Extended Stay America, Inc.
Q1 2017 Earnings Call Transcript

Published: 27 Apr 2017

[Operator:]

Greetings and welcome to the Extended Stay America First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rob Ballew, Investor Relations for Extended Stay America. Please go ahead Sir.

[Robert Ballew:]

Good morning and welcome to Extended Stay America’s first quarter 2017 conference call. The first 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. Joining me on the call today are Gerry Lopez, Chief Executive Officer; Jonathan Halkyard, Chief Financial Officer; Jim Alderman, Executive Vice President and Chief Asset Merchant 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 on February 28, 2017. In addition, on today’s call, we'll 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 our Form 10-Q filed this morning with the SEC. With that, I will turn it over to Gerry.

[Gerry Lopez:]

Thanks Rob, and good morning, everyone. Thank you for joining us to discuss our first quarter 2017 results. If you had a chance to glance at our release from earlier today, by now you know we got off to a solid start this year. RevPAR was up 2.1% for the quarter, slightly above the top end of our guidance, driven by a strong March, continued outperformance in our South division and the resurgence in the North. All in all, we saw a number of markets around or about double-digit growth from Minneapolis to the Carolinas to Jacksonville Florida to Denver to Seattle. These help offset weakness in the Bay Area and LA. We are pleased by the 2.1% improvement because it overlaps a very strong 5% RevPAR growth a year ago for a combined 7.1% RevPAR growth over the two years. As RevPAR was increasing, our field teams kept a tight lead on expenses and delivered for the second quarter in a row, triple digit flow-through. Across all controllable and significant line items to the P&L our operators excelled. This highlight that even in a quarter with lower RevPAR growth than we're used to seeing and even when we lose a day of revenue in a quarter, we have the flexibility to expand market. Thanks to our lean operating model and our triangle team's flowless execution down to the individual property level. Combined, the RevPAR performance and right cost controls helped Q1 adjusted EBITDA come in at $129.6 million or $2.6 million above the top end of our guidance, 5.5% over last year. Adjusted FFO kept pace, actually did a bit better growing 6.8% over 2016. As all of you know, strong free cash flow was integral to the extended stay investment pieces and we're delivering against it. To be clear we think that when you pair up first our Q1 operating performance with two, our long-dated low interest expense and third, our reduced CapEx needs as renovations draw to a close if free cash flow story is compelling indeed, very compelling. Our Board agrees and this morning we raised our quarterly dividend by more than 10% to $0.21 per paired share, making it the third time in our three years as a public company that we've raised dividend. Add to it, our share repurchase program 11 million shares retired in the last 14 months were roughly 5% of our shares outstanding and I think you'll agree that capital returns to shareholders is not just the promise made, but a promise kept at Extended Stay. Turning to ESA 2.0, happy to report progress continues at pace. In fact, not all renovations are wrapping up and as further plan that we laid out last June, we work against ESA 2.0 is beginning to accelerate. In the last couple of months, we've begun to build teams in asset management, development and franchising, all reporting to Jim Alderman, now four months into his tenure at ESA. Jim and his crew have already signed five Letters of Intent or purchase sale agreements for a land to build our next new prototype hotel. We expect to begin construction at one or two sites perhaps as early as Q4 of this year and ramp-up in 2018 and '19. We expect to begin franchise sales in the second quarter of this year. As I said before, we believe our franchise and program fees to be very competitive and we expect our FBD and franchise agreement to be simpler to understand than the forms used by many of our competitors. The construction prototype designs that have been finalized and model rooms in our Charlotte Support Center that are up and running, we look forward to a lively NYU hospitality conference in June so that we can bring discussions with potential partners to the next level. After the many inquiries and primary conversations that we've had in the last nine months, we are very much looking forward to closing some deals later this year. Now turning to asset divestitures, we are on track to closing the three Canadian asset sales we've mentioned in earlier calls within the next few weeks. At current exchange rates, this is more than a $56 million transaction. Once it closes, we'll continue to manage our hotels for a fairly short period, but either way anticipate our hotels will leave our system by year's end. In Austin, the other transaction we previously called out for you, we now expect the entitlement process to take longer than anticipated, so the transaction will likely close in 2018. As this hotel is twice as profitable as our average property, we see this strictly as a timing matter and think the revised timeline may actually have the benefit of allowing us to plan for a 1031 transaction, thereby minimizing tax leakage. Lastly on divestitures, this quarter we expect to sell an additional hotel in Northeast this time for approximately 18 times trailing 12 months EBITDA. This property has not been renovated, it would have been our last and it is currently unbranded. Looking now at the overall industry, supply growth in economy and midscale continues to be muted at best, certainly below the industry's total. That industry total by the way, we see hovering near its long-term rather reasonable average of about 2%. While we and others are yet to see a big bump in corporate demand so far, this year, we remain optimistic that improved business confidence, increases in corporate earnings and potential constructor investments will lead to increased demand over the medium term. Given the nature of projects being talked about, we have Extended Stay very well positioned to capture this potential volume and are the same time, insulated from the pressures that we see in the urban gateway markets. Net, we continue to be cautiously optimistic about the overall macro environment in 2017 and the immediate years beyond. Lower corporate taxes and infrastructure spending whether public or private, spells projects and projects are what fuel our best business. Let me close by coming full circle to Extended Stay America. In the next few weeks, we will complete our renovation program all 600 plus hotels, a project begun 5.5 years ago. We will then take what we think is an 18 to 24-month break from renovations while we ramp ESA 2.0, selling, building, transacting and franchising assets. We can do this because we have a team to build the business model that is now optimized, resilient and enables our future. In that future, we will remain committed to a focus on fundamental with operating and financial, one enables the other. The free cash flow story is and will remain strong and the return of capital to shareholders is not only a promise made but a promise kept. Now let me turn the call over to Jonathan to give you more detail on our financial results and provide commentary on our Q2 and full-year 2017 outlook. Jonathan?

[Jonathan Halkyard:]

Thank you, Gerry. After a soft topline start to 2017, our revenue performance strengthened during the quarter. This combined with our fiscal discipline throughout the quarter, enabled ESA to deliver strong results yet again and we certainly want to thank all of our colleagues in operations, sales, revenue management and here at the headquarters for making this happen. RevPAR increased 2.1% in the first quarter to $45.76 slightly above the top end of our guidance range, driven by ADR growth of 0.8% and an occupancy increase of 90 basis points. The increase in occupancy was aided by roughly 25 basis points from a decrease in rooms under renovation compared to the first quarter of last year. The increase in RevPAR in the first quarter came from increased demand of shorter staying guests from OTAs, more than offsetting small declines in our 30-plus night stay and corporate business. However, the increase in OTA revenue did not increase our commission cost for the quarter, as we were able to improve our acquisition costs in this channel. Total revenues for the first quarter increased 1.2%, which includes the loss of a day from leap year last year, which impacted us in the quarter by about 1.1 percentage point. Room revenue increased 0.9% while other hotel revenue increased by 17.2% in the first quarter or an incremental $800,000 in revenue. Other revenue per occupied room increased $0.17 compared to first quarter of 2016 to a $1.18 and we believe there continue to be opportunities for significant growth in this category. Hotel operating margin expanded 210 basis points in the first quarter to 52.5% on 230% property level flow-through. During the quarter, we saw a decrease in amenity cost, maintenance expenses, reservation cost and utility expense. These declines were partially offset by higher labor costs, but overall, expenses per occupied room declined 3.3%. Corporate overhead expenses and excluding non-cash share-based compensation and secondary costs increased 4.9% to $23.2 million in the first quarter. The increase in overhead was due to an increase in consulting and professional services and adjusted EBITDA increased to 5.5% in the first quarter to $129.6 million above the top end of our guidance range. Adjusted FFO for the quarter increased 6.8% to $68.7 million compared to $64.3 million in the same period of 2016. Adjusted FFO per share increased 11.7% to $0.35. Net interest expense during the quarter was $33.6 million compared to $47 million in the first quarter of 2016. During the first quarter, we booked a non-cash impairment charge on asset sales held for sale of $12.4 million, primarily due to a decline in currency exchange rate of the Canadian dollar. Our income tax expense was $4.5 million compared to $2.9 million in the first quarter of 2016. Our effective tax rate for the first quarter was 21.8% compared to 16.4% in the same quarter last year and net income for the first quarter increased by $1.3 million or 8.9% to $16.1 million with higher hotel operating profit and lower interest expense, partially offset by an increase in depreciation expense, the impairment charge I just mentioned and higher taxes. Adjusted paired share income increased 10.6% to $28.5 million. Our adjusted paired share income per paired share for the first quarter was $0.15 compared to $0.13 in the same quarter of 2016 an increase of 15.7%. Adjustments to paired share income are detailed in this morning's press release. Capital expenditures for the first quarter totaled $48.4 million, including $21 million in renovation and $25.1 million in maintenance capital. During the quarter, we completed 24 hotel renovations, bringing our total number of renovated hotels to 608 at the end of the quarter. As Gerry mentioned earlier, we expect to have renovated all hotels within the next few weeks. This final phase, which we began in early 2016 we believe will ultimately come in roughly $15 million under budget, thanks to procurement savings and process improvement. In total, when completed we will invested approximately $628 million on 628 renovation, that's a $1 million per hotel. I can actually do the math myself on that or roughly about $9,000 per key. During the first quarter, the company repurchased and retired approximately 1.4 million paired shares for $23.1 million. Since commencing the repurchase program about a year ago, the company has repurchase and retired approximately 11 million paired shares at an average cost of $15.07 per paired share for $166.2 million. These repurchases represent over 5% of the shares outstanding at the beginning of 2016 and should provide a nice boost to earnings, free cash flow and adjusted FFO per share in 2017. We ended the quarter with unrestricted cash of $64.8 million, total debt outstanding including unamortized deferred financing costs was approximately $2.6 billion with a weighted average maturity of 7.3 years. We completed our term loan repricing in the first quarter and our weighted average cost of debt is now approximately 4.4% with roughly two thirds fixed and one third floating interest rate. Our debt structure is low cost, long dated and flexible. Net debt to trailing 12 month adjusted EBITDA was 4.1 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 and ESH Hospitality approved a 10.5% increase in our quarterly distribution to $0.21 per paired share. This marks the third year in a row as a public company we've increased our dividend by over 10% highlighting our commitment to shareholder returns and confident in our ability to deliver free cash flow. These distributions include $0.14 per ESH Hospitality Class A and Class B common share and $0.07 per Extended Stay America common share. The distributions are payable on May 25, 2017 to shareholders of record as of May 11, 2017. As a reminder, ESH Hospitality expects to distribute approximately 100% of its taxable income. We get many questions about our capital allocation and I believe this quarter has provided a really strong case study in that regard. ESH's free cash flow of over $120 million during the quarter allowed the company to invest $48 million in CapEx, paid $37.5 million in dividends to paired shareholders, repurchased $23 million in stock and reduced our debt outstanding by approximately $13 million. Let's talk about guidance. We are increasing our outlook for total revenues and adjusted EBITDA for 2017. We expect total revenues of $1.285 billion to $1.31 billion on RevPAR growth of 1.5% to 3.5% and between $625 million to $640 million in adjusted EBITDA. We still expect the tax rate between 23% and 24%. We expect net interest expense of approximately $130 million with net cash interest expense of approximately $120 million. We expect capital expenditures for 2017 to total $150 million to $180 million, which includes $30 million to $40 million in renovation capital and $10 million to $20 million in land acquisitions and development capital. Our 2017 outlook does not reflect pending asset disposition. If these pending dispositions are complete in the second quarter as we expect it would lower our expectation for 2017 revenue by $7 million to $8 million and adjusted EBITDA by $3 million to $3.5 million, but would have minimal impact if any on RevPAR. For the second quarter of 2017, we are forecasting an acceleration of revenue growth compared to the first quarter and continued strong earnings growth. We expect RevPAR growth of 2% to 4% and adjusted EBITDA of between $170 million and $175 million, representing growth of approximately 3.5% to 6.5%. This outlook for the second quarter reflects a negative impact of Easter shifting into April and the benefit from lower renovation disruption beginning in May that will continue into the first half of 2018. There should be minimal impact on operating results from asset dispositions in the second quarter. Operator, let's now go to questions.

[Operator:]

Thank you. We'll now be conducting a question-and-answer session. [Operator instructions] Our first question today is coming from Anthony Powell from Barclays. Your line is now live.

[Anthony Powell:]

Hi. Good morning, everyone.

[Gerry Lopez:]

Good morning, Anthony.

[Anthony Powell:]

Good morning. A question on your customer mix, you mentioned that your OTA business was up, corporate was down, did that change throughout the quarter meaning did you see more corporate business in March than in January?

[Gerry Lopez:]

Not really Anthony. It fairly consistent. The year started soft, somewhat more driven by the holiday spell and the corporate business, not really waking up to the fact that it was in the year until the middle of the month, but by the end of the quarter, there was no other than that one anomaly to start the year. There wasn’t really any significant huge shifts that we noticed based on one month versus the other and one channel versus the other. It was it was a fairly consistent build business and then March was really a great month for us and that trend has kind of continued. So that's why you see the guidance laying out the way that it did. But it was -- overall that patterns of business and the sources of business did not really shift in any significant -- in a significant way. Once you start looking at three and four week blocks rather than individual days.

[Anthony Powell:]

Got it. So, I guess your RevPAR guidance increase of 50 basis points, is that due to I guess stronger OTA results or do you anticipate more corporate demand later on in the year?

[Jonathan Halkyard:]

Hey Anthony it's Jonathan, it really reflects the fact that our revenue performance has been accelerating through the first quarter and we've seen that continue into April. So, it's a modest increase in the overall RevPAR growth guidance for the year, but it really just reflect the trends we've seen over the last 60 days and what we're seeing in the coming 60 days, plus of course our confident around the conclusion of the renovation program and the performance of the newly renovated hotels.

[Anthony Powell:]

All right. Great. That's it for me. Thank you.

[Gerry Lopez:]

Thanks Anthony.

[Operator:]

Thank you. Our next question today is coming from Chris Woronka from Deutsche Bank. Please proceed with your question.

[Chris Woronka:]

Hey. Good morning, guys. Gerry, you mentioned the lower distribution cost than in the quarter despite more OTA business. Can you maybe elaborate a little bit more on that and just what's your outlook for that going forward? Is that a trend that we would expect to continue?

[Gerry Lopez:]

Yeah, I think it's a trend that you can expect will continue in a way that we started the first quarter. It's been driven by some accounting changes in the way that the business is showing up in the hotels whether it is net pay at the hotel, whether it is being handled through the web. It is also the product of pretty concerted, pretty significant effort by our revenue management and our marketing teams working with the OTAs. For us I suppose to perhaps a lot of the other players in the industry, OTAs are our friend. Their revenue management system and discipline that we've installed over the last year and a half now, have allowed us to be very nimble. On a property by property basis, we can allow the OTA business to filling blank and to filling blocks and rooms that otherwise would have gone unused and the pricing of that OTA business winds up even after commissions paid and etcetera winds up being net accretive to us to our P&L, particularly when you think of the OTA not just as a distribution channel, but as a marketing channel as well. In many cases for these guests that come to us through that distribution channel, this is the first time that they’ve stayed at one of our hotels. So, it winds up being both marketing and distribution. When you consider that, the OTA channel for us winds up being number one very efficient and number two very accretive. So, we welcome that business and our market activity reflects it and they know it and we know it and the guests know it and it works out for all of us.

[Chris Woronka:]

Thanks. That's great color and then on the ESA 2.0, I guess you have some moving pieces coming down later this year with a few asset sales and maybe starting in to develop a few hotels. How should we think about the pacing of that heading into next year and beyond in terms of your initial franchise sales?

[Gerry Lopez:]

I think that the pacing that you can bake in a little bit is that we will file an FBD later on this quarter. We will then at the NYU Conference in early June, really sit down and begin having subsequent conversations with any number of partners with whom we've had preliminary conversations for the last, things like the last nine months. You'll see us do some franchising deals. We anticipate in the second half of the year likely that that will be back end loaded just because of the time that it takes to do some of these things. You will see us in parallel to the franchising also acquire one or two pieces of land and perhaps even begin construction. That's perhaps the easiest part of it all because construction requires permits and every jurisdiction out there has different requirements for that, but certainly the land purchases you can anticipate a couple of those. So, this schedule that I just laid out it's a schedule that we discussed last June. The big hurdles where the wrap-up of the renovation program we're literally within weeks of doing that. Then just starting up of the teams. We have now done that. The capital is ample and has been allocated and preapproved by the Board. So, we're ready to go there. The FBD filing is a prerequisite. Frankly it's been ready to go. We've been waiting for the team to be staffed so that the people who are going to be selling their franchises have some ownership of what the product that they're going to be presenting to partners. So, all of these -- all of these things are now beginning to intersect and we think that the pace which has been mostly in background work, the last call it six nine months now the next six to nine months begins to accelerate and begins to be real and bear some fruit. I think that the true impact will begin to show up frankly in '18. This year it's still going to be a lot of early on work in the [1Cs and 2Cs] and is really into '18 and '19 that you'll see us then start doing some more bulk deals. That's the way it looks you look at the moment. Now Jim Alderman is here with us. Jim anything you would add or correct me or keep me on.

[Jim Alderman:]

Well I don't have to correct the boss, but I will build on really what is an amazing amount of un-waived really unaided awareness that we're getting out of the -- out of the franchising and investor community. I wouldn't necessarily say it's all 100% franchise interest. There are a lot of people who look at the margins that we operate and have approached us making the decision to want to build some of these on their own and even potentially have us manage them, which is a little bit of a twist, but we are the experts of this and I think that those two efforts combined, where we feel good about the Investor Day information that was last June, feel good about really hitting the goals that are in that?

[Gerry Lopez:]

Does that answer your question Chris?

[Chris Woronka:]

Yeah, that's great. Thanks very much.

[Gerry Lopez:]

You bet.

[Operator:]

Thank you. Our next question today is coming from Shaun Kelley from Bank of America. Please proceed with your question.

[Shaun Kelley:]

Hi. Good morning, guys and I apologize I missed maybe a couple of the prepared remarks. I hopefully I'm not making you repeat anything, but Gerry just looking at the hotel operating expenses, I know you called out some changes in your channel mix that may have impacted things, but what's the single biggest bucket of what drove the operating expense decline at the hotel level in the quarter?

[Gerry Lopez:]

The two biggest buckets no surprise are labor and maintenance, our operators and that's we called out in the prepared remarks both Jonathan and I did have really -- have really exceled at keeping a lid on costs, being very efficient with the per occupied room cost across the entire operation being very efficient on the overtime hours and so on and being very good and very proactive about staffing the hotel to the anticipated lows that the hotel is going to face. That's one of the benefits of this revenue management system that we rarely talk about and that is you can predict the low couple three days out half a week, a week out and that allows for use staffing level to really match your load a lot closer and that allows our operators to really keep a tight lead on cost. The maintenance is also being pretty good, a lot of it having to do with the fact that of course the vast majority of the hotels are now being recently renovated. Some of the early ones, perhaps four or five years, but the bulk of hotels were renovated a year or two ago and of course renovating a hotel requires somewhat less maintenance. Those were really the two starts. Jonathan am I leaving anything out?

[Jonathan Halkyard:]

Well, I do want to point out that everybody on the call probably remembers that in the fourth quarter, we had a very strong performance on the cost side as well now. There were a couple of items that were a bit unusual in the fourth quarter and we called those out. This quarter was different. This quarter was just solid cost performance across the Board and I think not only from the diligence of the operators, but benefiting from some investments that we've made. People don't appreciate all the time that the second or third largest cost category in our P&L is utility, but we've been allocating capital over the last couple of years in our heating-cooling units as well as our bathroom fixtures and we are really -- we've seen the benefit of that in our utility costs, which isn’t that effective but it makes a big difference in our margin. So, this is probably the best cost performance we've had this quarter since I've been at the company and that's one of the reasons we also have the confidence to improve our adjusted EBITDA guidance for the year.

[Shaun Kelley:]

And Jonathan to follow-up on that and I think that that's really impressive and I appreciate the clarity, I guess to follow-up just doesn’t sound like it was simply a response to what relative to your last few quarters has been like a little bit of a softer absolute RevPAR number. This isn’t like -- this is more operational day-to-day blocking and tackling, am I off on that or a fair characterization?

[Jonathan Halkyard:]

That's exactly right.

[Shaun Kelley:]

Okay. Great. And then my other question would just be and again, sorry if you gave this one, but would be the cadence of capital spending especially on the gross side now that the renovations are going down, can you just give us either an update or how you're expecting growth CapEx in particular to trend across the year?

[Jonathan Halkyard:]

Well, I'll give you a cadence for CapEx across the year and then I'll invite maybe Gerry or Jim to comment on growth or what I interpret your question to be around what we call the ESA 2.0. We spent some of $50 million of CapEx this quarter, which was a heavy amount of spending with the renovation program. That will decline in the second quarter and decline further in the third and the fourth quarter as we of course complete the renovation program. And our CapEx guidance for the year does include some monies for essentially real estate acquisition, but the timing of that is difficult to forecast at this point, but there won't -- I don't expect there will be any meaningful growth CapEx until the third or the fourth quarter at the earliest.

[Jim Alderman:]

That's right. We were in conversations at five different sites in four different states and now you're in that phase where you negotiated for the land and etcetera, etcetera. I would anticipate it will be definitely no early than the third quarter before we're laying out some hard cash for some of the dirt. And then depending on permitting whether or not that will then be followed by some construction, start up or construction money, but it will definitely be back end weighted, third and fourth quarter weighted. None of this amount will be huge. Certainly, none of these amounts in total will equal for example what we've been spending on the renovation front over any given quarter over the last five years. It will to be significantly lower than that.

[Jonathan Halkyard:]

Our guidance Shaun for the year in CapEx includes $10 million to $20 million of this growth capital. I'm still comfortable with that range and if we updated it all, I can't imagine we would do that until our third quarter call.

[Shaun Kelley:]

Great and 90 to 100 is still a good number on the maintenance side?

[Jonathan Halkyard:]

Yes.

[Shaun Kelley:]

Fantastic. Thank you, guys.

[Gerry Lopez:]

You bet.

[Operator:]

Thank you. Our next question today is coming from Harry Curtis from Instinet. Please proceed with your question. Our next question is coming from Stephen Grambling from Goldman Sachs. Please proceed with your question.

[Stephen Grambling:]

Hey, thanks for taking the question. I may have missed this at the start, but now that you lapped the first full year with a centralized sales team and the initial gains in corporate accounts, what are some of the key learnings in any adjustments you're thinking about to build on those initial benefits?

[Gerry Lopez:]

Number one, how efficient they can be in bringing the business and the way that we've had that group organized, really breaks into three different tiers. One tier of tax or addresses the corporate opportunity with big national players. There is a second team, which is really where the bulk of the people sit and the team that really have to drum up the business at the local level. And indifference to order people in our space, we don't sales folks associated with each individual hotel. We rather have them by market and that's part of our operating model and that's part of the efficiency, that's part of what we call the triangle teams. And then the third piece, the third layer sits here in our shallow headquarters and they are an outbound call center and they also support the field guys when we have to make bulk reservations and the like. The real secret to the secret sauce to us has been in that structure where we have specialist and it's a small group couple of dozen calling on those big national accounts where the requirements and the needs of that group are vastly different because they're spread literally spread all over the country, transportation companies and the like where they have drivers or maintenance folks that are all over the state to pay. That is a very different set of characteristics than the folks at the local level, who are much more project-based, who are looking for rooms on a two, three, four, five month basis, because they have some work to do whether it's a construction project or an IT project and those by the way are two out of the top three verticals that focus on which has been the other key to our successes. We've learned and declared that construction, IT and healthcare are the three top verticals that we focus on because when we do that, we learn that there are days then to average a month and beyond and that is our sweet spot. When we get people in our hotels that are looking for two weeks to two months, couple of months, four months, that's really, that's really the sweet spot that the package, the value package that we present that guest and the profitability for us of that guest is really the intersection that has allowed us to drive some of the results that you saw last quarter and this quarter. So, there's been a lot of learning, we’ll continue to optimize that group that responded great. The demand, the industry demand for that corporate business has remained flat, but we believe that we made some significant inroads and frankly we see nothing, but offside coming from that side of the business.

[Stephen Grambling:]

Great. Thanks, and then as you've gone through or getting towards the end of the initial renovations here, how wide is the performance in RevPAR index across the portfolio now and if you have any outliers, what's kind of the typical driver in that?

[Gerry Lopez:]

When you say, help me a little bit, when you say how wide, what do you mean by how wide is that?

[Stephen Grambling:]

So, do you still have a handful of underperforming properties and where would that in RevPAR index be relative to your average and just try to think about getting that up.

[Gerry Lopez:]

No, we do. I would call them underperforming Stephen for the simple reason that we reflect the market. Not single one of our 629 hotels is anything but profitable. All the properties running the black, but we do see a white gap on is for example, the ADR that we're able to charge in a market like say Kansas City, San Louis, Indianapolis versus the ADRs that we can get out of the Bay Area. East Bay, Went Bay or in LA for example. It would almost lead you to believe we were looking at those two in isolation say the Midwest versus the West Coast. You would almost think you're looking at two different companies, okay because the ADR gap can sometimes be almost twice, not quite, but almost twice, but that's not a reflection of anything but the markets that they're located in. Everything is more expensive in San Francisco, no surprise and our hotels reflect the individual marketplace more than they reflect any other set of practices. It is not the only thing that comes into play, but it's largely driven by a the individual marketplace. There's nothing -- when we look at the performance across the Board of all of the hotels, there is nothing in looking at the differences that cannot be explained first and foremost by the location of the hotel.

[Stephen Grambling:]

Right, I guess most of what you just described is just geographical differences, but if you look at the RevPAR index specifically, there is no different than across the Board.

[Gerry Lopez:]

None that is, not that couldn’t be 90% plus explained by the site by location of the hotel. In some cities, you may see differences between the airport and suburban demand center, corporate office park something like that. But mostly, what you'll see is lower RevPAR's in the Midwest and higher numbers in either of the calls, but certainly the East and West Bay in LA will have to higher RevPAR numbers. It's not unusual for us to have a hotel in the East or the West Bay where the RevPAR will be a three-digit number versus in the Midwest where it will be in the 40s.

[Stephen Grambling:]

Thanks so much. I'll jump back in the queue.

[Gerry Lopez:]

You bet.

[Operator:]

Thank you. Our next question today is coming from Harry Curtis with Instinet. Your line is now live.

[Harry Curtis:]

Okay. Can you hear me now?

[Gerry Lopez:]

Yeah Harry we can hear you now. We were worried about you for a minute.

[Harry Curtis:]

Yeah apparently, I not paying my dues.

[Gerry Lopez:]

You're with us buddy. You're with us. How can we help you?

[Harry Curtis:]

Buy back more stock.

[Gerry Lopez:]

We're working on that.

[Harry Curtis:]

So, the first question is related to the five LOIs that you've got. Do you have a sense of what kind of RevPAR index premiums these might need to generate to spur developer interest and as you're trying to do deals -- franchising deals, what kind of returns do you think these new hotels are likely to generate that will peak their interest? And then the last question is what are the features of these new developments that are maybe slightly different or more appealing to developers versus the bulk of your portfolio?

[Gerry Lopez:]

So, let me try and take them in reverse order. The appeal we think is going to be driven by a very, very much proven time-tested business model where our margins are such that that's what we're learning and we have learned over the last nine-month attracts the developer's interest. Right, that is not a brand-new brand that people don't already know. In fact, the brand has been around 20 years that is not a business model that is trying to be cute or edgy or appealing to a very narrow segment of the audience, it's not that is a chain scale that by and large has gotten forgotten by a lot of the other development work and a lot of the other brand work that the people are doing across the industry. So that combination, that brew has held appeal right. The fact that it's a proven brand that is a good business model that the markets are so ample it's what peak people interest was profit. A lot of the conversation, a lot of the phone calls that we've, received people get it, people get the fact that the hotel doesn't have to be and what I call the intersection of Oak in Maine, that people -- that people get the fact that our customer base will drive an extra traffic light or two in order to get the kind of rate that we propose, particularly when we bulk that rate up for extended stays of couple of weeks or a couple of months. So that's what we're finding is the base the fundamental -- the fundamental appeal. When it comes to the returns, we've seen and the work that we've done goes back to the presentation that we put together and showed everyone last June. We performed it at that time in the low double-digits unlevered. We're seeing nothing in the nine months and the work that we've done on design. Some of the preliminary conversations that we've had on land, some of the conversation we've had with potential partners that will lead us to believe that the assumptions made a year ago were incorrect in any way. So, we don't want to get in the business of predicting returns. Every situation is going to be different, but nothing that we've learned dissuades us from the assumptions that we made -- that we made nine months ago for that for that June presentation. So, feeling pretty good about ESA 2.0 on the direction in which its headed. We've had a lot of -- frankly a lot of inquiries that folks that want to get into the brand and are anxious to do so, so we continue to be very encouraged. And as I said in the prepared remarks Harry, anxious to get -- to do some deals. It's been nice to have all have all of the conversations on the chitchat. We want to get going on some of these things and the time to do so it's now fast approaching. Did that answer all of your questions or did I leave anything out?

[Harry Curtis:]

That answered the bulk of it. I guess the follow-up would be, do you have any sense of how the low double-digit expected return compares to a developer looking at say developing a residence in or a home to?

[Gerry Lopez:]

I am going to let Jim give you some -- we've actually been doing some work on that, Jim?

[Jim Alderman:]

Yeah. Hi Harry. Your initial part of your last question talked about index and that's really misleading it's kind of misleading for us market to market because it's really imperfect with us -- with our ability to get you to perfect dataset in each of these individual markets. It's just not enough Extended Stay for us to reach out to but as far as where we're targeting where these things work, it's really an $80 to $85 ADR on these new builds is the sweet spot and up. So, it's translated that into an index, it's certainly with index higher with this new product, but that is kind of transformational and as far as our returns versus home to it's really hard to say. We're really a different product type than they are. We've a much longer stay that both of those. Those are more of -- they're both fantastic brands, but their room formats are a bit different and ours is truly targeted towards that long-term stay guest. I know they're set up that way, but if you just look at their numbers, they're much more transient. The average LOS, the average length of stay Harry even across some of Extended Stay product by the majors. It'll be four night. So that's better than the two nights that they perhaps get in the transient business, but for us in the mid-20s, 26-day length of stay we really are going to end generation and our brands really goes at a different consumer behavior a different guest behavior than those guys do. So, it's tough sometimes to get to the right concept and so on. We operate in the higher end of economy, lower end of mid-scale. Most of those daily rates even for some of Extended Stay products by the majors, it's going to be one and half to two times our rate. A lot of undone discount for the extended period, for the extended stay. Of course, that's our bread and butter. So, it's really one for the guest that is trying to make a decision, it almost winds up being apples and oranges. They're both fruits, but they taste different.

[Harry Curtis:]

Yeah one would think that with your longer basis of a stay, your labor costs are lower and your operating margins ought to be higher. So that theoretically should be more appealing. Okay. That does it for me. Thanks very much.

[Gerry Lopez:]

You bet. Thank you, Harry.

[Operator:]

Thanks. Our next question is coming from Joseph Greff from JPMorgan. Please proceed with your question.

[UnidentifiedAnalyst:]

Hey, good morning, guys. This is actually [Brent] on for Joe. Actually, I appreciate the color on near-term trends and just looking at I think most of the industry are expecting some sequential deceleration through the Easter shift and I understand that you had a tougher 1Q comp, but can you just quantify what that Easter shift was for you in the long queue and what you're baking into your guidance?

[Jonathan Halkyard:]

We think the Easter shift was probably about 50 basis points.

[UnidentifiedAnalyst:]

Okay. Great. And then regarding corporate transient is it safe to assume that the acceleration you saw in the 1Q was on the leisure side and regarding corporate, what indicators do you guys track when trying to gauge how forward demand may trend?

[Jonathan Halkyard:]

When it comes to forward look for corporate business, we really every Friday afternoon, we have a pretty significant download with all of our sales force around their lead generation as well as the booking trends both out in the field and here in our centralized call center and that is accompanied by a forecast kind of 30, 60, 90 days out from the sales force. So now as we look at environmental factors around what folks are saying about corporate demand, but since ours is so much project-driven we really do our own homework in that regard and try to build our forecast based upon what business we know is out in the market and our success in getting it.

[UnidentifiedAnalyst:]

Okay. Thank you very much. That's it for me.

[Gerry Lopez:]

You bet. Thank you.

[Operator:]

Thanks. Your next question today is coming from Smedes Rose from Citi. Please proceed with your question.

[Smedes Rose:]

Hi thanks. I just wanted to ask a question on the development program. It sounds like you have a lot of interest so far from potential franchisors. Is there a point where you would scale back on your on balance sheet development given better-than-expected demand from franchisors or do you feel like it's important to move ahead with that development pipeline?

[Gerry Lopez:]

So, a couple of perspectives on that. One is we did quite a bit of homework before we launched into this ESA 2.0 and part of that homework, part of the learning was that the existing asset base, is just about double across the geographies in which we operate. To the existing 620 plus hotel base, the analysis show that we provided another 600 hotels, clearly not that they're going to do anything close to that, but it was reassuring and we've indicated a couple of times to know that that demand is exist out there and we had ample, ample room to grow. So that was kind of a point one. Then point two becomes a matter of balancing out our own balance sheet and the great cash flow generation that each property can put up versus the fact that we just can't get to all those opportunities even with a 600 potential expansion, 600 site potential expansion even is the only one who can do two thirds of that, that you still are not going to be able to get to all of the possibilities with your own capital quickly enough. So that's where the franchising really comes in. If we go back to the presentation last June, even then we were freely saying and admitting that we expect the bulk of the expansion the unit count expansion to come from the franchising site. That continues to be true to this day. We want to do some on our own balance sheet because we know that there's some great opportunities out there because we know that the brand works. Frankly the developers and the partners expected that we will build the first couple of prototypes on our own build, so that we can prove out that value engineering looks great on paper actually works in real life. So that's the impetus behind our own balance sheet. That is the fact that it generates great cash. Does that get to your question Smedes?

[Smedes Rose:]

It does and then just I wanted to do a quick follow-up, with the Extended Stay, help with the financing at all for potential franchisors or will they be responsible for putting together their own financing packages?

[Gerry Lopez:]

We may, we haven't committed to doing so or not. Frankly we have to be honest with you, the folks that we've talked to are all self-financing. The fact is the stated objective was to deal with companies and players who are already in the industry, B, have their own sources of capital, C, know how to run a hotel even if they don't run an Extended Stay hotel and certainly may not run it the way that we do. I believe they know what hiring and retaining people is all about and that's the reason that we wanted to do that. Now if we come across an opportunity where we may need to provide some financing or enter in some sort of deals, we remain flexible and our cash flow generation as we stated in the prepared remarks and as you know is such that it would allow for that. So not saying yes, not say no. More saying like we'll have to look at the individual opportunity and see how it shapes up and it wouldn't prevent from doing a deal put it that way.

[Smedes Rose:]

All right. Thank you. I appreciate it.

[Gerry Lopez:]

You bet.

[Operator:]

Thank you. Our next question today is coming from Michael Bellisario from Baird. Please proceed with your question.

[Michael Bellisario:]

Good morning, everyone. Just wonder on the development topic, how are you selecting your sites and then how does the new supply maybe like the uptown suites brand that looks like it's going to be a direct competitor of yours. How does that impact your thinking today as you swipe those sites?

[Jim Alderman:]

The way, that we're -- it's Jim Alderman, the way that we're looking at selecting sites is must taking a look at what our great factors of success are now. Where the business that we currently seem to gravitate towards and gravitate towards us is located and certainly we're looking at areas where we already have significant operational density, we're not going to be building in one-off places. So, we look for operational density. We look for the construction client -- the construction activity, we look for the high-growth states, the medical activity, the tech, and generally we were looking at infill and suburban locations in the major cities where you see most of the significant growth in the country we're concentrated right now. On the first five, we're in four states. We're looking in Colorado in Texas and Arizona, but we have several things working in the Southeast corridor and even couple things opportunistically in the Northeast. So, we're not limiting out necessarily any markets, but I think you can easily correlate where we're concentrating with the highest growth GDP states and GDP Metro areas.

[Gerry Lopez:]

Operational density matters, demand generators matter. Those are like the threshold questions. Of course, in the deal we don't drive and it's the purchase acquisition cost, the land acquisition cost is going to be reasonable. Is the construction crew available? Of course, all those things matter as well, but if there is strong demand generators and Jim underlined a couple of them, but we know healthcare is a good demand generator for us. We know that a growing market with a lot of construction activity is going to be a good demand generator for us. We know the tax centers are a good demand -- hey that's going to work and then we already are in that market with a number of other hotels for our operators, that's part of the secret sauce. The ability to source talent and retain talent is significantly better in any market where you have a operating presence already and that's at the end of the day the people's business, people serving people and if we have those characteristics and the line can be bought at the right price, we're in.

[Michael Bellisario:]

Got it. And any thoughts on that account suite brand introduction?

[Gerry Lopez:]

So, the first one is in North Carolina. So, we're going to drive by it. Don't know much about it. It looks like yeah, it's an interesting proposition. We learned -- we'll learn more once we visit. Congratulations to those guys. They’ve got a very successful business and looks good. We'll learn more once it's open and running and we can drive box.

[Michael Bellisario:]

Got it. And then just one quick follow-up on the OTA topic, Can you guys quantify what percentage of that OTA business of yours, is that first time stay guests that you mentioned and there maybe any conversion metrics upon subsequent stays, whether they go to Brenda account book or enroll in the Extended Perks program?

[Gerry Lopez:]

About 90%, 95% of the OTA guest is first time stay. We try to measure it, but it's mostly imprecise data but it looks to be pretty significant first-time stayer.

[Michael Bellisario:]

That's helpful. Thank you.

[Gerry Lopez:]

You bet.

[Operator:]

Thank you. Our next question is coming from Anthony Powell from Barclays. Please proceed with your question.

[Anthony Powell:]

Hi guys. As a follow-up on the uptown suites question, obviously you have a very attractive business model, what's your view on more competitors entering the space over time as people look for more about opportunities?

[Gerry Lopez:]

We welcome the competition; fair and square competition is always going to be good. It's going to make us. It's going to make them better. The guests is going to be served better and I've never been in an industry and I've been in my fair share where better served guests, better served customers didn't benefit -- didn't benefit all of the players in the business. It's good to see frankly the segment getting some attention. Most of the time, the economy segment, the midscale segment, the extended stay segment forgotten and I understanding it right. The glimpse and glamor development get all of the attention and the headlines and everything else. The fact of the matter is that it's in our end of the segment that the majority of people stay and we have tremendous, tremendous demand that we know is going unserved right. 80% of the rooms, 20% of the demand, 22% of the demand is serviced in our chain scale. So it's all frankly to the extent that new development and new players bring our end of the business more in the limelight more to put it in the forefront. Let's have at it. I think it's all good. The size will sort themselves out. The competition will sort themselves out. The guests will make their selection. I like the fact that these players entering an era of institutional validation to what we're doing and that I think serves us well Anthony.

[Anthony Powell:]

All right. Thanks a lot. Good quarter.

[Gerry Lopez:]

You bet. Thank you, buddy.

[Operator:]

Thank you. We've reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

[Anthony Powell:]

Thank you, Kevin and thank you, everyone for joining us this morning. We look forward to visiting with you again in the many investor conferences that we're going to be present over the next few weeks and certainly when we report our second quarter results in early August. Have a good morning. Have a good day.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.