Extended Stay America, Inc.
Q3 2015 Earnings Call Transcript

Published: 28 Oct 2015

[Operator:]

Greetings. Welcome to the Extended Stay America’s Third 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. I would now like to turn the conference over to your host, Mr. Robert Ballew, Director of Finance and Investor Relations at Extended Stay. Thank you, Mr. Ballew. You may now begin.

[Robert Ballew:]

Good morning and welcome to Extended Stay America’s third quarter 2015 conference call. Both the third quarter earnings release and an accompanying presentation are available on the Investor Relations portion of our website at extendedstay.com, which you can access directly at aboutstay.com. Joining me on the call are Gerry Lopez, Chief Executive Officer; Jonathan Halkyard, Chief Financial Officer; Tom Bardenett, Chief Operating Officer; and Tom Seddon, Chief Marketing Officer. After prepared remarks by Gerry and Jonathan, there will be a 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 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 most comparable GAAP measures are included in the earnings release and Form 10-Q filed this morning with the SEC. With that, I will turn it over to Gerry.

[Gerry Lopez:]

Thanks Rob. And thanks to everyone for joining us this morning, and what is my first call since joining Extended Stay America. I’d like to start by saying I am extremely glad to be onboard here at Extended Stay. Having joined at the end of August, I have spent the last few weeks getting to know the Company, and the team, and believe that we have an exciting opportunity ahead of us as we finish our renovation program, continue the rollout of our revenue management system, staff up on our sales team, zeroing in our marketing programs, improve our balance sheet and make progress in our development plans. Taken together, we firmly believe these elements are the foundation for sustained growth. Now as many of you know, I’ve spent my carrier being a part of, or leading a diverse group of consumer focused companies. There is a long list of parallels between those businesses and Extended Stay. In my prior position, I had the opportunities and I would like to think I was successful in creating some relevant, interesting, even fresh guest experiences that managed to resonate with customers in a way that uniquely made sense to them. Well no surprise, I believe the same opportunities exist here. And not just the opportunities but add to it the fact that at Extended Stay, we have a large degree of control over our destiny, much more than in any of the businesses I’ve participated-in in the past. Here we totally own the products, the delivery and then relationship with the guests in a way that few other enterprises ever really do. Through it all, focusing on the guests, their needs and wants and above all the associates who take care of them is the key to driving excitement, superior results and ultimately value for our shareholders. At Extended Stay, we think there are four very specific actions that we can take and are taking to achieve this. First, we focus on renovations and upgrading the guest surrounding. Since we know newly renovated assets are attractive to guests and meaningfully outperform outdated facilities in just about every metric that matters. Second, we maintain a friendly and clean environment for our guests as outstanding friendly customer service and world class facilities are the key to ensuring guest return. Third, we emphasize convenience by finding innovative ways to streamline and integrate our services. And finally, we work hard to increase guest loyalty as engaged repeat guests are extremely valuable guests. We do all of this, not only because it drives relevance with our guests but because it enhances our ability to drive room rates. And thanks to our efficient operating model and structure, those rates translate into strong shareholder returns and free cash flow. My team and I have an outstanding opportunity to execute on these four actions. And in doing so we can further capitalize on the strategic improvement the Extended Stay America brand has made these last few years. We are excited about the future. Our future is built on the present. And from day one, it was evident to me this is a smooth running, motivated organization that is full of potential. My goal in the near term is to spend time with as much of the team as possible from front desk managers and housekeeping staff to regional managers and our guests in order to find ways to increase revenue, enhance productivity and therefore, increase profitability. We will also continue to execute on the plans that have been outlined previously, including completing renovations on 75% of our properties by early 2016 and finishing our renovation program entirely by early 2017, if not sooner; realizing the majority of the benefit of our revenue management system in 2016, now that it is operational across the entire portfolio; continuing to expand our royalty program Extended Perks while also building out our sales force; and finally, we will refine our balance sheet to drive down our cost of capital while utilizing strong cash flow from our tax efficient structure to reinvestment in future growth while providing strong capital returns to shareholders. Our third quarter results are evidence of the positive impact this strategy is having. This morning, we announced RevPAR growth of 6.5%, adjusted EBITDA growth of 11.2% to $181.4 million, and adjusted paired share income increase of 11.2% with $0.33 per diluted paired share. In a quarter, where industry appears to a struggle, these are impressive numbers. And as we believe in our initiative, we will continue to drive strong growth. Before I turn it over to Jonathan, to get into more specifics and detail, I’d like to take a moment to come and more broadly on the lodging industry and perhaps more specifically on where we see Extended Stay positioned. On the supply side, we believe that the threat supply is limited in the economic and mid-scale segments where we compete. And overall U.S. room growth is still expected to be at or below long-term averages in the coming years. That may not be true in other segment, but it is in economy at mid-scale. Over on the demand side, we feel strongly that our geographically diverse portfolio which focuses on domestic markets, transient consumers and longer stay guests, is well-positioned at this point in the economic cycle. Further, a very little exposure to inbound international traffic, which has seen a pullback due to the strong U.S. dollar, indeed during the quarter where sentiment and results in our industry may have been affected by geographic concentration or exposure to global economic concerns, our model stands out even more. Our diverse footprint and multiple customer segments provide opportunity, not risk. And our operating leverage delivers revenue growth to the bottom line. Furthermore, we believe we have meaningful, economic, organic growth ahead as we complete our renovation program and begin to realize the benefits of our new revenue management system, marketing programs and other operational improvement and begin to formulate our future development plan. With that I’ll turn the call over to Jonathan, who will provide more detail on the asset sale we expect to complete this quarter, our initiative, our third quarter results, and our outlook for the remainder of the year. Jonathan?

[Jonathan Halkyard:]

Thank you, Gerry. Our third quarter continued the strong pace of growth seen in the first half of 2015. Revenue growth was again led by our renovated hotels and a continued mix shift from longer length of stay guests to higher paying shorter length of stay guests. Thanks to our efficient operating model and lean initiative, we controlled expenses, which drove strong hotel operating margin expansion and EBITDA growth. Combined with our efficient tax structure, our performance allowed us to delever in the third quarter while still investing in the business and delivering a meaningful distribution to shareholders. I’m particularly proud that we delivered these financial results while accelerating our renovation program. We had almost 130,000 room nights displaced due to renovation this quarter. That’s about five times the amount during the third quarter last year. And finally, we made progress on every one of our marketing capabilities this quarter and we announced the strategic asset sale that we believe adds value for shareholders. I would like to expand on these last two items, before moving on to our financial results. In the middle of September, we announced an agreement to divest our 47 economy Extended Stay Crossland branded hotels and six similarly positioned Extended Stay America branded hotels for $285 million with an expected closing date in the fourth quarter. We will repay approximately $86 million in debt when the transaction closes. And due to our increase cash balance, we expect to make a special distribution later this year in the amount of $0.20 to $0.25 per paired share, subject to approval by both board and satisfaction of our debt covenant. With the sale and distribution, our net debt ratio will be reduced by a 10th of a turn. This transaction will further enhance the long-term growth profile of our portfolio, eliminate future capital expenditures on lower performing assets, and most importantly, complete our transition to a single brand. We made significant progress on our ongoing initiatives and achieved several milestones this quarter. We completed 31 hotel renovations for a total of 413 renovated properties and began work on another 49 properties. We completed the roll-out of our revenue management system this quarter and early results are positive. We are already seeing improved RevPAR performance on high demand and shoulder days. In 2016, with continued improvement in the systems forecast performance, the roll out of additional functionality and our revenue manager gaining experience, we expect the system to provide a 1 to 2-point RevPAR lift enabled by automated forecasting, dynamic pricing, and granular inventory control. The impact will be realized primarily in the second and third quarters of 2016 during periods of peak demand. Our new Extended Perks loyalty program added nearly a 100,000 members during the third quarter, bringing our total to nearly 1 million members. We’ve seen strong activity from Extended Perks guests across numerous business channels. We completed our corporate sales reorganization this quarter, hiring 16 sales people as we expanded our centralized sales team. We are seeing positive results from this team with direct benefits from structured approach to managing the sales cycle. The performance from our corporate account continues to improve year-over-year and we expect momentum from the sales team to continue as we move through negotiations for corporate rates for 2016 working with our revenue management resources to maximize yield. Also during the quarter, we wrapped up our first complete year with our call center in place, which now drives over 20% of our revenue. In addition to allowing our properties to spend more time servicing guests, the call center provides better pricing consistency and the ability to drive new programs or sales initiatives. For example, this quarter, our call center began marketing our Clean Plus program. This is an offering whereby guest pay a premium rate to receive nightly housekeeping. By focusing our call center reps on this upsell, we increased production of Clean Plus by nearly 300% and added 10 basis-point improvement to our ADR growth in the third quarter. That may not seem like a lot, but when $1 dollar of ADR means $14 million and $19 million in EBITDA, every bit counts. Not only does this program drive revenues, but it also increases guest control of their experience and improve their overall satisfaction. We believe this program will continue to grow and we continue to look at other ways to deploy our call center reps and corporate sales force to increase revenue. Now for the results. RevPAR increased 6.5% in the third quarter to $50.83, driven by ADR growth of 8% and an occupancy decline of 100 basis points. Our renovated properties drove strong RevPAR results, posting an 8.5% increase in RevPAR, driven by an ADR increase of 8% and an occupancy increase of 40 basis points. Our non-renovated properties saw 6.3% RevPAR growth in the third quarter, driven by an ADR increase of 6.1% and a slight improvement in occupancy. We made progress on shifting a portion of our business to higher rate, shorter duration stay guests. Our one to six-night length of stay business increased this revenue mix by 1 point to 32% in the quarter and saw 4.7% increase in room nights in the quarter. Our longer duration 30-plus-night length of stay business saw a 3.9% decline in occupied room nights and decreased its revenue mix by 1 point to 44%. This shift in mix was most pronounced in renovated properties and properties undergoing renovation. The overall decline in occupancy this quarter was caused by our properties undergoing renovation which saw 12.5 percentage-point occupancy decline, which we expected. Hotel operating margin expanded 310 basis points in the quarter on approximately 105% flow-through to 56.2%. The margin expansion was driven by expense control at our properties with hotel costs decreasing 0.7%, driven by our lean operations initiative. Adjusted EBITDA grew 11.2% to $181.4 million. Net income declined 3.3% this quarter, due to a $9 million impairment change and a higher tax rate, driven primarily by a provision to return true up for 2014. Our adjusted paired share income increased 11.2% to $0.33. Adjusted paired share income, a non-GAAP measure, represents net income as adjusted attributable to the consolidated enterprise. These adjustments are detailed in our earnings release and in the 10-Q. We ended the quarter with total cash of $300.6 million comprised of $107.5 million of unrestricted cash on hand and $193.1 million of restricted cash. Net debt was approximately $2.6 billion at the end of the quarter. And net debt to trailing 12-month adjusted EBITDA is now down to 4.3 times. We are still on track to improve this ratio to 4.0 or better by the end of 2016. Capital expenditures for the third quarter totaled $67.1 million. This morning, the Board of Directors of the ESH Hospitality, Inc., the company’s subsidiary declared a cash distribution of $0.15 per share for the third quarter of 2015 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 third quarter of 2015 on a common stock. Both distributions are payable on November 24, 2015 to shareholders of record as of November 10, 2015. Over time, we intend to distribute approximately 95% of re-taxable income. With our Q3 performance and strong fundamentals, we are raising our adjusted EBITDA expectation for 2015. Excluding the effect of the 53 hotel dispositions, we expect revenue for 2015 to be between $1.285 billion and $1.29 billion, and adjusted EBITDA to be between $602 million and $607 million. For the fourth quarter, we expect revenue will be between $297 million and $302 million on RevPAR growth of 5% to 7%. And we expect adjusted EBITDA to be between $126 million and $131 million. Assuming a close in the fourth quarter, the disposition will reduce our revenue by $3 million to $7 million and adjusted EBITDA by $1 million to $3 million for the quarter and the year. These numbers also include the impact of an expected room displacement of 123,000 room nights in the fourth quarter of 2015 from our ongoing renovations compared to approximately 70,000 in the fourth quarter last year. Rob, we can now go to questions.

[Robert Ballew:]

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 questions.

[Operator:]

[Operator Instructions] Our first question is from the line of Smedes Rose with Citigroup. Please go ahead with your question.

[Smedes Rose:]

Welcome to the fold, Gerry. I wanted to ask you guys, as you see the end in sight for the renovation activity for the portfolio, I guess first, should we be thinking about is it still running at about $1 million a property for the full renovation? And then second, just how do you think about at this point expanding your distribution footprint; are you open to on balance sheet developments or conversions or starting a franchise program or what’s the thought maybe along those lines?

[Jonathan Halkyard:]

Smedes, this is Jonathan; I’ll take the first part and then invite Gerry to comment on the second. Yes, the renovations are still running approximately $1 million per hotel and we’d expect to see that to continue as we complete the program through 2016 and early 2017.

[Gerry Lopez:]

Then Smedes, it becomes a question of what we’re going to do to renew our fleet. As you know, the impact of this renovation is significant. We’re spending quite a bit of time understanding our guests, understanding the different segments, understanding as you heard me say in the prepared remarks, their wants and their needs. We are uniquely positioned in our mix. We are uniquely positioned with our properties. We think the opportunity exists to further position and expand on what we’ve already done. So you can anticipate us coming at you sometime in the first half of next year with an idea and a plan to go forward after these renovations complete their cycle. We anticipate as we said that the current wave of renovations will complete cycle sometime in early 2017. So, we think it’s time to start looking at what’s next. And we’re excited by the early work that we’ve done, what our guests are telling us with the opportunities that exist, as we see different players in the industry move elsewhere; and frankly in our laying, in the space in which we operate, we think ample room to grow.

[Operator:]

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

[Harry Curtis:]

Just a follow-up on Smedes’ question. Gerry, can you put a little bit of meat on that bone as far as what those opportunities are? Specifically, does it make sense to develop another brand? Does it make sense to consider franchising? It seems to me it has been an awfully long time since there’s been a new Extended Stay product. And have you talked to developers? And if so, are they excited about the returns they might get on your products?

[Gerry Lopez:]

We have not gone out in math with any kind of programs, talk to developers. We’ve had some private conversations with a few folks, encouraged by what we’re hearing. I will tell you at this stage of the game, there is nothing that is off the table. The possibilities are wide open. We’re considering all sorts of ideas, some are better, some are closer in, some are further out. There’s many number of things that we could go do. We’re not prepared to declare that we will go in any one definitive place, one definitive direction or the other, other than to say the model that we’ve developed, the select service model, the focus on the Extended Stay guests, its worth we’re doing things every day to hone it. We have tools today that we didn’t a year ago anticipate that we would build on that work, we would build on those tools, we will continue on some of the same programs and take it a step further. Not to go frankly off track or off lane or try to do things that wouldn’t be what you would expect out of our brand and our positioning. So, having said all of that, with different ownership structures, the property level be in play, absolutely we will continue to own the bulk of our hotels, chances are since we’re going to own 629 after the transaction closes sometime this quarter. So you’d anticipate -- I think it’d be safe to anticipate that our path forward will go deeper and further into the strength that we’ve built over the last couple of years rather than -- and then setting off in a totally different direction with totally different brands, trying to service totally different guests. We don’t think that would be prudent.

[Harry Curtis:]

And Jonathan, you mentioned momentum from your corporate accounts. It is early, but I am just wondering if you’ve got any read on or have any expectations as to where you might take the mix of corporate demand. And we’re kind of deep into the season for those negotiations, is there anything you can share with us as to where that pricing might go?

[Jonathan Halkyard:]

Well, we had a strong quarter, as it related to our national accounts. The revenue and ADR from those accounts grew at actually a higher rate than the portfolio, the customers as a whole. And we expected this. This is a direct consequence of the improvement of the scale and the effectiveness of our sales force. We are right in the middle of our discussions with our corporate accounts for 2016, but when I look at where we stand versus where we were a year ago, with many more renovated hotels and a much more affected sales organization, I think we’re in a great position for those discussions for 2016. And we’re coming off of the year where we have had a pretty good performance with corporate account. So I can’t share with you at this point, any kind of forecast around revenue growth rate for that segment, but I think we’re in a better position than we were at this time last year with respect to that segment.

[Operator:]

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

[Anthony Powell:]

I thought that Clean Plus program was interesting and it drove a lot of I guess ADR growth in the quarter. Gerry, have you identified more of these types of initiatives that you could implement in the next year or so to drive additional, either rate growth or non-room spend?

[Jonathan Halkyard:]

Before Gerry answers that, I just want to clarify that -- I think it’s stretching it to say that Clean Plus drove a lot of the ADR growth this quarter. But it was a program that grew tremendously this quarter because of our focus on it, and it is -- its incremental revenue, which certainly helps ADR and helped our ADR growth, but it was not a primary driver of ADR growth. Go ahead Gerry.

[Gerry Lopez:]

No, thank you Jonathan for the clarification. We are not ready, I mean to come out and announce all the Clean Plus like programs. What we like about it is actually financial impact that Jonathan outline is the degree of control that it offers our guests in shaping their stay, not inconsistent when you step back and think about the travel and hospitality business overall, where people get to peak and choose different services and then pay for them accordingly. So rather than the old days of a blank price covers all whether you need or not, today, we are migrating and Extended Stay is part of it towards models where the guests get to pick and choose and so doing moderate the amount of money they want to spend and check their experience. That’s the direction that I think will be safe to assume we will continue to explore. Not ready, as I mentioned, to announce any specifics, but the notion and the strategy behind it of engaging with the guests by giving some of that control to them, we’ll -- you will see that thinking move forward in our strategies and in our tactics.

[Anthony Powell:]

And my follow-up, the non-renovated properties did pretty well in quarter, 6.3% RevPAR growth. Was that driven by some of the RMS systems or what kind of helped that performance to improve?

[Jonathan Halkyard:]

I think it was helped in part by the revenue management system. It’s difficult for us to tease out the specific impact of that. I think it’s a consequence of the -- just our greater ability to migrate demand and price demand across channels that really help those hotels. And of course there will be fewer of those hotels as we go forward into 2016, but you correctly point out, the non-renovated hotels delivered a better performance this quarter than they had in prior quarters.

[Operator:]

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

[Chris Woronka:]

I want to ask you a little bit about pacing of renovations for next year. I think you will have if my math is correct, about 167 to go by the end of the year. And how do you think about kind of getting all those done next year versus bleeding little bit in ‘17? I know you mentioned you’ve got about one to two point expected lift what from the revenue management system. So with the theoretical extra displacement by accelerating those renovations, would that be more than offset by that, the bump in the RMS?

[Jonathan Halkyard:]

Well, your numbers are little bit high. We will be upto about 475 by very early 2016, so it’s about 150 to 155 that will be -- yet to be completed. We had many hotels under renovation this quarter, our highest seasonal quarter, and we are very pleased that we are able to deliver this growth in spite of that. That experience though I think will cause us perhaps to lighten up a little bit in the third a little bit in the third quarter of 2016. I still believe, we will be able to complete this renovation by early 2017. With respect to the impact of this on our results in 2016. I actually think the benefit of all of the renovations that we have completed this year getting that benefit next year. We’ll probably offset any disruption that we have from the renovation we’re doing next year. So I think net-net the impact ’16 versus ’15 will be neutral with respect to renovation. And then of course we will have the positive impact of the RMS system, which we think will really manifest in the second and third quarter.

[Chris Woronka:]

Great. And then just another question on the clean plus program. Is that, I guess there would be a slight incremental costs as well. But should I think or is being extremely high flow through despite the fact that there is maybe a little of bit extra labor costs in there?

[Jonathan Halkyard:]

Yes. There is extra labor cost associated with cleaning the room. But we’ll operate that service as better than 50% margin.

[Chris Woronka:]

Okay.

[Jonathan Halkyard:]

And one of the main benefit of this as Gerry noted, it’s not main benefit is actually customer satisfaction in addition to the financial benefit, it’s a winner on all fronts.

[Chris Woronka:]

Sure, that sounds good. And then Jonathan just sorry if I missed it. But if you guys talk about what percentage of stays are from your frequent guests this quarter?

[Jonathan Halkyard:]

No, we didn’t. As we get deeper into the extended perks program, we will be reporting on the behavior of the guest ideally longitudinally as we engage with them and hopefully increase their frequency. At this point, the main focus is signing them up to the program and we’re happy in eight months having gotten a million people find up to this program, it’s pretty extraordinary.

[Gerry Lopez:]

Yes. One having launch this program to a couple of other company Chris, a million people in what has been essentially six months, pretty good. So focused on the sign ups as Jonathan said, we know that some of these guest are significantly ahead of the pay than they were a year ago, it’s way too early to make any kind of prognostications regarding what their future behavior is going to be, but the program and the design of the program which is so different from the balance of the industry has appealed to our guest. And we’re very encouraged by what we’ve seen in the first six months.

[Chris Woronka:]

Okay, very good. Thanks guys. Nice quarter.

[Operator:]

Our next question is from the line of Joseph Greff with JPMorgan. Please go ahead with your question.

[Joe Greff:]

Good morning, everybody. Gerry and Jonathan, you talked earlier in the call that supply growth is limited in your market. When you look at next year in the markets that you’re in. How much supply growth do you actually see in your marketplace, what actually hard numbers do you have with respect to your specific market, then I have couple of follow-up?

[Jonathan Halkyard:]

So at this point, we of course have some supply growth in our market. We don’t have any, right now aren’t really able to share any kind of hard numbers in terms of rooms or hotels. We operate in so many markets and so many smaller markets that that’s a difficult thing to do. I think as we validate our own experience against the notes that we referenced in the call, the sources we referenced in the call, our experience is not really dramatically different from that.

[Gerry Lopez:]

The observation that I would add is a lot of folks appear to be moving upscale into the segments further up the scale. I suspect that is driven by their operating model and the flexibility that we have is that with ours, we can stay in the segment that we’re in and appeal to a customer base, a guest that candidly may not be getting their fair share of attention from all of the other players. And that is what opens up a window of opportunity we think, as we look at on possibilities. The beauty of this model is that it gives you a level of optionality than other operating models that are more dependent on the revenue sources, et cetera, et cetera, just doesn’t give you and that forces people to make decisions that we simply don’t have, we can just get better at what we already do.

[Joe Greff:]

Great. And then two quick follow-up, I know your business model is different and you highlighted it here. But if we look back in the 3Q, do you think you were negatively impacted all by holiday calendar shifting. And then another quick question, you talked about corporate rate. What percentage of your room night sold are associated with negotiated corporate rates? That’s all for me thanks.

[Jonathan Halkyard:]

Right now about, first of all, I’m going to comment around the holiday shift. We did see some movement between August and September around Labor Day that was unusual but we didn’t see anything that crossed the quarter because of any holiday shift. And with respect to the corporate account number?

[Gerry Lopez:]

Just over 40% of our business comes through corporate account relationships and about half of that would be on a specifically negotiated rate. So, we look at it both those ways because we have relationships with people who actually do quite good job of just selling at retail as well. So, the renegotiation rates that we’ve got going on will affect all 20-ish percent of our revenues.

[Operator:]

And next question is from the line of Chris Agnew with MKM Partners. Please proceed with your question.

[Chris Agnew:]

Good morning. Following up on the question on supply, Airbnb quite often gets mentioned by some commentators as more of a threat for the extended stay category. I just wondered what your thoughts there are in general. And then also maybe more specifically, could you give us any color or comment on activity you've seen in hotels that are maybe in and around a strong Airbnb market, somewhere like San Francisco? Thank you.

[Jonathan Halkyard:]

Well in general I think where we see Airbnb is probably consistent with some of the data and reports we’ve seen recently where a lot of their production seems to be the very urban cores and some of those really strong markets like you said, but Central City, San Francisco, New York, Miami kind of those things. We don’t hear much at all at this point from our customers whether they’re corporate customers or individual guests about comparing with Airbnb, I think largely because they really has been building in a different area. When you look at something like San Francisco again we don’t really have anything that has been back down town San Francisco, although we have a ton of hotels in the general area and some of those customers are staying with us and commuting into San Francisco, but it’s really not something that we’ve seeing at this point that’s having any kind of material impact. If anything I think again some of the information would suggest that they tend to be trading fairly significant rates above where we might be as well. So to Gerry’s point about where are people chasing, I am not sure that we’re really exactly working on the direct competitive from [indiscernible] out of this point, we’ll see how it evolves.

[Gerry Lopez:]

Yes, a significant portion of our business is in the 30 plus state with 30 plus guests. Having use Airbnb in prior lives, I can tell you I don’t know that when people who welcome strangers into their home is a 30 day thing. Few days at a time in and out perhaps, but their model as interesting as it is and we’ll see in the future whether they are a potential distribution channel for us, a competitor or what. So the core of our business the geography the type of guests, et cetera we seem to be in different operating in different spaces.

[Chris Agnew:]

Thanks for the color. And then last question, on your revenue management system, I think you've outlined that over time you should see a 1% to 2% benefit to RevPAR. Is there room for optimism that that contribution could be greater over time given what you've seen to date? Thank you.

[Gerry Lopez:]

I think we’re encouraged that what we’ve seen today one thing I talked about in September and October that has been interesting for us is looking at football weekend, whether it’s NFL or college, we believe we are running those weekends a lot better and those are currently probably good illustrations of the types of events that without a system are hard to manage. When you get something like the Superbowl, that’s such a giant event and you close everything out, that’s the media thing to manage. But something like a football weekend, a massive -- who is Notre Dame playing this weekend? And how they’ve been doing all, in Charlotte for example we see a lot more pick up right now because the Panthers are now fixing out. So those weekends certainly compress in a way that they haven’t. So I think those things make us optimistic, but the system is going to help us do a better job and I think only time will tell exactly how much we extract out of it. But I think we feel pretty comfortable that the basic premise of automated revenue management will help us extra more revenues and it seems to be proving out.

[Operator:]

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

[Shaun Kelley:]

Gerry, welcome to the hotel industry. So I think you guys have covered a lot of ground, I just had one follow up from the prepared remarks. Which, Jonathan, I apologize if I missed it, but did you give or could you provide any color on the actual impact you think you saw to RevPAR from the disruption from the renovations during the third quarter?

[Jonathan Halkyard:]

Well, we’ve used as or other have used as a rule of thumb about half of the disrupted rooms and we had about 1.8% of our room nights unavailable to rent because of the renovation program. So, using that rule of thumb that’d be about 90 basis point impact, it’s probably not a bad estimate. I did not actually quote that in the prepared remarks, but that’s the way others have done it and we’re okay with that.

[Shaun Kelley:]

Helpful and then the other thing I caught while you were talking about some of your initiatives, and it sounds like there's a lot, was the -- it sounds like you guys have added some direct salespeople, if I caught that. If those were added, could you talk a little bit more about that, if they were added in the quarter, specifically, I'm curious, did that impact flow through for a period of time, I mean you expect a topline contribution, just due to sort of centralize cost or do you expect them to sort of pay for themselves and be able to maintain the levels of flow through going forward, just to think about the sort of impact from that new initiative?

[Gerry Lopez:]

Yes, we’ve been building up our centralized sales team during the year, but wouldn’t really consider that the cost of that being very material in the grand scheme of flow through. We’ve been offsetting and making choices about what else we spend, so the net of the choices of what we’ve reduced at the same time I just don’t think that cost there is particularly material to our [indiscernible] quadrant.

[Jonathan Halkyard:]

In any number that we recorded today in terms of our outlook for the year is inclusive of all of these initiatives and their cost, so --.

[Shaun Kelley:]

Right, so it should be clear that 16 people were not added in the third quarter that's a total number of that have been out throughout the year then?

[Jonathan Halkyard:]

No, they were actually added over the course of the third quarter and actually into October a bit, you may recall Shaun last year, in 2014 for example we had a national advertising campaign, a national cable TV by and we did not repeat that this year, as resources instead deploy towards building our direct sales organization that's the kind of trade off that Tom referred to so on balance didn’t have a big impact on flow through.

[Shaun Kelley:]

Understood, so thanks a lot guys good quarter.

[Operator:]

Our next question is from the line of Steven Kent, Goldman Sachs. Please go ahead with your question.

[Steven Kent:]

Hi good morning, as everybody has noted terms like there was a couple of initiatives this quarter are little bit different, more housekeeping, more shorter stage, some mix changes, more variable services for the consumer, so three questions, coming out of that, are there -- as you look at 2016 and beyond do you think they are new expenses or systems to support some of those initiative should we start to think about that? Broadly are you sacrificing some occupancy to gain rate as that part of the program, and then finally, would you say that this is a design or a function of the consumer or more a market dynamics meaning as it more reactive or is this what you are getting from what you hear from your consumer and then, finally Gerry just as a completely separate subject, as you look out to 2016 and the proxy would you start to set key metrics for compensation for your team to create a focus where you set some kind of bogie out there that needs to be achieved in order for compensation to increase for your team?

[Jonathan Halkyard:]

I’ll comment on the first two and then of course invite Gerry on the third. As it relates to new expenses, we will see some increase in our corporate overhead next year from the rolling forward of our sales core, as we incurred a full year those expenses, that's not going to be dramatic increase at all, the RMS expense is really fully in our P&L for 2015, that might be very modest increase from that. And then these other initiative we’ve talked about are not going to really impact cost very much at all. As it relates to your second comment, this year actually we have sacrificed some occupancy, as we’ve been accomplishing this mix shift from longer stay to shorter stay guest and doing that kind of a chunky fashion at time, I would expect next year that we will not see that kind of occupancy decline year-on-year as we are able accomplish the shift, the shift from longer stay guest to shorter stay guest, I think more effectively and I also think that shift will not be as pronounced next year as we get more effective by just driving rate within those different length stay buckets and I think it’s important to know that this quarter except for the renovation, we actually grew occupancy and so that was an experience different and better than in the last couple of quarters. I think I interpreted your kind of secondary question around, is this coming from consumers, Steve you talking about the Clean Plus program and things like that --.

[Steven Kent:]

With the shortest stays Jonathan, just all of those things it sounds like that's the case, but I just wanted to make sure that it’s based on your analysis and what you are hearing from people, it sounds like that throughout the case?

[Jonathan Halkyard:]

Yes, it is, we are a very strong value even for shorter stay guest and so our success in growing the mix from shorter stay guest to I think it’s driven by our ability to get out through various distribution channels in front of those guest in an effective way, but I also think that there is a tremendous opportunity for us with longer stay guest primarily with corporate account. So Gerry on the last one?

[Gerry Lopez:]

Yes, the direct answer, Steven, to your question is yes, we are still a few months away from writing that proxy, but it’s hard to imagine that our compensation committee will allow us to structure too many components of comp that do not include very specific targets also very specific metric, particularly as they tie to shareholder value. The achievement of EBITDA target, the achievement of total shareholder return, I just cannot imagine a world that would not include those metrics front and center. Will these be some other metrics beyond that or some very specific individuals on the team that have very specific control over certain aspects of our strategy? Absolutely. But I think it starts with the most important metrics that drive that total shareholder value. I don’t know any other way of structuring a comp program that makes any sense. So you can better on those showing up in whatever we do going forward.

[Operator:]

Our next question is from the line of Chad Beynon with Macquarie Group. Please go ahead with your question.

[Chad Beynon:]

Hi, thanks for taking my questions. First half with respect to the asset sale. Could you maybe talk about kind of how you thought about the return that you’re generating on investing capital versus kind of what you got for the sale, just kind of how these two compare or if the asset sale was just more I guess less around price and more around how you want your brand to be position long-term? Thanks and then I have a follow-up.

[Jonathan Halkyard:]

Okay Chad. Jonathan, I’ll take that one. It was certainly about price as well as the strategic value of recognizing in our portfolio that we were focused on extended stay America brand that we were not intending to renovate or invest in the cross plan hotel. We felt as though the multiple that we received on these assets. Combined I think impotently with our tax structure and our ability through that structure to reduce our tax exposure provided a strong return on that net sales. So whether or not those proceeds or ultimately distributed to our shareholders or reinvested in our business. Our ability to sell those cash flows at a 10 times multiple and with the limited tax impact represented very strong return for us and for our shareholder.

[Chad Beynon:]

Okay, thanks. And then just kind of broadly on the different I guess phase RevPAR result. You generated 8.5 in the quarter and historically you’ve talked about kind of broadly what Phase 1, I guess now you’re on Phase 7. How these different phases have kind of compare to your average. Is the falloff or kind of the waterfall in terms of what you’re seeing with RevPAR consistent to what you had seen before and kind of what you discussed in prior quarters or could you just give us an update in terms of what some of the early phased renovated properties are generating compare to your average?

[Jonathan Halkyard:]

Well the 8.5% RevPAR growth from the renovated hotel. That’s not just the one that have just been renovated. That’s the entire class of hotel that are renovated and were renovated for the entire quarter. So that’s a blend of the one that we’re renovated back in 2012 versus the ones that we’re more recently renovated. The results from our renovation have remained generally consistent as we’ve gone through each of the classes. And the pattern is also consistent which is that we do see an initial drop in occupancy as we renovate that hotel followed by period between three and six months where it ramps up to prior level of occupancy at rates which are generally 10% higher than before the renovation began. So that pattern is well as the relative magnitude of the pattern has remained pretty consistent.

[Chad Beynon:]

Okay. Thanks Jonathan and congrats on the quarter.

[Operator:]

Thank you. Mr. Halkyard at this time there are no further questions. Would you like to make any closing remarks?

[Jonathan Halkyard:]

I would and thank you, operator. Thanks everybody for joining us for our call this morning and I would like to point out that we will be making several visits conferences in our industry in the next month. On December 17th we’ll be in New York for the Deutsche Bank Gaming Launching and Ledger Conference. On November 19th we’ll be also in New York with the MKM Entertainment Ledger and Internet Conference. And then December 2nd we’ll be down in Florida at the Bank of America Merrill Lynch Leverage Finance Conference. And then on December 8th in New York at the Barclays Gaming, Lodging, Ledger and Restaurant Conference. So we’re looking forward hopefully to seeing many of our investors at those conferences. And with that we’ll conclude the call and hope everybody has a great week.

[Operator:]

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