think long-term, we, unlike a lot of other more full service hotel companies, don’t have a lot of labor and other things, which we can cut to sort of change the operating model. Our labor is lean as it is with margins typically, above 50% at the hotel level and currently, above 40% in these sort of depressed RevPAR times, there’s not a lot for us to do to change the operating model or lean it out. You’ve hit on some of it with the OTA commissions. We don’t expect long-term to get back to an OTA contribution, similar to what we had in 2019. In 2019, 38% or so of our revenue was people staying one through six nights. That’s too much for us, that comes in often cases with OTA commissions that comes with more transactions at the front desk, that comes with higher usage of the breakfast, more housekeeping cleanings, et cetera. So, I think the opportunity for us is really to continue to focus on the extended stay customer and take that one to six down relative to where it was in 2019. Now, our current mix, it’s not where we’d like it to be either. We’ve got a suboptimal amount of 30 plus business in-house now. So, somewhere between where we were in 2019 and where we were in 2020, I think is optimal, but OTA commissions, some housekeeping costs are where I see there being benefits on the margin side relative to 2019.

[Stephen Grambling:]

And then maybe, an unrelated follow-up. As you were thinking about launching this brand, I guess, what was the feedback that you were hearing from corporate partners as you were thinking about this, because if I recall there was a moment in time, a couple of years ago before Bruce, you were in the COC, where there was some renovations going on to try to kind of, I guess, shorten the average length of stay and maybe, push up pricing?

[Bruce Haase:]

Yes. sure. I mean, we are very focused on sort of that corporate business is 7 to 29 day length of stay that is our bread and butter that is business that we’re very good at accommodating. It’s generally higher-rated business. And that is certainly, a part of the reason we are going after those customers with Premiere Suites. Our sales forces I mentioned, has been looking for a brand like this, something that is completely consistent, fresh, and new to attract those corporate clients. We spoke to a lot of BNB – B2B buyers, throughout the research process. And the feedback we got from them was not just similar to the feedback we got from direct consumers in terms of what they are looking for. So, I think, in terms of improving the productivity of our sales force, I think that is going to be huge. And I know that our marketing and our e-commerce and our distribution channel professionals are excited to be able to have more than one product to sell, so that we can sell the right products to the right customer.

[Stephen Grambling:]

Great. Thank you.

[Bruce Haase:]

Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back over to Bruce Haase for closing remarks.

[Bruce Haase:]

Great. Well, thanks everyone for your questions. We really appreciate your interest in the company. We’re obviously really pleased with our performance during the pandemic, but I hope you can tell we’re really excited about the future of this company. We’re really excited about the strategies we’ve unveiled today. We’re excited about our positioning and segment. We really feel like all these strategies really work together well for the long-term. We’re building a multi-brand platform in the extended stay segment. I think our asset and disposition strategies or renovation strategies fit well together with that. we continue to see a lot of upside in our commercial engines to drive better business to our properties at higher rates. All the while, we think we can continue as we said, that pay a market of well above market dividends and have other opportunities to return capital to shareholders since we pursued disposition. So again, thanks for your interest. David, Rob and I are always at your disposal and we look forward to follow-up conversations over the coming days. Thank you.

[Operator:]

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