Extended Stay America, Inc.
Q4 2014 Earnings Call Transcript

Published: 2 Mar 2015

[Operator:]

Greetings, and welcome to the Extended Stay America Fourth Quarter 2014 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, David Clarkson. Please go ahead, sir.

[David Clarkson:]

Good morning, and welcome to Extended Stay's fourth quarter 2014 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 that some of our discussions today will contain forward-looking statements including the discussion of our 2015 outlook. Actual may differ materially from those indicated in the forward-looking statements. Forward-looking statements made today speak only as of the today. The factors that could cause actual results to differ are discussed in our Form 10-K 10-Q filing this morning and other SEC filings. In addition, on the today’s call, we may reference certain non-GAAP financial measures. More information regarding these non-GAAP financial measures including reconciliation to the most comparable GAAP measure are included in the earnings release filed this morning. With that I will turn it over to Jim.

[Jim Donald:]

Thank you, David. And thanks everyone for joining us this morning. I would like to comment on our fourth quarter 2014 results. And then Jonathan will provide a more in depth discussion on the quarter and our outlook for 2015. This morning, we announced fourth quarter RevPAR growth of 5.3% and adjusted EBITDA growth of 2.4%. These results are within the guidance range we provided last November. More importantly, we made significant progress on our most impactful, strategic, initiatives during the quarter and as we have discussed on prior calls our strategy at Extended Stay America is to continue to improve the guest experience, build our brand nationally, improve our alignment across our sales organizations and increasingly capture higher yielding guest and grow revenue profitably all while investing in capabilities that will exploit our scale advantage, improve our pricing sophistication and in general customer loyalty. I am very pleased to report that during the fourth quarter now into the first quarter of 2015 we're making substantial progress on all these fronts. The experience of our customers improved this quarter, we completed the renovation of 5 hotels during the fourth quarter bringing our total 335 or 53% of the portfolio at year-end. This compares to just 36% at the end of 2013. We have completed another 22 hotels since year-end and our currently renovating 25 hotels which will be complete by early April. In June we will begin the next phase of our renovations, renovating 95 additional hotels over the ensuing six months. So by the end of this year approximately 75% of ESA branded hotels should be renovated. Now this is critical because of the results in the fourth quarter show our renovated hotels outperformed our un-renovated hotels in nearly every respect. They have higher occupancy and higher occupancy growth, higher ADR and higher ADR growth. Our renovated hotels generated over 90% of our revenue growth during the period and are a key enabler for our strategy to attract higher rated corporate business and shorter stay transit guest. And during our third quarter call I described changes that we made to our corporate and local sales organization under our new sales leader Mark Mahoney. We're excited about our new sales force plan which we think will enable our filed sales professionals to focus more on our high value accounts. We are currently piloting this new structure in one of our four geographic regions and we expect to roll out across the system later this year if successful. Our sales professional used to sell, set up reservations and billing and follow-up on any service issues. For this pilot region our centralized team now handles all administrative services which allows our sales team to focus 100% on selling. Local sales remains a priority for our hotel operation staff and they are better able to do that now that are operational improvements at Kai-ESA are fully implemented. Let me just give you a quick example or two of what I am talking about. For our Milwaukee, Wisconsin properties our account sales executive was visiting a client located in South Florida they mentioned that they needed 15 rooms for 3 months that's 1,300 room nights and they wanted a list of all of our renovated properties. So while the sales account executive moved on to his next call he emailed the information to the Charlotte support center centralized team and he had that information that he needed before he got out of his car and closed the deal. Now prior to that he would have been the order taker, the information finder and the assistant setting up the return call not to mention the closer. Another example Extended Stay America was built on the philosophy that everyone is in sales. And we mentioned last year in the launch of our process improvement we overburdened our field associates with activities that took away some of these valuable time. And as I mentioned earlier on the call our Kai-ESA implementations are paying off. Just last week a general manager from the northeast was out looking for leads amidst the snow and the ice. I made several calls, he left his cards but no luck. However, 48 hours later one of those leads called back Jim told him a pipe burst at a senior living facility and that GM and the sales executive booked $65,000 in business for the next 30 days. The story's gone, as a matter of fact, we published one story per day to the entire company. So very encouraged about our process and progress to date just as we are with the revenue management system. Now we remain on track with our automated revenue management system implementation. During the fourth quarter we completed phase one of the project with all of our hotels living in a one-way environment so that the RMS is now generating demand forecast and pricing recommendations for our team of revenue managers. Early indications are positive with the team feeling that they are better able to identify and respond to the man but it's too soon to quantify those benefits. We're now piloting phase two of the project with a test group of 25 hotels in which the system automatically implements restrictions or inventory controls with revenue managers modifying these auto exception basis. Our goal of this next phase and implementation is to observe this system's behavior and tweak the algorithm as necessary. But to do that we deliberately chose the hotels with lot of high demand days to minimize our risk, so we're aren’t expecting to see a lot of additional benefit yet. Once that calibration is done during the next six months we'll be rolling out to two way interfaces for the reminder of our portfolio. At that time I expect we'll see further revenue benefits from the system. Finally, on February 1st we began the beta launch of our customer loyalty program called Extended Perks. Once our beta testing is complete we will roll out the program in March. The program is built around the idea of instant rewards, no points required with members receiving discounts on our rooms, offers and discounts from merchandized partners as well check in and room preference priorities. In the website test page, we're 40% higher in rollout rates in the previously offered program. Loyalty to our guest will drive incremental revenue to us. Now we want to add some exciting changes to our leadership team recently. We began the search for a CFO in August but November we realized we have the right guy in our team already. Jonathan has been CFO of two public companies in the past and is fully converse in our strategies and our priorities. We're also fortunate to be able to attract Tom Bardenett a 26 years select service and veteran to join us as our COO and John Dent the former Deputy GC of Hilton to be our new general council. Our divisional operations leaders and our sales and revenue management team are in place and they represent a mix of tenured associates and experts recruited from outside the company. And with the continued improving of our service metrics through our renovated properties and process improvement are unlocking the hidden value through revenue management automation and aligned our sales force around the efficiencies to grow our corporate revenue beyond 40% of our revenue remain positive about our current trend as we begin our third month of 2015. With regards to lodging industry supply growth and the expended category remains muted. As a result we believe that our geographically diverse portfolio is positioned to perform well in this environment of increasing demand which strives pricing power for lodging operators. Further we're not relying on large urban markets such as New York City or we have not exposure and our supply growth has been and is expected to be particularly strong. Conversely 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 2015. I'll now turn it over to Jonathon who will provide greater detail on the fourth quarter comment on 2015 outlook as well as our ongoing priorities for free cash flow. Jonathan.

[Jonathan Halkyard:]

Thanks Jim. I am proud of our financial results this quarter, now as we discussed with you back in November we experienced discipline in revenue growth in the late third quarter and early fourth quarter. We took actions to stimulate revenue growth and it delivered results. Our growth accelerated through December and has continued into January and February. We maintained our industry leading EBITDA margins in the quarter despite some unusual expense headwinds. Our efficient tax and capital structure together with the benefit of refinancing moves we made earlier in the year that reduced our cost of debt and helped us deliver the revenue growth to the bottom line. As we saw net income grow this quarter by over $43 million. We invested a significant amount of capital into high return renovations while paying a distribution to shareholders at a dividend yield of above our C Corp peers. And we continued to de-lever 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. We have achieved year-over-year RevPAR growth in 20 consecutive quarters and ADR RevPAR revenue and adjusted EBITDA in both the fourth quarter and all of 2014 were all record for us. I am optimistic about ongoing record setting performance as our transformation continues and enables ESA to achieve results never before possible. In the fourth quarter of 2014 we generated revenue of $282.7 million an increase of $13.9 million or 5.2% over the fourth quarter of 2013. Full year revenue was $1.213 billion up 7.1% from 2013. This quarter system wide RevPAR grew 5.3% driven by an ADR increase of 7.8% to $57.86 offset by an occupancy decline of 170 basis points to 68.8%. The impact of renovations on revenue was slightly more modest this quarter as compared to the fourth quarter of 2013. Approximately 1% of our available roommates were displaced from renovation this quarter as compared to 1.7% last year. We estimate this positively affected our RevPAR growth rate by approximately 50 basis points. As a side note we have added this closure to our earnings release this quarter detailing the number of available room nights displaced due to renovation along with a comparison to the prior year. We will do this each quarter and when we discuss items later in the call I will provide a quarterly forecast of this measure. Our full year ADR was $57.93 up 7% from 2013. RevPAR for 2014 increased 7.1% to $43.02. Platinum renovated properties which are 53% of Extended Stay branded hotels or 49% of our total company delivered strong results. The RevPAR growth for our platinum properties was 8% in the quarter driven by an ADR increase of 7.2% and occupancy growth of 50 basis points. Our non-Platinum properties produced RevPAR growth of approximately 2.3%. Our leased properties achieved ADR growth of 7%, we saw a decline in their occupancy rate of 310 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 a decline in our longer length stay business particularly with long-term residential guests. This shorter stay segment of our business accounted for approximately 31% of our revenue in the quarter yet contributed nearly half of our $14.2 million in room revenue growth. Our hotel operating margin was 50.2% for the quarter compared with 51% last year. Flow-through in the quarter was approximately 35.5%. During the quarter, we recognized an actuarial adjustment to our general liability and workers compensation claims liability of $3.3 million which adversely affected our flow-through. Without this charge our flow-through would have been approximately 59% and margins would have expanded 40 bps as compared to last year. Hotel operating margin for the full year was 51.7% which is flat after adjusting the prior year or $9.4 million of system wide branded related costs that were classified as general and administrative expenses in 2013. General and administrative expenses were $20.2 million an improvement of $19.4 million over the same quarter in 2013. Last year's fourth quarter G&A expense of $39.6 million included $16.8 million in non-cash equity based compensation, $5.9 million in IPO related costs and $300,000 in system wide brand marketing. The figure for comparability to this year's G&A therefore would have been $16.6 million. This year's comparable G&A in the fourth quarter of 2014 was $18.8 million adjusted for estimates of public company transition cost and non-cash equity based compensation costs totaling $1.4 million. The additional G&A we incurred year-over-year is primarily due to increases in IT related expense associated with the roll out of our revenue management system and other initiatives. Adjusted EBITDA of $123.4 million for the fourth quarter increased $2.8 million or 2.4% when compared to the fourth quarter of 2013. Adjusted EBITDA for all of 2014 was $556.7 million and increased $38.1 million or 7.3% over the prior year. Adjustments to EBITDA for the quarter are detailed in our earnings release and include the aforementioned G&A adjustment as well as three other adjustments. First, loss on disposal of assets of $3.1 million, second asset impairment of $2.3 million and third non-cash foreign currency transaction loss of $900,000 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 $32.9 million this quarter compared to $76.6 million in the prior year period. Net interest expense in the prior year included $25.2 million of write-off of non-cash deferred financing costs and prepayment penalties associated with the repayment of the significant portion of our mezzanine debt, the remainder of which was paid off in the second quarter of 2014. The reduction in interest expense is also due to a decrease in both our average debt balance and our weighted average cost of debt. Since our IPO in the fourth quarter of 2013 we have reduced our total debt by nearly $700 million and reduced our weighted average interest rate by approximately 150 basis points resulting in an annual interest savings of over 80 million. Net income increased $43.4 million over the fourth quarter of 2013 to 28 million. For the full year 2014, net income increased 82% to $150.6 million. Income tax expense for the fourth quarter of 2014 was $6.9 million compared to a benefit of $8 million in the comparable period in 2013. Our effective tax rate for the fourth quarter of 2014 was 19.7% and our full year tax rate was 23% a healthy advantage over our C Corp peers and reflective of the efficiency of our paired share structure. Adjusted pair shared income for the three months ended December 31, 2014 was $32.7 million or $0.16 prepared share based upon a weighted average diluted pair of share outstanding $204.4 million. 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. We ended the quarter with total cash of $194.7 million composed of $121.3 million in the unrestricted cash on hand and $73.4 million of restricted cash. Net debt was approximately $2.7 billion at the end of the fourth quarter and net debt to trailing 12 months adjusted EBITDA was just under 4.9 times. Capital expenditures for the fourth quarter totaled $47.3 million for the year our capital expenditures totaled $173.2 million. This morning the Board of Directors of ESH Hospitality Inc. the company's subsidiary declared a cash distribution of $0.15 per share for the fourth quarter of 2014 on a Class A and Class B common stock. The distribution is payable on March 26, 2015 to shareholders of record as of March 12, 2015. Our continuing distribution policy will be to target a payout of at least 95% of re-taxable income and net capital gain. Turning now to our outlook for 2015, we anticipate total annual revenue 1.275 to $1.3 billion or approximately 5% to 7% growth over 2014. Overall we see continued industry wide growth and demand along with another year of low supply growth which should enable operators to push rates higher. This coupled with our ongoing strategy to shift to less rate sensitive higher yielding corporate leisure guest should enable us to achieve string rate growth. Our RevPAR growth has been trending in the 5% to 6% range in the last four to five months and we see that continuing and strengthening with incremental growth coming later in the year from our revenue management system and sales initiatives. Rooms put out on service by our renovation program will be a drag on revenue by roughly $5 million to $6 million this year. The impact last year was slightly lower and thus there will be a minor impact to our growth rates. Specifically we expect the number of room nights effected due to renovation to be 69,000, 16,000, 92,000 and 135,000 in the first quarter, second quarter third quarter and fourth quarters of 2015 respectively. This compares to 119,000, 9,000, 26,000, and 70,000 for the comparable quarters in 2014. Remember these figures only represent the rooms unavailable during a renovation, but the balance of the hotel can be effected as we renovate common areas during our process. We expect our flow through will be higher in 2015 than in 2014, at approximately 70% pushing our hotel operating margins even higher. G&A will be higher than 2014 due to investments in RMS our corporate sales organization and incentive compensation. In 2015 G&A expenses should be approximately $85 million excluding approximately $10 million of non-cash equity based compensation which will be added back to net income for the non-GAAP calculation of adjusted EBITDA. Adjusted EBITDA is therefore anticipated to be in the range of $585 million to $600 million or approximately 5% to 8% growth over 2014. For the first quarter we expect that our revenues will be in a range of $284 million to $288 million and our adjusted EBITDA will be in a range of $118 million to $123 million. We anticipate total capital spending to be between $190 million and $210 million for renovations, IT projects and ordinary maintenance in 2015. This includes the completion of 47 hotels under renovation at December 31, 2014 and the majority of the spend associated with the 95 hotels which will begin renovation later this year. We expect depreciation expense of 190 million to 197.5 million; net interest expense including cash interest and other fee amortization is anticipated to be $127 million to $132 million. The effective tax rate for the year is anticipated to be approximately 23%, given these assumptions net income is anticipated to range from 183.8 million to $205.6 million or an increase of approximately 22% to 37% over 2014. 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 enterprise to convert this to strong free cash flow. As we look forward we'll apply our free cash flow to deliver the highest returns to our shareholders. After our renovation investments and dividends remaining free cash flow will be available for debt reduction, future development and returns of capital to our shareholders. I'll now turn the call back to Jim.

[Jim Donald:]

Thank you Jonathan. David let's go straight to the questions.

[David Clarkson:]

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

[Operator:]

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question today is coming from Anthony Powell from Barclays. Please proceed with your question.

[Anthony Powell:]

On the Platinum renovated properties, could you drill down on how the ones that were completed in 2014, maybe in the first quarter, have performed so far? And how that's trended relative to your initial renovations that you completed earlier in the process?

[Jonathan Halkyard:]

Sure Anthony it's Jonathon, I missed the first part of the question, that we renovated hotels that were renovated in 2014 how they have performed so far fourth quarter?

[Anthony Powell:]

Yes, or for the year. Basically the ones that were completed in the first quarter of 2014 and second quarter of 2014, how have they trended in their initial timeframe out of renovation?

[Jonathan Halkyard:]

As you recall that was a pretty healthy group of hotels that we renovated early in 2014, those hotels they are performing according to our expectations. there is a period of ramp up that occurs after the completion of the renovations and those were all completed at the end of the first quarter. So they have been ramping over the course or did ramp over the course of 2014, they have not though yet passed the one year post renovation mark or we begin including them in the aggregate results of our renovated hotels when we talk about the pre and post renovation performance. But I can tell you that they're performing consistent with our plan. And then there was a small group of hotels which we referred to as early phase seven they were principally in Phoenix and they recall we renovated those last summer during the low season in Phoenix, those have been performing extraordinarily well. Of course helps a bit by the Super Bowl but that's one of the reasons we renovated them last year. So they've performed quite well and obviously it's too early to tell the other phase seven hotels that have been renovated in the middle of this phase.

[Jim Donald:]

It's Jim, we're still in a finish in April, as Jonathan mentioned. But from a branding standpoint phase seven was a very early stage in the Phoenix area, actually we have the super bowl but we have Waste Management PGA Golf Tournament and there is another event there as well. So it was really a good perfect timing for us to get that kicked off in that area.

[Anthony Powell:]

And let's onto the Silver hotel, there's been a divergence between the Platinum and Silver, I guess, both in the third quarter and the fourth quarter. What can you do in the short-term before you start renovating those hotels to improve the performance at that set?

[Jim Donald:]

Well the silvers are activated in the company's overall marketing plans whether they are on our Web site or internal. As Jonathan mentioned we're accelerating the platinum renovation and we should be able to, by the end of 2017, capture all of those, but right now they are part and partial of all of our margin activities and our internal operating functions as well.

[Operator:]

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

[Joe Greff:]

Jim, you had mentioned by the end of this year 75% of your Extended Stay-branded properties will be Platinum. When you think about the portfolio at the end of 2016, what percentage of the portfolio, of the ESA portfolio, is Platinum?

[Jim Donald:]

About 95% Joe. And then as Jonathan mentioned to get through the rest of network of properties by the end of ’17, that’s going to be if you look at scale, that's all of a sudden become starting to develop here, but we're looking at about 95%.

[Joe Greff:]

So when I think about the CapEx involved in the renovations in ’16, we should kind of think about it as being sort of proximate to what you guys are doing in ’15?

[Jonathan Halkyard:]

It will be I expect a little bit more than that Joe. Right now we have we have got it 190 to 210 in CapEx for 2015. And approximately $95 million call it $90 million to $100 million will be renovation of hotels this year. And I think it will be slightly more than that in 2016.

[Joe Greff:]

And then when I think about your ’15 outlook and how you guys maybe think about it, obviously you are anticipating industry lift, or anticipating renovation-related lift net of renovation impact that you guys went through. And then Jonathan, I think you talked a little bit about some second-half lift or benefit from yield management and maybe traction with corporate accounts. Can you talk about how much about of that is in the back half of ’15 or how you think about quantifying that opportunity, maybe what's incorporated into your guidance?

[Jim Donald:]

You are correct and that our revenue guidance for the year of course begins with an assumption around industry growth and then we have some puts and takes around the improvement associated with the greater number of Platinum hotels that we will have. As I mentioned in our opening remarks there is a slightly impact, less than 0.5% associated with revenue disruption from those renovations this year. And then we do expect some uplift from the automated revenue management system that will really begin to help us price our hotels large part of portfolio in the back half of the year. In terms of impact of that it could be as much as four percentage point of growth this year. So I think I consider that an important part of upside to our range of revenue guidance meaning the impact of the revenue management system as one of those factors which could help us get to the higher-end of that revenue growth range.

[Operator:]

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

[Steven Kent:]

Could we go over again, there is been a number of questions, the first two were sort of on RevPAR and sort of where things are. Joe pointed it out too. If I could just ask a more basic question is, do you still expect the total system to do a multiple of the broader RevPAR in the industry after renovations? At one point it was 1.5 times to 2 times the broader RevPAR after renovation. So is that still the bogey that is out there? Is that what your expectations are? And then just as a follow-on, flow-through of profit margins. Again, Joe asked that too, sort of the improvement in 2015. Could you just give a little bit more color on that? Especially, because more of it’s going to be coming from rate. Should we expect more over the next couple of quarters and years?

[Jonathan Halkyard:]

It’s Jonathan, I will address both parts of the question. And I comment for Jim or Tom as well. In terms of revenue growth from our renovated hotels as we go through a renovation of a hotel and we done that of course in group. We look at the performance of the hotels in terms of their RevPAR growth compared to a comp set before and after the renovation, and we have seen a high single-digit improvement in their index performance consistently as we move through the renovations. Now that is a kind of a one-time bump or a reset in the pricing of those hotels once they are renovated and that is a -- that’s a pretty obviously a pretty meaningful increase on top of let’s call it high single-digit RevPAR growth in the industry. However once the hotel is a platinum hotel or a renovated hotel it wouldn’t experience that kind of incremental growth over the market but we do expect to have an improvements in growth by virtue of two broad factors. One is the capabilities that we are adding our revenue management system as well as our direct sales efforts and the second is that still significant Umbrella of pricing that exists between ourselves and our closest competitor. And that’s a gap that we have closed but it’s been stubborn gap because our competitor while they are not raising price of growing ADR as quickly as we are. They have higher ADRs to start. So yes we do believe the combination of the renovation as they move through our portfolio, our new capability and hopefully our ability in the future to take advantage of the significant pricing gap that we have with our closest competitors is going to enable us to grow at rates higher than the market. We do though have other some constraints which is our occupancies are already quite high, so we don't always have the ability to grow occupancy as much as our competitors have grown occupancy. But we've grown rate at a faster rate. And before Jim and Tom will jump in but let me address the flow through question, in terms of our 2015 outlook we're forecasting 70% flow through at the hotel operating level and you are right that we have done better than this in the past, we're a couple of quarters where we have not achieved the 70% flow through. But given where our margins are already 20 points higher than our competitors. We view margin expansion on top of the levels we're already achieving as pretty darn good performance.

[Tom Bardanett:]

In addition to that -- this us Tom Bardanett. To comment about the flow through our owner operator model here I think we can speed the markets and enhance our savings. So with the initiatives and labor metrics being a significant area we're focusing on, we believe with rate growth that will be able to couple that with great savings due to these initiatives and being laser focused on that.

[Operator:]

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

[Chris Woronka:]

Appreciate the expanded disclosure on the room nights out of service for the renovations. That is very helpful. Wanted to ask you on the remixing of the business. I think that's something you guys have been working on for a while now and certainly showed up in the rate growth. As we get more and more Platinum renovations done this year and next year, how much do you expect this to accelerate? And have you thought about maybe what a more stabilized occupancy level might look? And also then on the rate side, how much progression you see there?

[Tom Seddon:]

This is Tom Seddon, what we see definitely the Platinum has held that we have a higher mix of shorter Stay business and less dependence on the more discounted long stay and we seem that continue as we’ve gone through renovations and as Jim pointed out we still have just a little under half of the rest of the hotels to do. We will expect to have some material movement on the total companies mix when we complete the rest of those renovations. I think in terms of total occupancy increase there's a bit of a room for us to grow there, but that's really not going to be the major part of our growth, growth is really going to come from ADR because we do run such high occupancies, so there is point or two that we can get even increasing demand in the industry, but when you get to somewhat of a high demand markets and high demand time periods the hotels are running functionally full. So I think for us it's really that rate which comes from both price increase and change in the mix, we still see a lot of opportunity within the very effective mix, but continue to get more corporate type customers and less dependent on eventual type customers. So lot of levers we have to pull but all generally drive rate rather than occupancy.

[Chris Woronka:]

And then just on the hotels that have not received the Platinum renovation yet. We obviously knew the RevPAR growth would be slower there, but can you talk about maybe what the market RevPAR growth in those markets is on the non-Platinums?

[Jim Donald:]

I don't know that we've -- tremendous difference in the platinum versus the non-platinum in terms of the market now. At this point we got so many hotels through platinum, but I think it's broadly comparable.

[Operator:]

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

[Shaun Kelley:]

Just a follow-up on, I guess, on that last question. I was kind of headed in the same direction. If we look at the fourth quarter RevPAR performance, and then we know that the Platinum hotels, If I caught this comment correctly, were up about 8%, doesn't that imply that the Silver and the non-renovated hotels were meaningfully below industry average? And the reason I ask is we did see, and we have seen for the last six months, numbers that have accelerated from mid-single digit to closer to high single digit for kind of lower-end chain scale hotels where you guys should be competing. So trying to get a sense of, do you guys think you're losing market share in some of these non-renovated hotels? And are those, at this stage, even -- where do you feel like those hotels are performing relatively industry at large?

[Jim Donald:]

Shaun its Jim. You are correct that the silver properties do have a lower than platinum RevPAR growth which is to be expected couple of things first of all as we grow our platinum properties that’s the emphasis that we are placing on our corporate accounts and placing some of the other businesses in those areas, however we basically -- there are gaps for all of our properties and we are still looking at how we can grow the silver RevPAR a -- silver property equally as well. And as the question came before yours is that in the areas that we operate in and the RevPARs are probably comparable to those areas with the exception of possible renovated properties from our competitors in those areas. But the good news on all this is that the accelerated renovation schedule will flip all of those silvers into platinum properties and the silver each day becomes less and less impactful to the company as it was just a year-ago. So we are really encouraged about the accelerated rate of renovations that we are putting out there, and the scale of that we can now go to market with.

[Shaun Kelley:]

That's helpful. And then just one clarification from the quarter as well. So you mentioned in the prepared remarks an adjustment for workers comp of, I believe $3.3 million. Did you guys adjust for that in your -- in the actual adjustment for EBITDA, or that’s actually included in what you reported, Jonathan?

[Jim Donald:]

It’s included in what we reported, it’s not an adjustment to -- it’s not an adjustment to EBITDA in terms of adjusted-EBITDA. But there is some unusual things either way that go on every quarter but I wanted to call that out because it was fairly sizable and also I believe non-recurring at least in terms of that kind of adjustment. But it’s not added back.

[Shaun Kelley:]

Got it. And it was not expected in your guidance, was it?

[Jim Donald:]

No.

[Operator:]

Your next question today is coming from David Loeb from Baird. Please proceed with your question.

[David Loeb:]

This is really for Tom Bardenett. You did talk a little bit about margins and kind of the direction margins are going to go. But I wondered if you could expand on that a little further. I know you weren’t around in the fourth quarter to really have an impact, but I think even adjusting for the workers comp that 59% flow-through was pretty disappointing, given less renovation disruption, the focus on shorter stay, higher profit generating guests and higher rate growth. But still the flow-through, the expense growth, even adjusted for the $3.3 million, was still pretty strong. Can you just go into a little bit more detail about how you think you can improve that and where you think that margin goes?

[Tom Bardenett:]

Sure David thanks for the question. The additional focus that we are having in addition to the tight savings in the labor metrics is going to be around procurement and sourcing. So if you think about our model here, our ability to have compliance in those areas is significant. Items that we are thinking are going to make difference this year on snow removal, landscaping, energy consumption, some of those areas that we are really going to market, and being a hammer in regards to our and our compliance regards to those. So those two areas in addition to the labor metrics we believe will give us some additional savings as we look for higher flow margins in 2015 and that’s the area that I am finding un impacting. We have an operations count flow that we have established in regards to the Kai process, and were taking our GMs and district managers through that. And we believe with that focus in addition to our labor model that we have out there in guest maintenance and housekeeping, we believe that will continue to contribute to our flow metrics.

[David Loeb:]

Great. And can you also, as a follow-up, just talk about the costs associated with Extended Perks? Maybe that’s for the other Tom. But what will that do to margins as you are heading this program?

[Jim Donald:]

Sure, it is basically not really relevant from the margin point of view because we are not creating a program that has points associated with it. So the vast majority of the cost obviously those programs are related to issuing points then you have to build that reserve to ultimately redeem. Our program is focused on instant award no points required at the actual selling line and it’s really about giving people access to the best deals from us and access to deals from partners as well as really simplifying their process to dealing with us checking-in checking-out making reservation. So we have taken a very different tax of it with the small amount of administrative G&A cost associated with that. It’s not really anything to speak off and that would affect our margin.

[Operator:]

Thank you, our next question today is coming from Chris Agnew from MKM Partners.

[Chris Agnew:]

I don’t know if I missed this. But can you talk about the mix of long stay guests overall and then compare that to what is the mix at platinum hotels and what do you think the optimal mix is? And then for my follow-up, on flow-through targeting 70% in 2015, can you give us any color on maybe the quarterly progression? And the impression I got was that flow-through would be a little bit higher in the back end of the year.

[Jonathan Halkyard:]

Sure I will take the first of that question and then hand to Jonathan on the flow-through. In terms of mix we are running high quality percent of our revenue coming from people staying on the 30 plus, we break our mix down weekly -- nightly, weekly and monthly. So those are the three ways we think about it. So it’s been high-40% overall, that splits between platinum and non-platinum. So if you look at our platinum hotels it’s more like 42% 43%, if you look at our non-platinum hotel it’s like close to 51%. So, pretty material difference in terms of that long-stay mix. We would see where the platinum hotels are around low-40% is pretty good probably an opportunity to keep trimming that down a little bit more. Again some of that, that will really been outflow of our revenue management systems. So the exact optimization of how much do I want from the long-stay versus a nightly guess is really a hotel-by-hotel, nigh-by-night decision based on what amount is being presented. So, I think there is opportunity for us to keep trimming some of that long-stayed attendance down, 48% of revenue coming from monthly I think is not bad sport to be to start with, and then optimize off that.

[Jim Donald:]

We should be able Chris to flow-through a bit higher in the second quarters and third quarters because those are our higher revenue quarters. There is also -- there is some impact on revenue growth that will be from year-over-year changes in renovation pace, and those numbers that I quoted during the opening remarks should help get to those a bit. I think that the bigger issue for us this year in terms of year-over-year renovation impact will be in the fourth quarter of 2015, which is going to be a pretty heavy renovation quarter for us. But generally the flow-through will be a bit higher in our second quarter and third quarter and a little bit lower in first quarter and fourth quarter.

[Operator:]

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

[Chad Beynon:]

Hi. Thanks for taking my questions. Given your geographical mix and 10% exposure in Texas, we get a lot of questions from clients with respect to what trends you are seeing at these properties. Could you comment kind of on we started seeing once oil prices came down and some of the companies that have I guess short-term employees kind of adjusted that? And then also what this could mean in 2015 if oil prices remain at these levels?

[Jonathan Halkyard:]

Thanks for the question Chad it’s Jonathan. Our general view is that lower gas prices are going to be a positive for our business as they provider great disposable income for leisure customers and perhaps drive a little bit more business travel as well. You are a right, we do had exposure in Texas approximately 10% of our sites are in the state of Texas, about 3% to 4% of our sites are in Houston which is where we have some corporate customers in oil and gas business, but that group of customers represents less than 10% of that business in Houston. And so this is a very small issue for our company. As you noted at the top of your question our company’s geographic diversity as well as our broad base of corporate customers really helps insulate us. In this regard with that small group of customers we have seen a reduction in their business but again it’s less than 10% of our Houston business in total. So, we feel that we have got plenty of other opportunities to backfill that business. And we also have very little exposure almost none to the fracking fields up in the Upper Midwest.

[Jim Donald:]

This is an offset to Chad the positive impact of lower oil prices with regard to our leisure travel -- with leisure travel.

[Chad Beynon:]

And then my follow-up, no one asked about supply. Jim, at the outset you kind of talked about one of the big positives is you are not seeing much supply in the segment for the year. Yet we are seeing RevPAR growth in the industry anywhere between 7% and 16%, kind of within your peer group. And hotel financing has eased, at least from what we are seeing. So why haven't we seen more supply? And do you have kind of a crystal ball beyond ’15 what the supply will look like, just based on the supply demand trends and maybe some hotel financing easing?

[Jim Donald:]

In our economy segment we saw growth at about 0.3% throughout the economy segment in the U.S. and 2015 we are looking about the same. Possibly we want a little not lower 8.2. We are not seeing it now. We are seeing what Tom said we are seeing the majority of that growth coming from one or two properties and that’s that is Candlewood or TownPlace. So I can't tell you why it’s kind of sort of staying it in that area. I am not going to necessarily give into what I think the future is for us, but I think this is a window of opportunity too as we finish up on our renovations just to look at becoming part of that growth going forward. I think it works well for us. And I think I am confident the team is putting the right steps in place now to be able to capture that. But Chad I got to tell you and even what we see out there and we hear from our properties on a week in week out basis about new competition coming in, we are just seeing it, as I said earlier on the call needed right now. Tom do you have anything add to that?

[Jonathan Halkyard:]

The anything I would add is, I think just anecdotally talking to some of the people in the development and planning side of things in the industry, they are just telling us that, continue to see lenders being disciplined. And I think they are the ultimate control on how crazy owners can get. And they are just seeing that the financing sources are still staying quite cautious. And I think as long as that continues, even with strong fundamentals, that will keep supply at sensible level.

[Operator:]

We have reached at the end of our question-and-answer session. Now let’s turn the call back over to Mr. Donald for the further closing comments.

[Jim Donald:]

I don’t have any closing comments. I appreciate everybody’s time. And we look forward to talking to all of you in our next earnings in April. Take care. Thank you.

[Operator:]

Thank you. This 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.