Extended Stay America, Inc.
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Greetings and welcome to the Extended Stay America Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief 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, Mr. Rob Ballew, Director of Finance, Investor Relations at Extended Stay America. Thank you, sir. You may begin.

[Robert Ballew:]

Good morning and welcome to Extended Stay America’s second quarter 2015 conference call. Our second quarter earnings release was issued this morning and is available on the Investor Relations portion of our website at extendedstay.com. In addition, today’s conference call and webcast includes a presentation, which is available on our Investor Relations section of our website. Joining me on the call are Jim Donald, Chief Executive Officer; Jonathan Halkyard, Chief Financial Officer; and Tom Bardanett, Chief Operating Officer. After our prepared remarks, there will be a brief question-and-answer session. Before we begin, I would like to remind you that 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 the forward-looking statements. Forward-looking statements made today speak only as of today. The factors that could cause our 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 and our Form 10-Q filed this morning. With that, I will turn it over to Jim.

[James Donald:]

Thank you, Rob. And thanks, everyone, for joining us this morning. I’d like to comment on our second quarter 2015 results and update you on our ongoing initiatives and then Jonathan will provide a more in-depth discussion on the quarter and our outlook for the second-half of 2015. During the second quarter, our team executed on the plan we have previously communicated, which includes our ongoing renovation program, making progress on the rollout of our revenue management system and marketing programs and improving our balance sheet. Additionally, I am pleased with our result this quarter, which illustrate that our team’s hard work combined with Extended Stay’s compelling value proposition is delivering improved operating performance. This morning we announced second quarter RevPAR growth of 6.1%, adjusted EBITDA growth of 8.7% to $171.7 million, and a net income growth of 40% to $64.8 million. Property margins in the second quarter expanded 270 basis points to 57.1% with the property level flow-through of over 100%. In May, we completed our first unsecured notes offering, a 10-year $500 million offering at 5.25%, the proceeds of which of we use to repay a portion of our CMBS debt. Our renovation program continues to progress as expected. We completed eight hotel renovations in the second quarter and began work on our next phase of 95 hotels that we expect to complete in early 2016. As we discussed previously, these renovations take on average about three months to complete at a cost of approximately $9,000 per key or $1 million per hotel These renovated hotels are growing faster than our non-renovated hotels and help us drive a consistent nationwide guest experience. We remain on track to have 35% of our ESA branded properties renovated by early 2016, and complete our renovation program by early 2017. We made progress on our revenue management and market initiatives this quarter and we seek to maximize the effectiveness and value of our national platform. By the end of the second quarter, over 60% of our properties had our new Revenue Management System implemented. We currently have over 70% of this done and we’ll complete the rollout to all properties by the end of the third quarter. Early results are encouraging and we continue to expect this system to provide a 1% to 2% RevPAR list over time. But please keep in mind that we will not realize most of the benefit until the second and third quarters of 2016, as our system becomes more proficient and we’re able to drive yield more efficiently during our peak season. Our loyalty program Extended Perks continues to gain momentum. Our program provides members with instant discounts from over 150,000 local and national merchants and the ability to save on their next Extended Stay America visit. We now have enrolled over 880,000 guests with whom we engage daily in direct marketing [ph] offers to drive incremental revenue. Extended Perks members have higher e-mail open and click through rates compared to nonmembers, which results in increased revenue. We’ve experience our highest rate of Extended Perks membership signups at our call center, where we began efforts starting in June. We also continue to improve our sales force effort, as we seek to streamline these functions and maximize both efficiency and yield, having piloted our new streamlined sales process in one of our region. Our sales staff becomes more effective by focusing on high-value sales activity, while our centralized sales team handles growing new accounts and support services to drive value. Here at Extended Stay, we strive to be a responsible stewards in the communities in which we live and we work. Given the ongoing water prices in most of California, we went to the drawing board to develop methods to reduce water consumption without affecting our customers’ experience. These solutions include installing new showerheads, upgrading our toilets, implementing operational process changes, and we are in the middle of reviewing irrigation design at a number of hotel. All said, we’ve identified over 26 million gallons in water usage saving annually, and this will also save us money, all without impacting our customer experience. We are now looking at ways we can rollout these learning to the rest of the company. I would like to comment on our lodging industry and our positioning within the sector, as we – as well as briefly update you on our development plan. Overall, U.S. room unit growth is expected to be below long-term averages of 2015 and 2016. Looking more specifically at the economy and mid-scale segment, overall unit growth should be at or below 1% for this year and 2016, and outside of a few metro areas, such as New York City and Nashville, supply growth remains muted. Additionally, given that we are not highly exposed to gateway metro market, international flowers do not compromise or comprise, excuse me, a meaningful demand driver for us. And, therefore, we have avoided being meaningfully impacted by the reduction in international travel driven by the strong dollar. We believe that our geographically diverse portfolio is well-positioned to take advantage of the current economic environment, and we have meaningful organic growth drivers embedded in our portfolio. Earlier this year, we hired Mike Fruin, as our SVP of Real Estate and Development and industry veteran with over 20 years of experience. These are the process of building a team to create the next-generation prototype and brand positioning for Extended Stay America, and he has engaged an external firm to assist with brand design and customer experience. We look forward to giving a more detailed update in the next few quarters. As I joined Extended Stay in early 2012, the team we put together has transformed ESA in all phases of our company from bricks-and-mortar to our operating performance, from our marketing capabilities to revenue management and sales, including national branding took both the way our guest interact with us and how we interact with them. It has been an honor and a privilege to work with over 9,000 associates, not only on the journey back to the public market, but also to a very bright future. As some of our initiatives wind-down and others get set to begin, the timing for a transition is perfect. And I could not be more excited to pass the baton over to Gerry Lopez. And I look forward to assisting him over the course of 2015. With our current executive leaders in place coupled with Gerry’s leadership, the best years are ahead of us. I’ll now turn the class over to Jonathan, who’ll provide more detail on the second quarter results, comments on our 2015 outlook and discuss our ongoing priorities for free cash flow. Jonathan?

[Jonathan Halkyard:]

Thank you, Jim. Despite cycling on a very strong performance for the company last year in the second quarter, we grew revenue and reduced costs, achieving flow through of over 100% on our incremental revenue to hotel operating profit. We issued $500 million in unsecured notes in May. The only company in our ratings category to price at 5.25 or better in 18 months, extending maturities by an average of 1.3 years. We invested $20.6 million in renovations of our hotels, provided a 13.3% distribution increase from the prior year, and further reduced leverage. This quarter our revenue growth was driven by outperformance in renovated properties, a shift in mix to shorter stay guests, improved ADR across the portfolio, partially offset by some disruption from hotels under renovation, and a reduction in lower rate, long-term residential guests. We generated revenue of $340.3 million, an increase of $18.4 million, or a 5.7% increase over the second quarter last year. System-wide RevPAR grew 6.1%, driven by an ADR increase of 8.5%, while occupancy declined 170 basis points to 77.1%. The impact of renovations on revenue was slightly higher this quarter than in the second quarter of 2014. Approximately $27,000 available room nights were displaced from renovation this quarter. This represents 0.4% of our available room nights as compared 2.1% displaced last year. Our renovated property which at quarter-end were 60% of Extended Stay America branded hotels or 56% of our total company, delivered strong results. RevPAR growth in the second quarter for properties renovated at the beginning of the quarter was 7.6%, driven by an ADR increase of 9.2%. Our non-renovated properties saw RevPAR growth of approximately 2.9%. These properties achieved ADR growth of 5.9%, but we saw a decline in their occupancy rate of 220 basis points. In the second quarter, we continued to shift our customer mix as defined by length of stay to enhance profitability. As occupancy in our one-to-six night business increase, while it declined for longer length of stay business, particularly with long-term residential guests staying 120 days or longer. The shorter stay segment of our business accounted for approximately 33% of our revenue in the quarter compared to approximately 32% during the same quarter last year. This segment contributed nearly half of our $18.3 million room revenue growth. We’re pleased with the direction of this trend and certainly expect it to continue. We reduced hotel operating expenses in the second quarter due to improved operational efficiencies, as a result of our lean operations initiative; so called, KAI ESA; lower property insurance claims expense and the slight decrease in the number of occupied room. This improvement in the hotel operating expense resulted in property level flow-through of 103.9% lifting our hotel operating margin 270 basis points to 57.1%. General & Administrative expenses were $26 million, an increase of $4.5 million over the same quarter in 2014. Adjusted G&A expenses, which exclude non-cash equity-based compensation, public company transition and secondary registration costs and the implementation of certain key strategic initiatives, were $22.5 million, compared to $17.3 million in the same quarter in 2014. The additional G&A we incurred year-over-year is primarily due to cycling a favorable settlement of $1.7 million last year, from previous employment-related agreement, and an increase this year in short-term incentive compensation due to our improved performance. Ongoing costs related to our new Revenue Management System also contributed to the year-over-year increase. Excluding these items, G&A increased by about 8%. Adjusted EBITDA for the second quarter was $171.7 million, an increase of 8.7% when compared to the second quarter of 2014. Adjustments to EBITDA by the quarter are detailed in our earnings release and include the aforementioned G&A adjustments, as well as two other adjustments. First, loss on disposal of assets of $0.4 million, and second, a non cash foreign currency transaction gain of $0.9 million related to the depreciation of the U.S. dollar versus the Canadian dollar at our Canadian subsidiaries which have U.S. dollar denominated debt. Net interest expense was $35.5 million compared to $46.5 million in the prior year period, representing the benefit of our refinancing activities over the past year. Interest expense this quarter included approximately $2.3 million in charges associated with repayment of a portion of our mortgage debt, the majority of which were non-cash. There were $9.4 million of such charges in the second quarter of 2014. Net income increased 40%, or $18.5 million over the second quarter of 2014 to $64.8 million. Income tax expense for the second quarter was $17.9 million, compared to $14.2 million in the comparable period last year. Our effective tax rate for the second quarter this year was 21.6%, which certainly reflects the efficiency of our Paired Share structure. Adjusted Paired Share Income for the three months ended June 30, 2015, was $66.8 million, or $0.33 per diluted Paired Share, based on $204.6 million weighted average diluted Paired Share outstanding. Adjusted Paired Shared Income, a non-GAAP measure, represents net income, as adjusted, attributable to the consolidated enterprise. These adjustments are detailed in our earnings release and our 10-Q. We ended the quarter with total cash of $260 million comprised of $68.2 million in unrestricted cash on hand, and $191.8 million of restricted cash. Net debt was approximately $2.6 billion at the end of the quarter and net debt to trailing 12 months adjusted EBITDA is now down to 4.5 times. Capital expenditures for the quarter totaled $39.9 million. This morning, the Board of Directors of ESH Hospitality, Inc., the company subsidiary declared a cash distribution $0.15 per share for the second quarter of 2015 on a Class A and Class B common stock. Also this morning, the Board of Directors of Extended Stay America, Inc. declared a cash distribution of $0.2 per share for the second quarter of 2015 on its common stock. Both distributions are payable on August 27, 2015 to shareholders of record as of August 13, 2015. Our continuing distribution policy will be to target a pay out of approximately 95% of re-taxable income. Based on our year-to-date performance and our outlook for the remainder of the year, we are increasing our adjusted EBITDA guidance for 2015 to $595 million to $605 million. We’re increasing our net income guidance range to $171 million to $192 million, and narrowing our revenue guidance to $1.28 billion to $1.295 billion. We expect the number of room nights affected due to renovation to be 142,000 and 112,000 in the third and fourth quarters of 2015, respectively. This compares to approximately 26,000 and 70,000 room nights displaced in the third and fourth quarter of 2014, respectively. We continue to anticipate total capital spending to be between $190 million and $210 million for renovations, IT project, and maintenance in 2015. For the third quarter, we expect that our revenue will be in the range of $355 million to $362 million, and our adjusted EBITDA will be in the range of $174 million to $179 million. We remain very enthusiastic about our business model and our ability to execute on our initiatives. Our renovation, revenue management, and marketing initiatives will continue to drive top-line growth, while our operating margin improved capital structure. And tax efficient corporate structure enables us to convert that top-line growth into strong free cash flow. As we look ahead, we will use our free cash flow to deliver the highest return to our shareholders. After our renovation investments and distribution, the remaining free cash flow will be available for future development, accretive acquisition, debt reduction and further returns of capital to our shareholders. We’re also pleased to announce that Extended Stay America will be at three upcoming investor conferences

[James Donald:]

Thank you, Jonathan. The hard work of our team has resulted in another strong quarter. We have significant work ahead of us and we remain focused on building the best brand and a lodging business here at Extended Stay America. Rob, let’s go straight to the questions.

[Robert Ballew:]

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

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Anthony Powell with Barclays. Please go ahead with your question.

[Anthony Powell:]

Hi, good morning, everyone.

[James Donald:]

Good morning.

[Anthony Powell:]

Just on your RevPAR growth in the quarter did you see any impacts from either lower demand in oil-producing regions or impact from weather in the quarter? A number of other hotel companies did mention that as headwind for the quarter.

[James Donald:]

No, we really didn’t. With respect to Texas, which is, of course, where mostly oil-and-gas business and lodging is based, Texas is certainly meaningful to us. It’s about 10% of our hotels. But in Houston, specifically – actually most of our business comes out of the medical sector. So we were really not affected there and actually we had quite a strong quarter in Austin specifically. So we were not really impacted by that segment of the business at all. And with respect to weather, no, we don’t think that there was really any unusual weather impact. I think it does speak to the geographic diversification that we have. And the slightly different nature of our customer segments that make us perhaps a bit more immune to those effects.

[Anthony Powell:]

Right, and for my follow-up, thanks a lot of the detail on the shorter-stay guest, the 33% of your room night. What’s your target there for that benchbrick [ph] over time and where are your competitors on that metric right now?

[James Donald:]

Well, the target is – it’s difficult to say, because that really will come as a consequence of improved revenue management over the upcoming quarters. We do expect that the percentage of short-term guests will continue to increase. And this past quarter actually is a good example of some of our delivered efforts in that regard, because as we mentioned on the call our extremely long 120-day-plus guests actually declined with us, which we would expect to see in the second and third quarters, and that’s really to make room for higher paying more profitable short-term guests. That group though remains important to us and I would expect to remain stable in the fourth quarter and the first quarter, where there’s not as much retail demand. As it relates to our competitors, we think that they do more transient short-term business than we do, although we don’t have specifics on their customer segmentation.

[Anthony Powell:]

All right, great. That’s it for me. Thanks a lot, and, Jim, good luck on your position. [ph]

[James Donald:]

Thank you, Anthony. I appreciate that.

[Robert Ballew:]

Thanks, Anthony.

[Operator:]

Thank you. Our next question comes from the line of Harry Curtis with Nomura. Please go ahead with your question.

[Harry Curtis:]

Hey, good morning, everyone. A quick question on your effort to develop a deeper relationships with the corporate accounts. Can you just give us an update on how that’s going, given that, or as your renovation program matures?

[Jonathan Halkyard:]

Sure, Harry, I’ll comment on it and then I’ll invite Tom Bardenett, our Chief Operating Officer, who is also in the line and has been involved in this process. It is certainly true that our renovation program has helped our efforts with respect to corporate guest, just going from 50% of our hotels being renovated to now 60%, and with a view at the end of the year that we’ll have 75% of our hotels renovated. As we engage in those discussions now with those corporate customers, particularly around 2016, we really believe we’ve achieved a tipping point with respect to our renovated hotels. Now, every market in the U.S. of consequence, Extended Stay has renovated or will have by the end of year renovated hotels in those markets, so it puts us in a much better position. And I think it’s borne out by the numbers. Our renovated hotels have higher ADR levels, higher occupancy levels, higher revenue growth, higher occupancy growth than the unrenovated hotels. This is augmented also by our sales force reorganization, which we’ve now been at or about three or four months, which is helping us call and fulfill those orders more effectively. Hey, Tom, do you want to comment at all on the corporate sales activity?

[Thomas Bardenett:]

That would be great, Jonathan. In fact, timing is perfect. We just returned from the GBTA, which is Global Business Travel Association Conference held in Orlando. And this was our third event, where we participated and had a tradeshow booth. And what was the most noticeable was the amount of activity because of the renovations and our ability to now have a product that we think can be very attractive for the value of conscious corporate clientele. We noticed a significant increase in our reception that we had. We had over 130 people attend. And on the face-o-floor [ph] many of those accounts are similar accounts that you would see in other hotels, Lockheed Martin, IBM, Oracle, just to give you an example. So we’re very, very excited about the opportunity to participate with companies like that and grow their Extended Stay business in addition to some of their client-interest [ph] in the one to six category.

[Harry Curtis:]

That’s very helpful. And then my second question goes back to the comments you made about your development in your prototype. What are your thoughts on using other people’s money to grow your footprint, as opposed to your own money?

[Thomas Bardenett:]

Well, we’ll – we use the most cost-effective source of capital available to us. We certainly understand that it will be important to grow the footprint. We think we got a very strong brand and a strong operating system here that we can apply to a greater number of hotels. And I think the use of other outside capital developed those hotels is a real possibility, and I think may look very attractive to us, as we go forward. But our efforts right now are focused on defining the next-generation Extended Stay hotel box and room and then we’ll move into identifying specific markets. And at that time, we’ll pick up the financing strategy. But certainly, using a more capital-light, and from our own shareholders perspective, approach is a possibility for us.

[Harry Curtis:]

Very good. Thanks, guys.

[Thomas Bardenett:]

All right. Thanks, Harry.

[Operator:]

Thank you. Our next question comes from the line of David Loeb with Baird. Please go ahead with your question.

[David Loeb:]

Good morning, folks. This one might be for Tom also. And I appreciate the table with the displacement outlook in the 8-K. And I’m just trying to really kind of tease out in the third quarter guidance three crosscurrents here. You’ve got a lot more displacement coming in the third quarter, but at the same time you’re clearly seeing some benefits from both the revenue management system and some pretty significant cost-cutting. Can you just help us understand about how those three components come together and that help for the third quarter and fourth quarter?

[Thomas Bardenett:]

Sure. First, I would comment on costs. We’re really holding the line on cost rather than doing any deliberate cost-cutting. And – but it does speak to the power of the business model and the fact that we are generating revenue growth really through paid [ph] entirely that we are able to flow-through pretty high levels of additional revenues to hotel operating profit. In fact, in our guidance for the third quarter contemplate over 90% of incremental revenue flowing to the hotel operating profit. On the revenue side, you correctly note that we are going to experience more displacement due to renovations in the third quarter than last year. In fact, it’s probably going to affect our growth rate by 70 to 80 basis points in the third quarter. We in the past have been reluctant to renovate in the third quarter because of the level of business, but we are in the different spot now. We have, as you mentioned, greater confidence in revenue management and our demand generators and sales, and also we think that it makes a lot of sense for our shareholders to complete our renovations as quickly as possible given the results that we’ve seen. So we’re going to press ahead and renovate hotels in the third quarter and it will impact revenue. But we have maintained our revenue guidance of about 5% to 7% RevPAR growth for the third quarter and despite of that – and yes, that comes out of more our improved demand generation and our conversion out of our call center, which by the was up 60% in terms of revenue booked through the call center in the second quarter. The call center is working very effectively and so we think that, we are still comfortable with that revenue guidance in spite of the increased displacement that will be.

[David Loeb:]

That’s great, very helpful, Jonathan. Thank you. And also just compliments on the inspired choice of Haydn Surprise Symphony for the hold music this morning.

[Jonathan Halkyard:]

We disclaim all responsibility for that.

[Operator:]

Thank you. Our next question comes from the line of Steven Kent with Goldman Sachs. Please go ahead with your question.

[Steven Kent:]

Hi, good morning. Could you just talk to a couple of issues on ADR, which was up 8.5% occupancy, down 170 basis points? Can you just decompose the trends on both a little bit? How much of this was mix shift, share of rooms booked by short stay guests? Can you just give us a little bit of a sense on that, because obviously ADR up 8.5% might be one of the better ADRs of all the hotel companies to report so far? And then, the other thing on RevPAR was roughly around 29% for non-renovated properties, so it’s pretty-wide delta versus the industry average. When you look at that, what is really hindering the performance there, what could we expect over upcoming quarters? And the reason I ask is because so much of hotels’ RevPAR is driven by location and from my recollection those non-renovated properties are in pretty good locations. So I’m trying to figure out why those were so soft?

[James Donald:]

Sure, Steve, let me – I’ll try to address each of those good questions. In terms of the ADR growth, ADR growth was certainly helped by our short-stay guests, ADR and our renovated sites. The ADR growth was stronger in our renovated sites than our un-renovated sites, but generally, consistent across all of our – in terms of percentage terms, in all of our length of stay segments. The un-renovated versus renovated growth rate, on the un-renovated sites it’s really the mix. Our un-renovated sites do have a higher percentage of the longer-term guests. So which are then – in those un-renovated hotels, those longer-term guests, the rates are not growing as quickly. And part of our playbook as we renovate our hotels are to – we have to take a third of the hotel out at a time; many of those guests do not return after we raise price. And then it takes some amount of time for us to rebuild the occupancy at higher rate. So I think what we really causes those un-renovated hotels to grow is, what has been for the past few quarters kind of 3% or 4% growth rate, has been the fact that they are disproportionately longer stay guests, and those are not growing quite as fast. Our RevPAR, just final comment, the statistics that we called out on several prior calls which is, as we look at our transient guests in our renovated hotels, which is probably the best proxy to compare to other limited service hotels, our RevPAR growth in the quarter for that group was over 10%. And I think that bodes well for the future as our renovated hotel become a greater percentage of our overall portfolio and the shorter stay guests become a greater percentage of our overall guest segmentation. Our ability to really drive rate and grow occupancy in that segment has been pretty strong now for several quarters.

[Steven Kent:]

Okay. Thank you.

[Operator:]

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

[Chris Woronka:]

Hey, good morning, guys. I wanted to ask you about, kind of go back to that question about the un-renovated properties maybe a slightly different way. Of what you’re renovating in the third and fourth quarter this year, how are those determined? And is there a – when you look at what’s the second quarter RevPAR growth was then what you’re renovating in the third and fourth quarter of this year, is there a big difference between those of what you’re going to renovate early next year?

[Jonathan Halkyard:]

Well, we’re renovating about 95 hotels between now and prior to the first few weeks of January of 2016. So, right now as we speak we have about 40 hotels under renovation. And those will be completed around the end of third quarter and then we’ll start with another 50-some-odd hotels. We don’t have the numbers in terms of ADR RevPAR for that class of hotels that’s undergoing renovation. We prioritize certainly the highest ADR hotels when we started this program three years ago. But what we did do though was – in prioritizing the remaining hotels we solicited a lot of input from our corporate sales-force in terms of where our corporate customers were most interested in renovated product or where conversely we thought we were losing from the hotel’s opportunity because of not having renovated property. That certainly is what moved this group of 95 up to complete in 2015. Is it compares to what we’re doing next year and next year we plan to complete the renovation of the portfolio. There is not a tremendous amount of differentiation between those two groups.

[Chris Woronka:]

Okay. That’s helpful. And then, also wanted to ask you about the cadence of the benefit from the renovation side; I think you guys have historically said that it takes couple months to rebuild occupancy and shift the mix, and then you don’t really get the peak benefit for six or nine months or even a year after the renovation is complete. Does that still kind of hold true? And I guess, the question is kind of as we look out next year, not asking for guidance at all, but if that trajectory holds true it seems like you should have a pretty large benefit starting fairly early in the year, is that directionally correct?

[Jonathan Halkyard:]

It is certainly true that we are now bringing online a lot of renovated hotels. We did 90 early in 2014 and we just completed 60 in early part of this year. We’ll have another 95 completed in early part of January of next year and then on to an even larger group. So yeah, I mean, we are – believe me, we are excited to have this kind of products coming online and are continue to be enthusiastic about the results that we’re getting at. And we talked about how it makes our corporate sales-force’s life easier. So, I wouldn’t say that there is any path that’s going to occur early next year because of it, because it’s been a pretty steady renovation pace now for some time. But what I can say is that really provides a nice background for all of our other efforts including sales as well as revenue management.

[Chris Woronka:]

Okay. And just finally on the Crossland portfolio, is there any further thinking about for any further along on maybe looking at alternatives for that longer-term and then what you might do with it?

[Jonathan Halkyard:]

The Crossland suites are performing well, but they certainly are not core to our growth strategy and we are not investing renovation capital dollars in those properties. And beyond that we really don’t have any plans at this point, nothing to say.

[Chris Woronka:]

Okay. Fair enough. Thanks, Jonathan, and good luck to Jim.

[James Donald:]

Thanks, I appreciate that. Next question?

[Operator:]

Our next question comes from the line of Shaun Kelley with Bank of America. Please go ahead with your question.

[Shaun Kelley:]

Hey, good morning, guys. Thank you for taking my question. So, Jonathan, first one, can you give some color on this? And I think the answer to Steve’s call – to Steve’s question, but I’m going to ask it in a slightly different way. Clearly you’re seeing some very positive mix shift as you move from the longer stay guest to the shorter stay. Could you help us understand just typical gap or rate gap between those two types of customers in dollars?

[Jonathan Halkyard:]

Sure. Typically, it’s a little bit different times of the year, but the rate gap will be about $20 now between a short stay guest, which is one to six nights versus a 30-day or more guests. And it’s usually between 20% to the 30% discount for those longer stay guests. Now, the longer stay guests bring with them much lower cost, because we’re not doing daily housekeeping and turning the room like we do for shorter stay guest. But, certainly the shorter-term guests are more profitable guests for us.

[Shaun Kelley:]

So, then to kind of follow-up on that, so you’re mix-shifting and that’s partially what’s helping drive some of the rate and occupancy was up a bunch, it would imply that flow-through would have been a little tougher to get, but it seems like you guys kind of killed it on flow-through anyway. So, what sort of kind of gives in that, that I’m sort of missing at least when we look at sequentially what you did last quarter versus this quarter?

[Jonathan Halkyard:]

Well, I do think it’s important to keep the shift in perspective. If we shift a 100 basis points out of long-term to short-term guests, say, quarter-over-quarter, it’s a meaningful number of room nights on 6.5 million available room nights in a quarter. On the other hand, it’s not something that have the tremendous impact on the cost structure. I think what’s you are – so it’s not as though that shift to shorter term guest has put a tremendous amount of pressure on our operating costs. We’re very proud of the fact that our operational initiatives have offset any of that impact that – those additional costs that shorter term guests bring and we’re able to bring all of our incremental revenue to the bottom-line. So this has been a steady shift from long-term to short-term guests, but not a dramatic one, certainly not in a single quarter. So, it’s not anything that I think really has a material impact on our cost structure.

[Shaun Kelley:]

Got it. That’s really helpful. And then just one last one would be, big picture, number of jurisdictions out there in particular in California you’re beginning to talk about minimum wage increases. Is that something that would be a risk for your hotels in terms of percentage of labor that might be at minimum wage and is that something you would help us think about a little bit?

[Jonathan Halkyard:]

Well, I’m going to ask Tom to address that in just a minute. But I would point out that for us because of our – this fantastic business model that we have, labor is not a significant component of our cost structure. So, we do not expect to have the kind of risk that others might have with who had extensive food and beverage operations or other operations involving labor. Ours is very much a self-serve model. But I’ll let Tom comment on further on that.

[Thomas Bardenett:]

Yes, thanks, Jonathan. Only a small portion of our employee, let’s say, 1% to 2% are at the minimum wage, and whether it’d be stayed or settled. So our impact from changes in the minimum wage would be minimal. And even some of the most extremist proposals like Los Angeles and CTAC [ph] and that has some – and that could presumably hurt us in those areas, but it’s pretty rare and will only affect us in those specific markets.

[Shaun Kelley:]

Great. Thanks, Tom. Thanks, Jonathan.

[Thomas Bardenett:]

Thank you, Shaun.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Chad Beynon with Macquarie. Please go ahead with your question.

[Chad Beynon:]

Hey, great. Thanks for taking my question. Jonathan, I just want to elaborate on your comments thereabout the flow-through when you’re able to shift long-term guest to short term. Is that your expectation that you could continue to see this in the third and fourth quarter? I’m just trying to kind of couch that against, the 70% flow-through goal. If this is a little bit easier, if it’s mainly just a shift for their extra cost with the rooms that are being renovated that could make it harder to beat that 70% flow-through? Thanks.

[Jonathan Halkyard:]

No problem. I feel very good about our ability to beat the 70% flow through. I – as it relates to the shift, I would expect to see the same type of shift in the third quarter, because, remember, this is our – it is a high season with high transient demand in a quarter. If we are doing our jobs, we are accommodating that demand by reducing somewhat our business from longer-term residential, or just longer-term contract business. Now, in the fourth quarter, I’m – I don’t expect that to be the case, because our fourth quarter and the first quarter performance does depend a bit more on that longer-term guest than we are – we’re in a strong position to attract that business. So, as we get into late August and September, we turn a lot of our demand generators towards that longer-term business to supplement our occupancy in the offseason. So I don’t – I would not expect to see as much of a shift year-over-year. The renovation program really does not have much impact on our operating cost, except that, it could help our maintenance expenses a bit, as we address some of those issues in the course of the renovation, but it doesn’t have any really any other impact on operating costs.

[Chad Beynon:]

Okay. Thanks. And then on the RevPAR side, it looks like your blended underperformance against the industry improved pretty significantly, mainly because of, I’m guessing the Platinums like you said, up 9% ADR. Could you provide maybe some RevPAR guidance kind of how you’re thinking about the back-half of the year, whether it’s for the industry, or kind of what’s in your revenue guidance?

[Jonathan Halkyard:]

Sure. I certainly don’t like the way you characterized our underperformance to the industry. We, again, when we look at the industry, we’re looking at, there is a lot of transient business and with hotels that are probably been renovated much more recently than ours. And when we look our performance against in our renovated hotels, which is a growing percentage of our portfolio and our shorter-term guest, we grew over 10% in the quarter, which we think are very good growth rate. Our revenue guidance is pretty straightforward. It is – it assumes approximately a 5% to 7% RevPAR growth in the third quarter and we narrowed our guidance for the year slightly, mostly taking into account the fact that now through six months, we’ve had RevPAR growth of about 6%. So and as I mentioned earlier in the call, we’re making this with – we’re giving this guidance in spite of the fact that we’ll be incurring higher levels of disruption in the, particularly, in the third quarter than we did last year. There are certainly underlying assumptions around continued mix shift and pricing there. We’re not making really any assumption about positive impact from the Revenue Management System this year. Although certainly, that system as it’s now going to be rolled out by the end of the third quarter could help us meet the high-end of our revenue guidance range.

[Chad Beynon:]

Okay. Thanks. Sorry about that. I appreciate your clarification.

[Jonathan Halkyard:]

No problem. Thanks.

[Operator:]

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to Mr. Jim Donald, for closing remarks.

[James Donald:]

Thank you, operator, and thank you, everybody, for being on the call today. As I said in my closing comments and in my prepared remarks that the hard work of the team has resulted in another strong quarter. I think it’s exciting to see some of these initiatives start to gain the traction that we always knew they could. And while we still have some significant work ahead of us, as we always do, we remain, as a group, as a team focused on building the best brand in the lodging business at Extended Stay America. So with that, I’ll sign off. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.