Extended Stay America, Inc.
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Greetings and welcome to the Extended Stay America first quarter 2015 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 for the call today, Robert Ballew, Director of Finance and Investor Relations for Extended Stay America. Mr. Ballew, please begin, sir.

[Robert Ballew:]

Good morning and welcome to Extended Stay's first quarter 2015 conference call. Joining me on the call are Jim Donald, Chief Executive Officer, Jonathan Halkyard, Chief Financial Officer, Tom Bardanett, Chief Operating Officer and Tom Seddon, Chief Marketing Officer. After our prepared remarks, there will be a brief question-and-answer session. Before we begin, I would like to remind you some of our discussions today will contain forward-looking statements including the discussion of our 2015 outlook. Actual results may differ materially from those indicated in our forward-looking statements. Forward-looking statements made today speak only as of today. The factors that could cause actual results to differ are discussed in our Form 10-Q filed this morning and our other SEC filings. In addition, on today's call, we will reference certain non-GAAP financial measures. More information regarding these non-GAAP financial measures including reconciliations to the most comparable GAAP measures are included in the earnings release filed this morning. With that, I will turn it over to Jim.

[Jim Donald:]

Thank you, Rob and thanks to everyone for joining us this morning. I would like to comment on our first quarter 2015 results and then Jonathan will provide a more in-depth discussion on the quarter and our outlook for the reminder of 2015. When ESA returned to the public markets 18 months ago, I described to you how our company was undergoing an exciting brand transformation, including our product offering, the level of marketing sophistication, customer segmentation and capital structure. We described this transformation against an appealing backdrop of geographic diversification, superior locations, favorable supply and demand dynamics, industry-leading margins and a tax efficient corporate structure and over the ensuing five quarters, we have been accomplishing this transformation on every front and at the same time strengthening our management team and now preparing the company for its next stage of growth. Our results this quarter demonstrate how the story continues to play out for the benefit of our shareholders. Let's start with the product. As you know, three years ago we had a portfolio of hotels that had not been renovated in at least 10 years. After testing and piloting the renovation program, we began to renovate our hotels in a series of phases across our system. Three years later, we now have a systematic renovation process whereby we renovate our rooms over a period of three weeks at a cost of approximately $8,500 to $9,000 per feet with an entire hotel taking about three months and approximately $1 million. As the hotels come out of renovation, we have seen an eight point improvement in RevPAR index while having a hotel that meets a higher brand standard for our customers. During the first quarter, we completed the renovation of 39 hotels and another eight in April, bringing our total number of renovated hotels to 382. In June, we will begin the process of another 37 hotels and in the third quarter, we will begin an additional 49. As we have described in prior calls, we intend to complete the renovation of our Extended Stay America hotels by early 2017. From the marketing front, we have made substantial progress on the implementation of our automated revenue management system and our loyalty marketing efforts. On March 11, we launched our new Extended Perks instant rewards loyalty program. For years, traditional hotel reward programs have dangled an unreachable carrot of point based rewards to lure guests to stay at their hotels. But here at ESA, we believe that our loyalty program should be about us showing our appreciation and loyalty to our guest, not asking guests to demonstrate their loyalty to us. Extended Perks is easy-to-use and the best part about our program is that our guests don't have to collect a single point. Our program provides members with instant discounts from over 150,000 local and national merchants featuring brands people use when they are away from home for extended periods of time, like Papa John's, Avis, Staples, Neimen Marcus, Last Call and 1-800-FLOWERS. Our guest can use our mobile app to save anywhere, anytime by simply entering their Zip Code. Since the introduction of our new loyalty program just six weeks ago, we have increased enrollments in our database by 56% versus a year ago and now we have over 500,000 guests enrolled with whom we engage daily in direct marketing offers to drive incremental revenue. The revenue management system implementation is well underway. Three years ago, many of our hotels were setting rate on their own without the benefit of business intelligence or rate leverage that is common in the pricing functions of large enterprises. Over the past three years, we have established pricing parameters for our hotels and strengthened our revenue management team. Now we are engaged in the implementation of an automated revenue management system which initially will enable our revenue managers to make better pricing decisions and ultimately make many pricing decisions automatically and free up our managers to intervene only in exceptional situations. During the quarter, we moved 127 hotels to the second stage of automation. We are on track to complete the implementation by the end of the third quarter. As I have said in the past, it will take several quarters for the system to meaningfully influence our growth rate as the system becomes more proficient in generating a forecast and as we gain experience in its use. I am excited about the prospect for this project and I am confident it will contribute to our efforts like this year and in 2016. But nothing can tell the story about how our company is changing better than one of our guests. In this case, a consultant who is working with us on a major leverage procurement project. He wrote to me, the word transformation kind of gets overused in our line of work. But what I personally experience that ESA was nothing short of true transformation. I can safely claim that I have had a very intimate experience with Extended Stay America as a product. Having stayed at the Pineville, Matthews Rd, ESA for over seven months during the engagement. And that's not a feat too many can lay claim to. Over that time, we literally saw the hotel transform in front of our eyes as floor after floor was remodeled and took on a best-in-class look. Towards January, when it was time to leave, my wife is like, do we have to? And at the backend, I witnessed another transformation in terms of how projects and programs are managed with meticulous attention to detail, rigor and process. Now that's what I call a great case study of true transformation. And what a great testament to how we are changing our product in the field and how we do business here at our corporate support center. Amidst all of this change though, many things remain the same. First and foremost is the dedication of my 9,000 colleagues to take care of people who are building a better future for themselves and their families. That's our purpose and we take it very seriously. We provide a clean room, limited housekeeping, Grab and Go Breakfast and free Wi-Fi. Ours is precise operating model providing our customers what they want and they are willing to pay for. This is a formula that enabled us to grow revenue, while improving margins, which are already meaningfully higher than the industry average. The financial results we announced this morning confirms this. We announced first quarter RevPAR growth of 6.8% and adjusted EBITDA growth of 9.4%, both at the top and at the guidance range we provided for the quarter. Our property level of flow-through was over 80% above our guidance range and property margins expanded 190 basis points to 50.1% which we believe are the highest in the industry. Also this morning, the Board of Directors of ESH Hospitality declared a distribution of $0.15 and the Board of directors of Extended Stay America declared a distribution of $0.02. Together these distributions represent an over 13% increase in the distribution to our shareholders. At the same time, we delivered our balance sheet from a year ago and upon completion of our bond offering, we will have extended debt maturities by one in a quarter years. Now before I turn it over to Jonathan, I would like to comment briefly on the lodging industry. Demand growth continues to outpace supply growth. We believe that our geographically diverse portfolio focused on coastal markets is positioned to perform well in this environment of increasing demand which improves pricing power for lodging operators. We have limited exposure to large urban markets where supply growth has been and is expected to be high. On the other hand, expectations for supply growth in our segment and local markets remains limited. We believe the strength in the industry coupled with our operational enhancements and renovation program position us very well for the remainder of 2015 and beyond. I will not turn it over to Jonathan who will provide greater detail on the first quarter, comment on our 2015 outlook and discuss our ongoing priorities for free cash flow. Jonathan?

[Jonathan Halkyard:]

Thank you, Jim. We are proud of our financial results this quarter. We accelerated our revenue growth from the fourth quarter of last year. We flow-through over 80% of our incremental revenue to hotel operating profit and expanded margins year-over-year. Net interest expense declined by $5.2 million versus last year as a result of our refinancing moves and a lower debt balance and net income grew by 73% to $27.9 million. We invested $18.2 million in renovations this quarter and completed 39 hotels, increased our distribution to shareholders by 13% and continued to delever the balance sheet consistent with our goal of reaching four times net debt to adjusted EBITDA by the end of 2016. Let's discuss some of the details. RevPAR, revenue and adjusted EBITDA were all first quarter records for us. In the first quarter of this year, we generated revenue of $287.6 million, an increase of $17.3 million or 6.4% over the first quarter of 2014. This quarter, systemwide RevPAR grew 6.8% driven by an ADR increase of 6.3% to $58.87 and by an occupancy increase of 40 basis points to 70.4%. The impact of renovations on revenue was slightly lower this quarter than the first quarter of 2014. Approximately 76,000 room nights were displaced from renovation this quarter. This represents 1.1% of our available room nights as compared to 1.7% displaced last year and we estimate this positively affected our RevPAR growth rate by about 50 basis points. Our renovated properties, which the quarter-end were 59% of Extended Stay America branded hotels, were 55% of our total company delivered strong results. RevPAR growth in the first quarter for properties renovated as of the start of the quarter was 9.6%, driven by an ADR increase of 5.7% and occupancy growth of 250 basis points. Our non-renovated properties produced RevPAR growth of approximately 3.8%. Now while these properties achieved ADR growth of 4.1%, we saw a modest decline in their occupancy rate of 20 basis points. This quarter we continued the shift in our customer mix as defined by length of stay. As occupancy in our one to six night business increased, while it declined for longer length of stay business particularly with long-term residential guests. This shorter stay segment of our business accounted for approximately 32% of our revenue in the quarter, yet contributed half of our $17.1 million in room revenue growth. Our hotel operating margin was 50.1% for the quarter, compared with 48.2% last year and flow-through in the quarter was 80.7%. G&A expenses were $23.5 million, an increase of $400,000 over the same quarter last year. Adjusted G&A expenses, which excludes non-cash equity-based compensation, public company transition costs and implementation of certain key strategic initiatives, were $21.3 million, compared to $18.2 million in the same quarter in 2014. The additional G&A we incurred year-over-year is primarily due to legal and audit fees, personnel expenses and ongoing costs related to our new revenue management system. Adjusted EBITDA of $122.9 million for the first quarter increased $10.6 million or 9.4% when compared to the first quarter of 2014. Adjustments to EBITDA for the quarter are detailed in our earnings release and include the aforementioned G&A adjustments, as well as two other adjustments, the loss on disposal of assets of $1.6 million and non-cash foreign currency transaction loss of $1.8 million related to the appreciation of the U.S. dollar versus the Canadian dollar at our Canadian subsidiaries which have U.S. dollar denominated debt. Net interest expense was $31.3 million this quarter, compared to $36.5 million last year. The reduction in interest expense is due to a decrease in both our average debt balance and our weighted average cost of debt. Net income increased $11.8 million over the first quarter of last year to $27.9 million. Income tax expense for the first quarter was $9 million, compared to $5.1 million in the comparable period in 2014. Our effective tax rate for the first quarter of this year was 24.4%, a healthy advantage over our C Corp peers and once again reflective of the efficiency of our paired share structure. Adjusted paired share income for the three months ended March 31, 2015, was $30.4 million or $0.15 per paired share based upon weighted average diluted pair shared outstanding of $204.4 million. Adjusted paired share income, a non-GAAP measure, represents net income as adjusted, attributable to the consolidated enterprise and these adjustments are detailed in our earnings release. We ended the quarter with total cash of $248.8 million, composed of $71.9 million in unrestricted cash on hand and $176.9 million of restricted cash. Net debt was approximately $2.7 billion at the end of the first quarter and net debt to trailing 12-month adjusted EBITDA was 4.7 times. Capital expenditures for the quarter totaled $34.2 million. Now this morning, the Board of Directors of the ESH Hospitality, Inc., a company subsidiary, declared a cash distribution of $0.15 per share for the first quarter on its Class A and Class B common stock. Also this morning, the Board of Directors of Extended Stay America, Inc., declared a cash distribution of $0.02 per share for the first quarter of 2015 on its common stock. Both distributions are payable on May 28, 2015 to shareholders of record as of May 14, 2015. Our continuing distribution policy will be to target a payout of approximately 95% of re-taxable income and net capital gain. We are reaffirming our revenue and adjusted EBITDA guidance for 2015 with annual revenue of $1.275 billion to $1.3 billion or approximately 5% to 7% growth over last year. We expect the room nights affected due to renovation to be 17,500, 92,000 and 135,000 in the second, third and fourth quarters of 2015 respectively. Adjusted EBITDA is anticipated to be in a range of $585 million to $600 million or approximately 5% to 8% growth over 2014. We anticipate total capital spending will be between $190 million an $210 million in renovations, IT project and ordinary maintenance this year. For the second quarter, we expect that our revenues will be in a range of $338 million to $344 million and our adjusted EBITDA will be in a range of $164 million to $169 million. We will face some minor insurance related expense items this quarter, but are still comfortable with the hotel level of flow-through of 70% for the year. I remain highly enthusiastic about our business model and our ability to execute. Our renovations and strategic initiatives will continue to drive revenue growth. Our operating margins, improved capital structure and efficient tax structure enable our company to convert this to strong free cash flow. As we look forward, we will apply our free cash flow to deliver the highest returns to our shareholders. After our renovation investments and distributions, remaining cash flow will be available for debt reduction, future development and returns of capital to our shareholders. I also pleased to announce that we will be presenting at three upcoming conferences, Baird' Growth Stock Conference in Chicago on May 6, Nomura's Gaming, Leisure and Lodging Conference on May 19 in New York and Goldman Sachs' Lodging, Gaming Restaurant and Leisure Conference on June 2 in New York. I will now turn the call back to Jim.

[Jim Donald:]

Thank you, Jonathan. And in closing, I am speaking for the team, we are all excited about entering into our strong selling season with much progress made on our slate of initiatives. We still have more work to do though. And we also look forward to sharing these results with all of you in July. Rob, let's go to questions.

[Robert Ballew:]

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

[Operator:]

[Operator Instructions]. Our first question today is coming from Smedes Rose from Citi. Please proceed with your question.

[Smedes Rose:]

Hi. Good morning. I wanted to ask you and I am sorry if I missed this in your prepared remarks, but your interest expense is moving up quite a bit for the year and taking down your net income outlook. Is that just related to the $500 million of refinancing that you announced a few days ago? A do you feel pretty comfortable that that number is now constant for the year?

[Jonathan Halkyard:]

Smedes, that's correct. That is principally to account for that transaction which is currently in the market. And yes, I am very comfortable with that range now and don't anticipate it changing for the remainder of the year.

[Smedes Rose:]

So does not that imply that would price it at around 6.5% for the interest on that. Is that about right?

[Jonathan Halkyard:]

It's a wide range. So it doesn't imply that at all.

[Smedes Rose:]

What do you think it would price at?

[Jonathan Halkyard:]

I am not going to comment on the offering that's in the market right now, Smedes. I can't do that.

[Smedes Rose:]

Okay. And then you mentioned that the shorter-term guests were 32% of revenue in the quarter. What sort of mix would you like to see longer-term in terms of the guest versus your longer term or Extended Stay guests?

[Jonathan Halkyard:]

Smedes, I am actually going to ask Tom Seddon, our Chief Marketing Officer, if he would comment on that.

[Tom Seddon:]

Sure. And I think I probably think about a couple of ways. When we think about managing our length of stay mix, we think about both the mix of shorter stay versus longer stay customers and what's the composition of those type of customers. So in addition to the growth in the one to six, probably just as interesting is the reduction in the 30-plus segment where we have taken that down to about 44% of our revenue now and we continue to shift that segment to be less about kind of residential long stay business and more project based company type business which comes in a higher rate. So in terms of a target for that 30-plus business, 40% to 45%, we will probably get it down to 40% to maintain some sort of stability, I think, on an average for the year, would be a fairly good number for us to look at next. And then obviously there is a massive variation in that by nights and by hotel, because that number tends to be an output of our revenue management activity, not an input to it, because we are trying to optimize our mix every night.

[Smedes Rose:]

Okay. That's helpful. Thank you.

[Operator:]

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

[Chris Woronka:]

Hi. Good morning, guys. And thanks for the color on the RevPAR growth on renovated, non-renovated hotels. Can you maybe drill down a little bit further for us and those platinum renovated hotels? What's the growth in the first 12 months following the renovations?

[Jonathan Halkyard:]

I am not sure I understand the question, Chris. What is --?

[Chris Woronka:]

Yes, sure. So I think you said the platinum renovated hotels were up 9.6% in RevPAR for the quarter. If we look at the subset of those platinums that have been completed in the last year, I think the 9.6% is for all platinum renovated hotels, right. But what would it be for the ones that are most freshly out of renovation?

[Jonathan Halkyard:]

We really haven't broken down for the purposes of these calls in our disclosures, the revenue growth rates of each phase of renovation. So you are correct. That revenue growth rate that we cited applies to those hotels that were renovated for the entire quarter. So it's of course in multiple phases since the beginning of the program. That plus the revenue index pickup that we have seen from all of those hotels that have been open post-renovation for a period of the year of about eight points, those are really the lengths of our disclosure around the renovated versus on un-renovated performance. But I think it was important to note once again, these renovated hotels are performing quite well and of course that's a blended growth rate across all lengths of stay and the un-renovated hotels also grew their growth rate sequentially from the fourth quarter.

[Chris Woronka:]

Right. Understood. And then the second question is, have you guys given any thought to what you might do with the Crossland branded hotels and/or some of the ESA branded hotels that you might not, I think there is a small group you said you might not platinum renovated at all. Is there any kind of movement on thinking on what you might try to do with those? And does the debt deal, I know you can't really talk about it, but directionally it seems to give you more optionality in terms of unencumbering some of the assets. So just your thoughts on a potential real estate recycling?

[Jim Donald:]

Yes. Chris, this is Jim. The Crossland properties are in the mix. And by that I mean, we are continually looking at the path that we are going to take with these properties as we complete our renovation cycle. Right now it's not our intent to put those into that renovation mix. They are doing very well, I will say that. An d we are to continue to maintain and run those properties as Crossland at this point. I will also add that they are EBITDA positive and they are showing good growth.

[Chris Woronka:]

Okay. Very good. Thanks.

[Operator:]

Thanks. Our next question today is coming from Anthony Powell from Barclays. Please proceed with your question.

[Anthony Powell:]

Hi. Good morning, guys. Could you give some detail on maybe the RevPAR growth cadence within the quarter on a monthly basis? And also maybe some trends in April, if you have them?

[Jonathan Halkyard:]

Hi there, Anthony. It's pretty consistent throughout the quarter, actually. When we last spoke in the third or fourth week of February, we indicated that we were seeing that the growth rates in this range and it was pretty consistent during the quarter as has April been. So that's the reason we are guiding revenue growth for the second quarter that's consistent with that level as well as it's consistent with our full-year guidance.

[Anthony Powell:]

Got it. And on the dividend, that was a bit of a surprise to us. Could you remind us on what your dividend roughly is? That you will get a payout ratio, percentage of cash will be available for distribution or how you are looking at dividend on a long-term basis? Thank you.

[Jonathan Halkyard:]

Okay. Thanks, Anthony. Recall our structure is one where we have a REIT subsidiary of a C Corporation and the REIT is required by its REIT status to distribute 90%, at least 90% of its taxable income in the form of dividend. So that is the first pillar of our dividend policy, the distribution from the REIT to meet that requirement. The C Corp, as 55% owner of the REIT of course receives fairly significant dividend income flow from the REIT and has accumulated cash. So our management team and our Board agreed that as that cash accumulated over the past several quarters, that it would be a good use of that cash to return it to shareholders in the form of a dividend from the C Corporation in addition to the REIT distribution. Our priorities for cash flow at this point are completing our renovation program, paying our dividend and then deleveraging, development or returning cash to shareholders in the form of additional dividends. So I think met that test this quarter and are pleased to have been able to return some additional cash to our shareholders.

[Anthony Powell:]

All right. Great. Thank you.

[Operator:]

Thank you. Our next question today is coming from Steven Kent from Goldman Sachs. Please proceed with your question.

[Steven Kent:]

Hi. A couple of questions. First, if you could just talk a little bit about the optimization of revenue program? Maybe just go into it a little bit more, because it seems like you are getting some traction with it. Is it more a headquarter driven or locally driven? It sounds like, Jim, that you want to work through some of this before you can give us some insight on how it's working but I wanted to hear where you are on it. And then also, Jim, it sounds like the renovations are going faster and more smoothly than before. So as a negative factor, should that be less of a negative factor? Should we be hearing less about it over the next couple of quarters?

[Jim Donald:]

Thanks, Steve. Just to address the renovation piece. We are just getting more efficient. Jonathan talked about the displacement that we anticipate, but those are probably worst-case basis. As we wind this process down to the last, say, 200 properties, from a cost perspective as well as execution perspective, we got this down. And so I would say that what you see on there is probably as much displacement as we would expect in this. We have several examples of property getting completed a week to 10 days earlier as we see it now. And of course, when you are dealing with 90 properties, that adds up. Regarding revenue management. Yes, we are in this pilot process currently in both, the one way is out throughout the company, the two way was in about 200 properties. But Tom Seddon, I would like for you to address just where we are at on this and as we near our end of the third quarter completion to go live on this. Tom, if you can give us some color on that.

[Tom Seddon:]

Yes. Sure. We have been taking a fairly cautious approach to make sure that we can feel good that the thing is adding to the mix and not taking away as we go forward. So as Jim said, we added about another 90 in this past month to take us from the 127 at the end of the quarter to now just around 200 live in environment. Paying a lot of attention to how the revenue managers are using it. And we like what we see. We are tracking performance of those hotels. But just as importantly, we are tracking how it is affecting the types of controls and the amount of controls that we are putting in. So it's definitely helping revenue managers be more dynamic over big weekends or big peak demand days, which is quite difficult to do manually and especially balancing how many rooms you want to keep open for long stay guests versus how many you want to sell to short stay guests. It's just a tricky balance to do manually on many days across a lot of hotels. So the control of that is all really done centrally. All of our revenue management is done by a team of about 24 or so revenue managers, who have portfolios of hotels. So that's the way the system does it and we have a couple of people who sit and help them and watch what's going on. And we have been pleased with the progress we have seen yet. First quarter is a fairly low demand quarter, which I think it's been good for us to get familiar with the system, get some benefit on some of the peak nights where they are, but get that experience ahead of coming into the high selling season, as Jim was talking about. So we feel good about where we are as we ramp into the second quarter and then the third quarter.

[Steven Kent:]

Okay. Thank you.

[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, everyone. I just wanted to go back to the difference in nights stayed or length of stay for some of your different guests. I was wondering if you can give us any color, you told us about the percentage of business and where you are targeting that to go, but could you just give us any color on rate gap or rate differential between the one to six night guests and the 30 day plus guests? Like how wide of an opportunity is that?

[Jim Donald:]

Go ahead, Jonathan.

[Jonathan Halkyard:]

Hi, Shaun. I will take that. Now, our 30 plus guests will be discounted over the nightly guess and that will typically be anywhere from 20% to 30% discount. And that generally requires payment upfront and of course that's an appealing guest who is there with us for 30 days, even if at discounted rate. So on balance, that difference in our numbers tends to be $15 to $20 difference, if you were to look at just the ADR for our one to six night guest versus our 30 plus guests, which makes sense given about where the relative ADRs are. Tom Seddon, would you want to add anything to that?

[Tom Seddon:]

No. I think those are the key stats.

[Shaun Kelley:]

Thanks, Jonathan. And then I guess, but can you remind us, now is the margin a little higher for the 30 day plus largely because of the housekeeping and the churn of the room?

[Jonathan Halkyard:]

Yes. The margin on our 30 day guest is a bit higher. There is very little expense against those guests. There is weekly housekeeping and that's virtually the only costs that we have other than our daily Grab and Go Breakfast. The one to six night guests have, of course, higher ADRs, a little bit more cost against them. And a number of our one to six night guests come into the OTA channels which have a bit more channel cost against them than our 30 plus guests do. But then again, of course, the rates are higher. So there is not as much a margin difference as you might think. Both are of course extremely profitable.

[Shaun Kelley:]

Thanks. I guess my last question on the topic to not beat the dead horse would be, the $15 to $20 rate gap, that would be net, right? So after OTA costs?

[Jonathan Halkyard:]

Yes. That would be after the OCA costs and yes.

[Shaun Kelley:]

Okay. Great. Thanks for the color, guys.

[Operator:]

Thank you. Our next question today is coming from Harry Curtis from Nomura. Please proceed with your question.

[Harry Curtis:]

Hi. Good morning. Following up on a couple of the questions. You had mentioned the one to six stay mix, but what is the mix of your corporate customers today?

[Jim Donald:]

Harry, it's Jim. You mean the percent of business coming from corporate?

[Harry Curtis:]

Yes.

[Jim Donald:]

As a percent of revenue, about 40%.

[Harry Curtis:]

It's about 40%. Okay. And as you speak to your corporate customers, what feedback you are getting from them about the renovation project? In other words, do you get the sense that once you are some percentage of the way through the renovation process, some of the corporate customers or some corporate customers who on the sidelines will come into the fold?

[Jim Donald:]

Yes. Listen, what we are hearing from our corporate group is that they are very pleased with the amount of platinum properties that we have across the country now. We started working really intensely with our corporate customers three years ago at our very first global business conference. It was held in Boston. But it was a pick and choose then. And we have probably 100 properties that we had available for them. We had a model showroom and they were really excited about getting it. The only thing is, we couldn't take care that business. Now with about 65% completed now, 75% at the end of the year, they are pleased to say that we are kind of one-size-fits-all for them now all across the country, rather than in select locations. So we are getting favorable comments from them both during the year and also as we go through the RFP process in the fall. So its all positive.

[Harry Curtis:]

I guess, are there any numbers that you can put around this in a sense that if you are at 40% now, is it reasonable to think or have you set targets that your mix would lift to 50% or 60% once the renovation process is maybe 75% or 80% done?

[Jim Donald:]

Yes. We don't really have targets that we are putting out there to say this is the goal and we want to get there. We are continuing just to take a look at this business. And as I say, as the corporate was 40%, overall business including the government, including visiting nurses, it's around 60%. So we are continuing just to grow that and looking to grow that above what the current runway of the company is.

[Harry Curtis:]

Okay. And then just shifting gears back to the revenue management system. What I am trying to get a better sense of is, if you built any improvement in RevPAR into your guidance as a result of the revenue management system kicking in? It sounds like your guidance is really based on what you are doing today and not based on any improvement that that system might bring. And when you signed on for this system, what was the system's historic success in lifting RevPAR?

[Jonathan Halkyard:]

Harry, I will take the first part. I am going to ask Tom Seddon to address the second. That is correct. Our guidance for the second quarter does really not contemplate any meaningful impact from our revenue management system as we are still right in the thick of the implementation and it's early. Our annual guidance, I think to hit the top end of that guidance, I would expect some impact from the revenue management system and we do later in the year. But for this quarter, we are really not assuming much. Tom Seddon, would you comment on the question around the historical performance of these types of systems?

[Tom Seddon:]

Yes. We business case, the 2% to 4% RevPAR range once we have stabilized that, which is a little bit below what people who sell these systems will quote you. But we felt comfortable with that. And, as Jonathan said, with the rollout schedule, we expect it to be more to help in the second part of 2015 and then momentarily in 2016 as we just cycle, get more efficient and so will the hotels fully on.

[Harry Curtis:]

Okay. Thanks, guys.

[Operator:]

Thank you. Our next question today is coming from Joe Greff from JPMorgan. Please proceed with your question.

[Joe Greff:]

On that last line of questioning, by the end of the year time, how many of your properties will be on the system?

[Jonathan Halkyard:]

They all will be on, Joe. By the end of third quarter, we expect to have them all in two way and then there is a couple of different phases of functionality we will be rolling out after that. But when we talk about having 200 or so on right now, we have got all the hotels on a one-way environment where it's providing information to the revenue managers and we now have about 200 where the system is automatically applying controls. So by the end of the third quarter, we expect to be in a situation where all the hotels are in two way and the system is automatically applying controls. And then, if you fit some box behind the scenes that we will be later than that, but that's the point at which we essentially are fully up on the system.

[Joe Greff:]

Great. And Jonathan, I missed this, since we are juggling a few other earnings calls today. Can you repeat your revenue and EBITDA guidance for the 2Q please?

[Jonathan Halkyard:]

Yes. The revenue guidance is $338 million to $344 million and the adjusted EBITDA guidance is $164 million to $169 million.

[Joe Greff:]

Got it. And can you help us with the cadence of CapEx spend by quarter for the balance of this year?

[Jonathan Halkyard:]

The maintenance expense will be a bit back-loaded, I think probably a good estimate is just looking at our revenue. We spent less than 25% of our expectations in the first quarter. So there will be a little bit more, I would say, in the third quarter in terms of maintenance CapEx. In terms of our growth CapEx, our renovation program, that will be primarily in the third and fourth quarters. I would expect it to be relatively light in the second quarter as we just completed a number of renovations and we are now planning for renovations that will largely begin in the third quarter. The other corporate and IT projects will be pretty evenly distributed across the year.

[Joe Greff:]

Okay. So if I look at the $34.1 million in the 1Q, how is that broken out between maintenance, project, corporate and IT?

[Jonathan Halkyard:]

About $18 million in project and about $14 million in maintenance and the remaining small amount in corporate and IT.

[Joe Greff:]

Okay. Thank you.

[Operator:]

Thank you. Our next question today is coming from Christopher Agnew from MKM Partners. Please proceed with your question.

[Christopher Agnew:]

Thanks very much. Good morning. In terms of free cash flow, I think you mentioned future developments as your third priority. As you are approaching 75% threshold for renovations completed, what are your considerations around future development in terms of when? And then also what are you thinking about in terms of future development? Thanks.

[Jim Donald:]

Thank you. Chris, this is Jim. We had made an announcement about six weeks ago that we brought in Mike Fruin, formerly of Marriott and High Hotels who has peaked in development experience and has dealt with that all of his career. We have officially begun that development process. But it's not like we have put up a lien in the sand and said we are going to have a property up in 12 to 18 months. We are looking at the entire portfolio and timing all of the things that we do with our renovations and focusing keenly just on executing on these renovations. But at the same time, we now with Mike's presence have people to field questions about certain greenfields that come up for sale that we want to look at and/or small acquisitions. We haven't done anything yet but it would be my plan by the time that these renovations do complete in early 2017, that we will be underway with some kind of development on probably a purpose built Greenfield location. But right now, it's just very early days for us. It's just a matter of us getting the ball started in that direction.

[Christopher Agnew:]

And maybe just a follow-up to that. As you look across your existing portfolio, are there properties or locations that you would maybe look to exit and almost swap into other locations as part of that development process? Thanks.

[Jim Donald:]

That's a very good question. And we are always looking at our properties from a top to bottom list, not necessarily in revenue or EBITDA but just in age and the amount of renovations that they need. So we are constantly combing the company for those opportunities. But in that same vein, I will add that we are also looking at areas that we currently have very productive properties and I should stay, highly saturated areas where we think we can actually put more properties in. And being an owner operator, we don't have to worry about any restrictions around there. So, we are looking at it as a defensive measure in terms of other properties that we maybe to exit the portfolio but at the same time, can we put new properties back in there. But again, I just want to make it clear that there is a lot going on here and right now with the return of the renovations, the consistent return, I should say that that's where our focus is right now.

[Christopher Agnew:]

Great. Thank you.

[Operator:]

Thank you. Our next question today is coming from David Loeb from Robert W Baird. Please proceed with your question.

[David Loeb:]

Another one for Jonathon. Good morning, gentlemen.

[Jonathan Halkyard:]

Good morning, David.

[Jim Donald:]

Good morning.

[David Loeb:]

Not specifically about the bond offering, but you are doing the bond offering. You are paying 95% of the REIT's taxable income and paying tax on the remaining 5%. You are now paying some dividend from the C Corp and I guess in late March you issued 1.7 million of stock from the REIT to the C Corp. Is all of this essentially balancing the cash needs of the REIT? And can you talk a little bit about what the motivations are of debt on a longer term basis? And essentially how you manage, how you plan to balance the cash between the REIT and the C Corp?

[Jonathan Halkyard:]

Well, the equity issuance you are talking about was to satisfy stock compensation that was granted in March.

[David Loeb:]

Just to clarify, that was stock issued by the REIT to the C Corp and then pays the stock comp. Is that how that works?

[Jonathan Halkyard:]

Yes.

[David Loeb:]

Okay.

[Jonathan Halkyard:]

All I can really say about the offering from the REIT is that it is intended to extend debt maturities of the REIT debt. Beyond that, I think I just need to be deliberately vague around the offering itself. But it is a refinancing intended to extend maturities for the REIT. That's all.

[David Loeb:]

Okay. Can you comment a little bit more about what the REIT's cash needs might be? And about what's the thought process behind paying tax on that last 5% of taxable income?

[Jonathan Halkyard:]

No. Only to say that the REIT is required to distribute greater than 90% its taxable income and we have described now over several calls that it's our general objective to distribute approximately 95% of the taxable income to provide a return to the paired shareholders.

[David Loeb:]

Okay. Thank you.

[Jonathan Halkyard:]

Okay.

[Operator:]

Thank you. Our next question today is coming from Chad Beynon from Macquarie. Please proceed with your question.

[Chad Beynon:]

Hi. Thanks for taking my questions. Jonathan, I just wanted to follow up a little bit on the guidance commentary and ask the question a little bit differently. You came in at the high end of 1Q compared to your guidance, announced a pretty healthy 2Q guide and you are really starting to bear the fruits of some of the initiatives that have been put into place over the past year or two. So maybe if you could provide a little bit of color as why maybe you want to tweak the annual guidance at this point given the momentum and obviously the back half guidance implies and EBITDA deceleration, just taking the midpoint of 2Q and the result in the books. If you could elaborate a little bit there?

[Jonathan Halkyard:]

Okay. Thank you for the comment. And we are pleased with the momentum, not only on the marketing front, but also on the cost front. We felt our first quarter results were quite good and certainly consistent with the full year guide with our property flow-through of 80% higher than what we have guided for the full year. There are different dynamics from quarter-to-quarter, both within the business as well as in comparison to prior year. I have to be cognizant of that. And also it's early in the year. With just a quarter under our belts. I just did not think it was prudent quite yet to make any adjustments to our annual guidance and we will certainly revisit that as we go through the year. But it's primarily because it's still a bit early. And the third quarter is our most significant quarter in terms of revenue and EBITDA generation. And so with better visibility there, it's probably when we might revisit the annual guidance.

[Chad Beynon:]

Okay. And I know last quarter I think you talked about 1Q benefiting from the Super Bowl and a PGA event down in the Phoenix area. Are there any other, I guess, major events that were either in 2014 or will come in 2015 that we need to be cognizant about with respect to quarterly performance?

[Jonathan Halkyard:]

None that come to mind right now. We will do well with special events and some seasonality, but none come to mind right now beyond those that you mentioned. And I will note that we called those out specifically because that was a situation where we accelerated our renovation of our Phoenix hotel so that we could take advantage of those events you just mentioned and we had very strong performance in Phoenix as a result of having done that. So it was the right decision.

[Chad Beynon:]

Okay. Thanks for the color.

[Jonathan Halkyard:]

Thanks.

[Operator:]

Thank you. Our next question today is coming from David Hargreaves from Sterne, Agee. Please proceed with your question.

[David Hargreaves:]

Asked and answered. Thank you.

[Operator:]

Thank you. We 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.

[Jim Donald:]

Yes. Thank you, operator. It's Jim. Listen, thanks for your time today. As a team, we are looking forward to updating all of you next quarter. Thank you very much.

[Operator:]

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