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Edited Transcript of STAY earnings conference call or presentation 7-Nov-19 1:00pm GMT

Q3 2019 Extended Stay America Inc Earnings Call

Charlotte Dec 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Extended Stay America Inc earnings conference call or presentation Thursday, November 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian T. Nicholson

Extended Stay America, Inc. - CFO

* Jonathan S. Halkyard

Extended Stay America, Inc. - Executive Officer

* Robert Ballew

Extended Stay America, Inc. - VP of IR

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Conference Call Participants

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* Anthony Franklin Powell

Barclays Bank PLC, Research Division - Research Analyst

* Chad C. Beynon

Macquarie Research - Head of US Consumer, SVP and Senior Analyst

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* David Brian Katz

Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure

* Harry Croyle Curtis

Instinet, LLC, Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging

* Michael Joseph Bellisario

Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst

* Shaun Clisby Kelley

BofA Merrill Lynch, Research Division - MD

* Stephen White Grambling

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thomas Glassbrooke Allen

Morgan Stanley, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to Extended Stay America's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Rob Ballew, Vice President, Investor Relations. Please go ahead.

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Robert Ballew, Extended Stay America, Inc. - VP of IR [2]

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Good morning, and welcome to Extended Stay America Third Quarter 2019 Conference Call. Both the third quarter earnings release and the accompanying presentation are available on the Investor Relations portion of our website at esa.com, which you can access directly at www.aboutstay.com.

Joining me on the call are Jonathan Halkyard, Chief Executive Officer; and Brian Nicholson, Chief Financial Officer. After prepared remarks by Jonathan and Brian, there will be a question-and-answer session.

Before we begin, I would like to remind you that some of our discussion today will contain forward-looking statements, including a discussion of our 2019 outlook. Actual results may differ materially from those indicated in the forward-looking statements. Forward-looking statements made today speak only as of today. The factors that could cause actual results to differ from those implied by the forward-looking statements are discussed in our Form 10-K, filed with the SEC on February 27, 2019. In addition, on today's call, we will reference certain non-GAAP measures. More information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures, are included in the earnings release and Form 10-Q filed yesterday evening with the SEC.

With that, I will turn it over to Jonathan.

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [3]

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Thanks, Rob, and good morning, everyone. Thank you for joining us this morning to discuss our third quarter 2019 results.

Before we begin, I'd like to thank my 8,000 colleagues out in the field for their hard work this quarter. When you run at greater than 80% occupancy like we do in high season, and so many of your guests see your business like a home away-from-home as ours do. It takes a special team to make each hotel work. That our associates can do this day in and day out and are so engaged that they give our company a 4.0 rating on Glassdoor, among the highest in the industry, is one of the things that makes me so proud to work here with my colleagues.

We accomplished a lot this quarter. During the third quarter, this team managed through a challenging top line environment by fortifying our relationship with our core extended stay guests. We built on our recent momentum with the franchise community, now boasting a pipeline equal to 14% of our room base, nearly double the level a year ago. Our owned hotel development is at full steam with our first hotel opening next month and then about 1 per month through most of 2020. We strengthened our balance sheet with a highly successful bond offering in September and just increased our capital return guidance to return more than 10% of our market capitalization to our shareholders this year.

I'd like to spend a few minutes on each of these items in turn. As we all know, the third quarter saw a continuation of the softness that the industry began experiencing in June. And in fact, the decline accelerated in September, even after adjusting for holiday shifts. Comparable system-wide RevPAR growth during the third quarter for ESA declined 1.3%, including a 2.7% decline during the month of September.

Now after adjusting for unusual items in the third quarter, such as cycling hurricane business in Houston and Florida and renovation disruption, RevPAR during the third quarter declined 0.5% for ESA. We remain focused on driving demand from our core extended stay guests, business travelers with stays ranging from a week to a couple of months, which we believe is a bit more consistent then transient business and for whom we have a clear value proposition. It was because of these efforts, that we achieved a record occupancy for the company this quarter, and the strength of our 30-plus day length of stay customers will help us as we go into the shoulder season. And Brian will provide more color on the RevPAR challenges that we and our chain scales have seen in recent months.

Our adjusted EBITDA during the quarter finished at $156.3 million. Hotel operating margins remain challenging, with labor costs, property taxes and property insurance rising at this stage of the cycle. Although, the pace of that growth was lower this quarter than we saw in the first half of 2019.

We remain committed to controlling expense growth, including investments to reduce utility costs as well as keeping tight controls on overtime hours and always working to reduce turnover.

Historically, low unemployment rates are a sign of a healthy economy in our republic, but it also makes it difficult for businesses to attract and retain great employees. This is why we have invested so much time and effort in building our company's recruiting programs and culture. Our turnover among general managers and district managers is down 8 to 10 points in the last year and still coming down. This is a lean operating model. All of our hotel direct costs other than labor totaled less than $16 per occupied room. And those were up about 2% versus the third quarter of 2018.

One reason our hotel adjusted EBITDA margins lead the industry at nearly 54%. And along those lines, our adjusted corporate overhead expense for the first 9 months of 2019 is down more than 3%. Despite continuing to build out a development and franchise team. But holding the line on costs is not enough in times like these, not for me at least. Nor is beating our comp set, as we did this past quarter and we have for all of '19. I and ESA's management team are committed to improving the company's performance continually.

The good news is that when you own and operate system as large as ours, in every major market in the U.S., you don't have to look very far for the keys to success. We understand what a great extended stay hotel looks like. And we segment the performance of our hotels ruthlessly against one another. When our hotels are fully staffed, when they follow our revolutionary, but simple Kai-ESA workflow and have a solid base of core extended stay business, they operated RevPAR index levels 15 points above our company average. Dozens do this in every market and it's our soul operational objective to bring every hotel, owned and franchised to this standard of performance. Our hotels must deliver on this or they can't bear our flag. It's simply a matter of getting the fundamentals right every time and we believe that starts with culture and stable leadership in our hotels.

Demand generation is also critical in times like these. Our corporate sales team is wholly dedicated to our core guests and the companies they work for. In recognition of that effort, Business Travel News 2019 survey of corporate travel manager, gave our sales team their highest score on record, with a total rating up 19% from just 2 years ago. Our overall brand score improved as well. And we finished second among corporate travel managers surveyed this year for overall brand perception in the mid-priced extended stay category, outpacing competitors with much higher average nightly rates.

Supporting our corporate sales team, we recently opened a new call center in Bogotá Columbia to increase our bandwidth in making and extending reservations over the phone, which we believe will provide a better experience for guests calling to make reservations and ultimately lead to higher sales generation.

Our franchising efforts continue to move forward. During the third quarter, we grew our franchise pipeline by 12% to approximately 7,100 rooms. Combined with the ESA-owned pipeline, our total pipeline is approximately 14% of our existing base.

Roughly 75% of our pipeline comes from more than 15 current and future franchisees. Our total pipeline has grown 35% so far this year. Our company-owned pipeline has remained steady as we believe we have enough land and construction to account for our target growth for 2019 and '20. We expect to open our first purpose-built ESA hotel this quarter. Importantly, our construction costs for these first few projects are coming in line or below our expectations of $75,000 per key. This is critical for both our own development as well as franchisee development as we continue to prove out the economics to a wider audience. We have assured our shareholders that we would be opportunistic and only opportunistic with acquisitions and conversions.

Accordingly, next week, we will close on and convert a hotel in a growing Florida market that we had already targeted. The acquisition price for this hotel is less than it is to build a new site and it's already near stabilization, meaning there will not be a long lead time to begin generating a nice return for our shareholders. We're not alone in this.

Next week, one of our franchisees will convert another hotel, this one in Katy, Texas. There will be more conversions by our franchisees in 2020. We do not have asset sales to announce this quarter, but as we mentioned on our last quarterly call, we're completing an updated review of our portfolio and our disposition strategy as requested by our Board, and we have made substantial progress. We look forward to executing on that strategy and outlining the strategy to our investors soon. We note that interest from prospective buyers remains high and that financing conditions for buyers remain strong.

We continue to evaluate the size and scope of our renovation program in conjunction with our ESA brand review and other capital investment options. We expect to provide a fulsome update on our renovation program on our fourth quarter 2019 call in late February. And finally, as I mentioned on our last call, this has been a year of technology innovation for ESA. We have installed our new property management system in 96% of our hotels and will be complete by the end of this month. 86% of our hotels have had their TV cabling upgraded this year and the rest will be complete this month and next. We have upgraded WiFi bandwidth in every one of our hotels, a critical advantage and revenue generator for our core GAAP.

Next up is a complete revamp of our B2C and B2B CRM system, a technology which I'm particularly excited about and that will drastically improve the sophistication with which we market to our core guests. The good news is that the lion's share of the capital investments for these technology investments are behind us, and we and our customers are poised to benefit from them in 2020 and beyond. We will continue to update you periodically on these efforts.

Our financial position is in the best shape this company has been in since I joined in 2013. With our recent refinancing in the third quarter, we have approximately $500 million in cash on the balance sheet, no maturities for roughly 6 years and a weighted average cost of debt well below our current dividend yield. Combine that with what we believe are strong opportunities to sell assets at attractive free cash flow multiples in the coming quarters and our industry-leading margins. And we know we're very well positioned going forward. We repurchased 6 million Paired Shares since our last earnings call, retiring more than 3% of our float in just 3 months and have reduced our share count by 11% since 2016.

We still have nearly $180 million in authorization left as of this morning, and we continue to be active repurchases of our stock at these levels. For the second time in as many quarters, we've increased our capital returns outlet for 2019, despite having only 4.5 months to repurchase shares this year. Counting our dividend yield of more than 6%, we're on track to return in excess of 10% of our current market cap to shareholders this year.

I'll now turn over the call to Brian to discuss our third quarter financial results in detail and our updated 2019 outlook. Brian?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [4]

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Thank you, Jonathan. Before getting into our operating results, I think it's important to review briefly our financial policy and some of our recent accomplishments. In recent years, our goal has been to strengthen our financial position on several key fronts. Operationally, we continue to look for ways to defend and grow revenue, control costs and grow our asset-light revenue streams. On the balance sheet, we've strived to delever the company, while maintaining a flexible capital structure, extending maturities at attractive rates and continuing to fix rates opportunistically.

Our capital allocation priorities focus on pruning the portfolio of lower ROIC and free cash flow hotels to provide capital to be recycled into aggressive share buybacks and capital investments with strong returns, all while paying a healthy dividend. We're proud of the progress we've made on all of these fronts. Since our IPO 6 years ago, we've reduced our leverage by more than 1 turn. We've sold more than 100 hotels at attractive multiples and have returned roughly 50% of our current market cap to our shareholders through dividends and share repurchases. We've extended maturities and transitioned from a covenant heavy CMBS-based capital structure to a more flexible bank and bond debt structure.

Looking to our quarterly results, our third quarter revenue environment was challenging, with an especially weak September. Comparable system-wide RevPAR decreased 1.3% in the third quarter, but we beat our comp set by 30 basis points.

The economy and mid-price chain scales as well as our comp set, all saw declines in RevPAR of more than 3% during September. Our comparable system-wide RevPAR decline was driven by a 2% decline in average daily rate, or ADR, partially offset by a 70 basis point increase in our occupancy rate.

The decline was most pronounced among business transient and mid-length extended stay's from property walk-in visits and a decline in global distribution system business, partially offsetting this was a 1% increase in 30-plus night business and a slight increase in leisure travel. Excluding the impacts of hurricanes and renovation disruptions, our comparable system-wide RevPAR would have declined approximately 0.5% in the third quarter. Absolute company-owned RevPAR increased 1.1% in the third quarter, reflecting the improved portfolio quality from asset dispositions. For the first 9 months of 2019, comparable system-wide RevPAR declined 0.9%, which was impacted by approximately 2.0% from hurricane displacement business in 2018 as well as renovation activity in 2019.

Hotel operating margin declined 170 basis points in the third quarter to 53.8%. The decrease in hotel operating margin was driven by increased payroll expenses, property taxes, property insurance and full year charge off expense as well as a decline in comparable RevPAR. Excluding the aforementioned expense items, same-store property expense increased a modest 1.5%, as we focused on controlling costs throughout the organization.

Our overall weighted cost growth decelerated from the pace in the first half of 2019. For the first 9 months of 2019, hotel operating margin declined 190 basis points, due primarily to a 1.2% decline in comparable company-owned RevPAR and increased payroll expenses.

Corporate overhead expense, excluding share-based compensation and transaction costs, increased 4.2% to $20.4 million during the quarter due to $1.2 million in severance costs incurred during the quarter. For the first 9 months of 2019, corporate overhead expense, excluding share-based comp and transaction costs, declined 3.4% to $61.4 million, despite a $2 million increase in severance expense.

The year-to-date decrease in corporate overhead expense reflect cost synergies realized in the third and fourth quarters of 2018. Adjusted EBITDA in the third quarter was $156.3 million, adjusted EBITDA during the quarter was impacted by the lost contribution of approximately $6.8 million from hotels dispositions in 2018, a decline in comparable system-wide RevPAR and an increase in comparable hotel operating expenses as well as the aforementioned $1.2 million in unanticipated severance expense during the quarter.

Adjusted EBITDA for the first 9 months of 2019 was $426.3 million, reflecting lost contribution of approximately $20.5 million from hotel dispositions in 2018, an increase in comparable hotel operating expenses and a decline in comparable system-wide RevPAR. Interest expense during the quarter increased by $5.5 million to $36.5 million due to approximately $6.7 million in debt extinguishment costs related to our refinancing completed during the third quarter. Excluding this cost, interest expense declined by $1.2 million. During the third quarter, we issued 8-year notes at very attractive fixed rates and paid down a portion as well as extended the maturity for our term loan by 3 years. For the first 9 months of 2019, interest expense increased by $0.8 million to $95.9 million.

Excluding transaction costs in the current and prior year quarter, interest expense year-to-date declined by $4.3 million. Income taxes during the quarter declined $4.5 million to $10.5 million, driven by lower pretax income. Income taxes for the first 9 months of 2019 declined by $7.4 million to $27.8 million driven by a decrease in pretax income and a slight decrease in our effective tax rate.

Adjusted FFO per diluted Paired Share declined 11.5% in the third quarter to $0.54 per compared to $0.61 in the same period in 2018.

The decline was driven by an increase in comparable hotel operating expenses and a decline in comparable company-owned RevPAR, partially offset by a decline in income tax expense.

Adjusted FFO per diluted Paired Share for the first 9 months of 2019 decreased 10.6% to $1.43, driven by an increase in comparable hotel operating expenses and a 1.2% decline in comparable company-owned hotel RevPAR, partially offset by a decrease in income tax expense.

Net income during the third quarter decreased 29.7% to $53.2 million. The decline in net income during the quarter was driven by a decline in comparable system-wide RevPAR, an increase in comparable hotel operating expenses, $6.7 million in interest expense related to the third quarter financing transactions as well as noncash impairment expenses of $2.7 million, partially offset by a decrease in depreciation and income tax expense.

Net income for the first 9 months of 2019 declined 18%, driven by a decline in comparable system-wide RevPAR, an increase in comparable hotel operating expense, cycling a gain on asset sales in 2018 and partially offset by lower impairment expense and lower income tax expense.

Adjusted Paired Share income per diluted Paired Share in the third quarter decreased to $0.33 per diluted Paired Share from $0.39 in the same period as last year. The decrease was due primarily to an increase in comparable hotel operating expenses and a decline in comparable system-wide RevPAR, partially offset by a decrease in depreciation expense and income tax expense.

For the first 9 months of 2019, adjusted Paired Share income per diluted Paired Share decreased to $0.81 compared to $0.94 in the same period of 2018.

We ended the third quarter with our net debt to trailing 12-month adjusted EBITDA on a pro forma 554 hotel basis at 4.0x. A slight increase due to the decline in adjusted EBITDA and a heavy pace of Paired Share repurchases.

After these latest debt transactions, we have no maturities until 2025 and more than 80% of our debt is fixed at attractive rates with a weighted average cost of debt at 4.75%. Our total cash balance was just above $500 million at the end of the quarter. Gross debt outstanding was $2.69 billion.

Capital expenditures in the third quarter were $65.1 million, including $10.2 million for renovation capital, $20.2 million for development, land acquisitions and other ESA 2.0 costs. And $10.9 million in IT capital.

Capital expenditures for the first 9 months of 2019 totaled $178 million, including $69.9 million for maintenance capital with insurable events of $9.3 million as well as $34.3 million for renovations. We completed 12 hotel renovations in the first 9 months of 2019 and expect to complete 4 more during the fourth quarter. Our own balance sheet development pipeline at the end of the third quarter stood at 19 hotels. While our franchise pipeline grew during the quarter to 58 hotels. We expect to purchase and convert one extended stay hotel during the fourth quarter and expect a handful of franchise conversions over the next few months. As Jonathan mentioned earlier, our total pipeline has grown 35% so far in 2019. Yesterday, the Boards of directors of Extended Stay America, Inc and ESH Hospitality, Inc. declared a combined cash dividend of $0.23 per Paired Share, payable on December 4, 2019, to shareholders of record as of November 20, 2019.

Our dividend yield is now approximately 6.4% of recent trading prices, which is significantly higher than our weighted average and our marginal cost of debt. During the third quarter, we repurchased 4 million Paired Shares for approximately $57.5 million. Since the end of the quarter, we have repurchased an additional 2 million Paired Shares for an approximately $28.7 million, meaning we have retired more than 3% of our diluted share count in the last 90 days.

Our current total outstanding remaining availability for Paired Share repurchase is approximately $177 million. We expect to remain very active repurchasers at current trading levels. Looking to the fourth quarter of 2019, we expect comparable system-wide RevPAR growth will be between negative 4.5% to negative 2%, reflecting the recent RevPAR trends in our chain scale and comp set. This includes the 75 to 100 negative basis points impact from renovations as well as cycling a similar level of impact from the Boston area as we cycle over gas explosion business in the fourth quarter of 2018.

We expect adjusted EBITDA between $109 million and $119 million during the fourth quarter. For the full year 2019, we update our guidance as follows. We expect comparable system-wide RevPAR growth of minus 1.75% to minus 1.25% and adjusted EBITDA between 35 -- $535 million and $545 million, reflecting the lower-than-expected industry and chain scale RevPARs in 2019. The adjusted EBITDA totals includes lost contribution of approximately $21 million from assets sold in 2018.

We're lowering our expectation for capital expenditures in 2019 at the midpoint by an additional $40 million. And expect to be between $235 million and $275 million, which is an $80 million decrease from our initial guidance back in February. The decrease in expected capital expenditures from our August guidance is driven by lower capital expenditures for renovations, as we continue to review the size, scope and returns associated with this program compared to other capital investment options, including capital returns to shareholders. We expect to provide an update on our renovation program in our fourth quarter earnings call.

We expect our annual interest expense to be approximately $129 million, an increase from our prior guidance due primarily to transaction costs incurred during the third quarter. We expect adjusted Paired Share income for diluted Paired Share between $0.93 and $1.01 per Paired Share. Through our dividend and Paired Share repurchases, we now expect to return between $285 million and $315 million this year to our shareholders, reflecting higher share repurchase activity and lower capital expenditures, representing roughly 11% to 12% of our recent market capitalization, among the highest capital returns as a percentage of market cap in the lodging and adjacent spaces.

Operator, let's now go to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Harry Curtis of Instinet.

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Harry Croyle Curtis, Instinet, LLC, Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [2]

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Two quick questions, please. The first is if you look at the hotels that have been renovated in the last 6 to 12 months. How are they performing relative to the comp set and your expectations?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [3]

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Harry, this is Brian. On the hotels that have been renovated sort of as we referenced in the call, I hesitate to express too much enthusiasm or report anything on the performance because the number of hotels that have reached restabilization at this point are really limited and a really limited number of observations. I would say on the renovation program, we are sort of in a pause-and-evaluate stage, part of that is driven, frankly, by the fact that we have been renovating to 4 tiers. And we're getting feedback that some of our guests might be a little confused as to what the differences between the tiers are, especially when you're making booking decisions based on relatively small pictures on our website. You might not notice all the differences between the tiers. So we're looking at how we might be able to consolidate, simplify for guest decision-making and, frankly, to make our sales process more efficient.

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Harry Croyle Curtis, Instinet, LLC, Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [4]

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Yes. Where I was going with this obviously is -- when we look ahead to 2020. Is there -- I'm trying to get a sense of how much renovation CapEx you're likely to spend in 2020 versus 2019, as we look ahead to further cash available for repurchases?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [5]

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Yes. Harry, we guided to about 1/7 of the portfolio getting a renovation per year over about a 7-year period. While we are not in a place to issue guidance on 2020 yet, I would note that we're going to be in this evaluation mode until probably late first quarter next year and then there is a permitting process. So yes, at best I think we would get to about half of a normal number of years or a normal number of hotels within the renovation cycle in 2020.

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Harry Croyle Curtis, Instinet, LLC, Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [6]

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Okay. Very good. And then moving on to the second question, which is the group of hotels that you have yet to sell. Is that number still -- is it sort of still 65 to 75? And again, as we look into 2020, might that number increase particularly given the huge gap between what you're able to sell hotels for versus the 9 multiple that your stock trades at today?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [7]

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Harry, it's Jonathan. We -- few years ago when we introduced our growth strategy, we did outline that we saw a pathway to selling 150 hotels over a 5-year period. We're now just over 3 years into that 5-year period and we've sold about 75 hotels. So despite the fact that we haven't executed asset sells this year for a few reasons earlier because of the process we've been going through. And more recently, our Board has asked us to evaluate that pool of assets we're looking to sell.

I think we're still basically on track with that initial plan. That being said, as we noted in our prepared remarks, we believe the market for purchasing our hotels remains very strong. Some of that market is represented by our existing franchisees, all of whom, we believe are -- they're performing very well or very happy with their acquisition of Extended Stay America assets. So we're very confident that we can continue to sell our assets at valuation, similar to the ones we have in the past. I think the makeup of that remaining group of 66, 65, it's probably closer to 75 of 80 hotels is a bit in flux right now as we go through this process. But it certainly could grow from that number. Now whether or not we would execute all that in 2020, I think time will tell, but we're still very comfortable about the market for these assets, and it's an important part of the company's strategy.

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Harry Croyle Curtis, Instinet, LLC, Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [8]

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Yes. I guess what I -- where I was going is what is your sense of the Board's sense of not necessarily urgency, but priority in recognizing this arbitrage between the value of your stock and the value of your hotels. And do they share the same sense of urgency that many of you shareholders do?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [9]

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I really can't speak for the Board on this point, but I would add that our repurchase activity this year has -- and I expect for the next several months will not be constrained by our asset sales activities. We had $500 million of cash on our balance sheet by the -- at the end of the third quarter, we've repurchased 6 million shares as of yesterday. We have another -- at today's prices, we have outstanding authority to purchase an additional 12 million shares. So this is without any additional asset sales. So while the 2 are related as you note in terms of the nice arbitrage that's available for our shareholders, they are not related in the sense that our ability to repurchase shares right now is not constrained by the company's liquidity. We don't require additional asset sales to be active in the market.

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Operator [10]

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Our next question comes from Chad Beynon of Macquarie.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [11]

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I know you guys are still going through the 2020 budgeting process. And Brian, you mentioned the number of renovations are still under review. So this may be tough to answer. But as you look forward to 2020, at least right now with kind of the current renovations and all the puts and takes. Could you give us a sense of what you'll be facing just in terms of potential headwinds in 2020 versus the industry? And I believe most prognosticators have projected a sub-1% RevPAR for 2020. So not that you're willing to give something now. Just trying to figure out how you could fare against that.

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [12]

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Thanks, Chad. I appreciate the question. As -- again, you're right, this is tricky to comment on because it is our preference to provide fulsome guidance in the first quarter, when it's basically already for prime time. But to your point, yes, and sort of as I alluded to earlier, we do have a number of hotels that have undergone renovation or will undergo renovation or in the process of renovation right now. It's not the number of hotels that we would expect to get to on a run-rate basis each year, when the renovation program is sort of fully vetted out. But there are still dozens of hotels that either have recently been renovated or renovation is being completed. And we would expect that renovation activity at least for the first half of next year would be virtually nonexistent. And so we would get the tailwind of renovated hotels without the headwind of displacement, at least in the first half of 2020.

And then beyond that, I think, I would say, we'll be able to gauge the scope of all those factors more effectively for you when we provide our guidance for 2020.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [13]

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Okay. And then regarding the September weakness, you said it was mainly in the business transition and mid-length stay. Was this a consistent theme across the country in your portfolio? Or was it in certain pockets of the country that could maybe give you the confidence that it's more transitory in a couple markets?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [14]

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Yes. It's a good question. I would say that it was fairly broad-based. Looking at the segments, that contributed to the decline, especially in the middle lengths of stay, the 7- to 29-night guests. Certainly, there were some segments that are higher represented in some markets than others. But generally speaking, I think the underlying drivers that we saw are more broad-based than geographically restricted. Yes, I'd also comment here, we mentioned that September was weaker than the quarter as a whole. October has been a rough month for economy and for mid-scale. The STR data for the month of October has not yet been made available to us, but we do get daily data.

And so just looking at our comparable comp set and accumulating the days October 1st through the 31st, this year versus last year. Yes. It was a tough month. We were down 3.8%, but we beat our comp set by about 70 basis points. And at the -- our ability to beat our comp set is strengthening as we continue to build the 30-plus based book of business and continue to migrate hotels more toward that true extended stay business that we're really uniquely positioned to serve.

Looking to our guidance for the quarter, I know that was probably a little bit of a shock to some folks, given what's going on externally. A part of that is conservatism on our part. We missed our guidance slightly this quarter. I have no intention of doing that again. I don't like it a bit. And so want to the derisk the guidance somewhat.

And frankly, as -- even looking at October, November so far, we have reason to believe that we're through the worst of it, the first few weeks of October was tougher than the last week of October, the first week of November. Our booking pace and the way that the booking pace is evolving as we move through time, are all still not rosy, but certainly improving as we move through time, week-to-week and day-to-day.

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Operator [15]

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Our next question comes from Michael Bellisario of Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [16]

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Coming back to your comments on the asset sales in the lower-tier hotels. I think you laid out 3 options, last call. Are the comments you made -- are you still evaluating all 3 options? Or have you decided on one and now you're digging deeper into that one option and looking to pursue that one? Or you're still in the early stages of looking at all 3?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [17]

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Well, certainly not. I'll make a couple of comments, Mike, and then invite Brian to comment as well. We're certainly not in the early stages. We're in the latter stages of that. And by the 3 options, I think you're talking about in selling and refranchising or selling unencumbered or retaining these hotels. And so we're doing the work on that. And as I hinted at this in response to Harry's question at the top of our Q&A session, which is that it's the makeup of these assets that we're selling and which I would say is more -- is going to be more informed by brands considerations at this stage in the game, then necessarily by market considerations. And so we're close to the end, but we still need to cover some of these conclusions internally and with our Board of Directors.

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [18]

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The decision is not necessarily -- I don't know what the analog for 3 relative to binary is -- trinary. We don't necessarily have to pick one strategy for each of these -- for this set of hotels. There may be some hotels that we sell and franchise back as ESAs. There may be hotels that we sell some other way, potentially unencumbered. So yes, again, as Jonathan mentioned, it's related to brand considerations. And is really about positioning our portfolio for optimal success going forward. And getting optimal value for shareholders in the transaction process.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [19]

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Got it. Fair to assume, still fluid, but making progress, correct?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [20]

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Absolutely.

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [21]

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Yes.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [22]

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Got it. And then the second question, can you maybe update us on the franchise sales, hiring process, how many people have been hired so far? And have you seen any change in pace of signings since the Board concluded its strategic review, plus or minus 90 days ago?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [23]

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We have begun expanding the franchise team and it wasn't just in franchise sales, but actually more importantly at this stage in the game franchise services as we build up that internal team to serve a growing franchisee base. And the pace is, as we described it in our prepared remarks that we've grown that pipeline I think nicely and we would expect that to continue and accelerate as we get into 2020.

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Operator [24]

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Our next question comes from Stephen Grambling of Goldman Sachs.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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I guess a couple of quick follow-ups. First, just sticking with the asset sales. Are there any gating factors on selling assets quicker or expanding the base that you're targeting, either as it relates to tax basis or a need to keep a manager franchise agreement?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [26]

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No.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

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Great. And then from your commentary on medium-length stays, what is driving that pressure in your view? Are you seeing any change in the competitive environment that might be affecting your properties?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [28]

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No, we don't see any change in the competitive environment. This business, this is very good business for us. It is priced well and yet because it's greater than a week, we only incur the weekly housekeeping expense and not as much check-in and checkout as you would in transit business. So we really like this segment, but it does tend to be very project-driven. And so this requires our sales force in the field, knowing what projects are going on, which ones are coming, and it's really scrappy sales at the field level. We do that very well, but there is some ups and downs to it. There's no sign that I see that we're losing market share in this area.

As Brian noted, there are -- there is really no geographic concentration to it, but there are certain areas that get impacted or got impacted a little bit more in this quarter than in the future. But this is an important business for us. This length of stay segment we're very focused on it. And I'm not concerned about any sustained weakness in it. It's a customer that -- for whom our product is ideally suited and where we don't see a lot of supply coming into our markets.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [29]

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Fair enough, one last one. Does the reaction to the stock following last quarter and what's continued make either you or the Board reconsider any alternatives that were previously on the table? And maybe holistically is there -- are there other things that you're thinking about to unlock value from a corporate standpoint?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [30]

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Well, that's certainly a board question. And I know the Board will consider any and all options as they always have for the creation of shareholder value. As far as the management team last quarter when we announced our earnings and the conclusion of that process, we announced at the same time, an increase in our share repurchase authorization, which the Board supported enthusiastically. And we've been hard at work, working down that authorization as we noted this morning. So I would also note that each of the 3 of us talking on the call this morning, all purchased stock in this company during the third quarter. And so we're committed, and we're confident in this company's ability to continue to perform. And I think our actions, repurchasing shares for the company and for our own personal account, speak to that.

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Operator [31]

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Our next question comes from Chris Woronka of Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [32]

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Wanted to dive back into the, I guess, the different bucket of customers for a second. So understanding that the longer-term stays have lower ADR, but higher margins. I guess if that strategy were to continue if you continue to kind of bulk up on the longer-term stays. Is that ultimately going to reduce some of the margin pressure, even though the rates are a little bit lower?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [33]

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Thanks for the question. Yes. To some extent, remixing to 30-plus business will relieve some of the margin pressure. As Jonathan alluded to, longer stays mean less frequent housekeeping, a little bit less activity check-in, check-out activity at the desk. In terms of the desk, there's, for a lot of properties, we're basically in a station fill sort of environment, where you can add a little or take away a little. But that doesn't mean that you're going to leave the desk alone for an hour or half-hour a day. You have to have that station fill. But especially on housekeeping. As you remix the hotel, you don't necessarily use as many housekeeping hours. And that does relieve some of that pressure. Some of these items -- property tax, property insurance, the mix of the hotel and the way you operate the hotel, really doesn't matter at least in the short term. But I think there's good news, at least on the property insurance front that there has not been significant claims in our markets here over the last couple of years. And we would expect to see some of that pressure abate as we move forward.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [34]

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Okay, that's helpful. And then wanted to kind of revisit the -- I know last quarter, you had talked about the potential for almost I guess quasi-residential brand. And whether that might be for some of your owned hotels to kind of rebrand or for you to kind of sell hotels unencumbered and refranchise them in more of a residential format? Can you give us maybe an update on that? How many hotels might fall into that broader bucket of going more strictly residential?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [35]

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Chris, I'll give you an idea, but I want to caveat this with the -- as Jonathan noted, that while we're toward the end of this evaluation process, there's still some work to be done internally and some work to be done at the Board level. But basically, the -- and Jonathan alluded to this earlier as well, protecting our brand is important. And we have a number of hotels, frankly, that are well suited to serving a business-driven extended-stay demand mix. We have other hotels due to their situation within the market or due to some physical characteristics of the hotels themselves are likely better geared toward serving a more residential guest.

And so this evaluation process is really about making sure the hotels are serving a brand mission. Yes. We believe there could be a 100 may be more hotels that are really better for residential all the time than a mix of residential and business-driven extended stay. And again, because of physical characteristics of where they are in the market, you're probably not willing to have them completely full of business-driven demand. So that's kind of where we are. That's kind of what we're thinking.

So it's a not insignificant number of hotels that today are operating really more serving a residential guest, but we're sort of it in, in something of a no man's land trying to support these hotels with corporate sales, trying to hold a brand standard, that's the same as for other extended stay hotels. And we think we may be more efficient, more profitable if we draw a broader line between the missions of these different assets.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [36]

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Great. Would you may be willing to share the relative performance of those hotels, if not a specific number, just the relative performance of how they're doing versus the rest of the portfolio?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [37]

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Yes, I really hesitate to comment there because, again, on an asset-by-asset basis, I think there's still some final work to be done. I would say at a higher level, that the hotels that we have identified as these hotels that are potentially more residential in nature tend to receive lower social media and other scores, especially from shorter-term guests who tend to be there for more business reasons...

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [38]

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But I would add, I mean financially they perform well. They tend to run at a slightly lower ADRs because they're longer-term guests, but the margins are quite high. And in many cases, the capital investment required is lower because they don't get the -- they don't just get that frequent turn that our more -- the hotels that have more balanced book of business do.

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [39]

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Yes, that's absolutely fair to say. Those hotels perform very well financially. The concern here or the aim here is just to make sure that they're meeting the needs of the intended guest mix optimally and are best suited for growth going forward.

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Operator [40]

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Our next question comes from Thomas Allen of Morgan Stanley.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [41]

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Can you just remind us how you're thinking about hotel openings in 2020 both on an owned and franchise basis? I think you said you expect to own approximately -- you expect to open approximately 1 owned hotel a month next year, but I just want to make sure I was hearing that. And then on the franchise side?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [42]

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Yes. You did hear that correctly, we'll open 1 in December. And then we have 7 or 8 under construction right now. And we might have 2 that open in one month and then we miss a month. But generally, as we look at the schedule right now starting in December, we're opening one every month, through August or September. And that just counts the ones that are currently under construction right now. As it relates to the franchisees, we have one hotel that we expect to open in the February time frame. The others are largely -- I expect to come from conversions. And the timing is a bit uncertain at this point. I mentioned one on the prepared remarks, that's going to be converted shortly by one of our franchisees. And so those will continue, but really on the time line of our franchisees, but they can come in a little bit more chunky fashion over the year.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [43]

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So do you think that will be a similar ballpark of about 8, 9 next year? Or do you think it could -- or just you don't know?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [44]

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I think it's going to be higher than that. Our franchisee opening, it will be higher than that.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [45]

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Okay. Helpful. And then ...

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [46]

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I was just going to say we just approved 5 additional conversions by one of our franchisees yesterday. So those will be done in the next several months. So I think it'll be higher than our owned openings.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [47]

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Okay, helpful. And then in your 10Q, it showed that there was one franchise hotel removed in July and another in August, what happened there?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [48]

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A couple of different things. One was a hotel that was in Austin. We sold that for higher, better use. It continued to be -- to operate for a while, but now it's closed so that it can be razed and construction can start. And then the other was a similar situation in Denver, the Denver Tech property that had been operating, but now is being redeveloped in the multifamily.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [49]

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Okay. So the properties that you guys have sold at a good cap rates. And we knew about from a couple of quarters ago.

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Operator [50]

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Our next question comes from Dave Katz of Jefferies.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [51]

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You covered quite a bit of territory, but I just wanted to follow-up on the franchise system. We spent time thinking about what critical mass for a franchise system really is. And this may be a point of open debate that it sounds like you might be having. But where do you consider critical mass to be for a system of franchised hotels. Is it 100, 200, 500, 300?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [52]

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I think of it a bit differently, which is around momentum. And at what point does the performance of these franchise hotels amongst a larger diversed franchisee community begin to win the day. And the argument begins to carry itself. So that franchisees begin to come to us and say, hey, we've got these 5 hotels we'd like to convert to Extended Stay America and so on. In that sense, I believe we've already reached that momentum point. That -- folks are bringing us deals as much as we are going out and proposing them to our franchisees. So that's one sense of critical mass, that sense of a tipping point, which I feel we have achieved already.

But as it relates to the -- your question is still a very good one because there -- in order to have a franchise services organization with some scale, a QA function, that makes sense. I think we probably need about double the number of franchisee hotels that we have right now. I also think that there is a capital markets question here in that the company in order to be a growing more asset like company does need to have some real scale amongst its franchise income stream. And clearly, we're not there yet, but I think that we got a line of sight to that. And that's probably at least 150 or 200 or 300 hotels. So that's a couple of ways that I think about it, David, and -- but like you had mentioned at the beginning of your question that's kind of a -- I think there could be different perspectives on that question.

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [53]

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Yes. I do have a slightly different perspective on that question in that ESH Hospitality is essentially a franchisee of 554 units right now. So unlike some other franchise systems that are getting off the ground, we do have decades of history of performance. We do have demonstrated ability to work in every market in this country. So I think that there are advantages, especially as it comes to franchise sales, that other franchise systems -- the size of our franchise system just don't have.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [54]

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And if I may just follow that up. Are there interim strategies between something more absolute of selling to a much larger system and fighting the good fight, which you obviously are doing quite well. Are there interim steps where you could have an affiliation arrangement of some kind with a larger system? Just to establish a little more deal flow, loyalty system that's a little larger, derive some of the benefits from scale. Obviously, you have to pay for it, but are there any strategies in that range, that could be discussed at any point?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [55]

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Well, we certainly appreciate your recognition of our company fighting that good fight. And we certainly think we are. It's an interesting point. I think in terms of affiliations, I could conceive of certain partnerships around loyalty, that could make sense at some point for the company. I think with respect to brand and management, we believe that our brand is sufficiently unique and that the management required is also differentiated. It's hard for me to think of, as you describe interim strategies, but perhaps on loyalty and adding value to our loyalty program, that -- I think there are possibilities there.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [56]

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Just one follow-up comment about it because it's been so prevalent. And frankly, we had some discussions this morning around loyalty and .com bookings and how -- the impact that that's having on the OTA side of the business. Loyalty use is kind of up and off the charts. It sounds like some loyalty affiliation is something that you could consider at some point under the right circumstances, correct?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [57]

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Yes. Under the -- kind of the menu of things you listed. And as I think about the -- our business, our advantages, as well as some of our competitive challenges. It's loyalty and adding value to our loyalty program and there are number of ways to do this, which other operators, not just in lodging, but in other spaces have done this routinely. I can conceive of certain partnerships that might help us increase the value of our loyalty program, sure.

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Operator [58]

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Our next question comes from Shaun Kelley of Bank of America.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [59]

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So just 2 things for me. I mean one, obviously it seems like a lot of what you're doing is sizing down some of the renovation program, redeploying some of that capital into the share buyback. But overall, because the numbers are coming down a little bit, it does seem like leverage is going to tick up a bit. Just Jonathan or Brian what are you comfortable with on sort of your medium-term leverage target, just given sort of the operating challenges that are somewhat beyond your control on the top line?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [60]

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Shaun, it's Brian. I think as Jonathan mentioned there might be a temptation to link a lot of these things that don't necessarily need to be linked. The slowdown in renovation spend is not necessarily a function of or related to the accelerated share buybacks et cetera. We do have the resources available to pursue these various objectives without success in one determining whether or not we can be successful in another. Yes, that said, I think you correctly note that if we continue to see this environment, where RevPAR is sluggish and where there is some growth in some pretty important expenses, that could contribute to somewhat higher leverage. Our interest coverage is very comfortable. In terms of medium-term versus long-term leverage targets, certainly, the company has gotten itself in a place, where we are far removed from what has caused trouble for this company and for others in past downturns and past situations.

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [61]

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I would add one other thought, Shaun, which is that the financial risks that a company is willing to -- is able to bear is directly related to the business risk that it faces. And our company has 550 owned hotels across the country. No hotel generates more than 1% of our revenue. Every hotel is cash flow positive. So while we are -- we're always doing our best to drive revenue and control cost across the enterprise and in each hotel individually. The business risk in this company is quite low. And so as a result, we believe that we can put financial leverage on this business.

And Brian and his team did a fantastic job in placing debt for the company back in September. And I think that demonstrates this nice situation we have with respect to the company's leveraging its business risk. So when we see opportunities like this to repurchase our shares, capture dividend yield in excess of our marginal cost of debt. I mean corporate finance 101 says you go and you continue to do that. And we can sustain an interim pickup and financial leverage to accomplish that.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [62]

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Got it, great. And then the other question, sort of, again, I appreciate you're, sort of, in the middle of the budgeting side. But I think last quarter you referred to CapEx on the new builds possibly also being a little lower maybe over the medium-term than you kind of had planned previously, just given how good some of the ROIs are turning out, how much traction you had on the franchisee side. Is that still the case? And can you just give us a sort of a broad sense of kind of the cadence over -- even the next 2 years on the new build CapEx?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [63]

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Sure, Shaun. Certainly, over the next year, as Jonathan mentioned, we have, let's call it, 10 hotels teed up to open over the next 10, 11 months. After we get past sort of that -- going back to 2016, we had outlined something like 10 to 15 on balance sheet builds per year. As we move beyond, say the next year or 2, where we've already acquired the land and have some of these projects in flight, I think we do see that it is likely that the pace of our on-balance sheet development is somewhat lower than that 10 to 15. But that you would see that beginning in maybe 2021.

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [64]

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So these hotels at approximately $12 million all in capital cost per that pace annually is $120 million to $150 million, but as we get into 2021, that could come down a little bit.

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [65]

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That's right.

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Operator [66]

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Our next question comes from Smedes Rose of Citi.

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Unidentified Analyst, [67]

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Joseph (inaudible) for Smedes. The first question is could you talk about what you've seen on the supply side for your properties? And do you have a sense of what that looks like in 2020?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [68]

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Yes. In the economy chain, yes, we're looking at supply growth of about 40 to 50 basis points, both this year and next year. And, well, we have visibility to 2021 as well. The mid-scale it's a little bit higher, just over 1%, along that -- that's the new true supply by Hilton that's coming online. So you kind of average those 2 together, we're looking at roughly 70 to 80 basis points of supply growth over the next couple of years.

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [69]

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Real supply growth is kind of hitting at upper mid-scale and above, speaking in terms of chain scales. Upper mid-scale is much more robust.

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Unidentified Analyst, [70]

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Great. And then just another one. On the capital spending program, are you scaling back on the scope on the per-key renovations and upgrade? Or is it more of a timing issue?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [71]

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Yes. Again, maybe a little premature to speak to what that might be but -- as we -- I mentioned that we may go from 4 renovation tiers to a lower number of tiers. That may mean that on the bottom end hotels get a little bit more on the top end. Some hotels that are slated for a lot are going to get a little less. But in terms of the overall cost of the enterprise endeavor, I don't know that I'm really in a position to say that it's going to be materially different at this point.

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Operator [72]

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Our final question comes from Anthony Powell of Barclays.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [73]

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Just a follow-up on the supply growth question, could some of these upper mid-scale hotels that are kind of higher quality than the past products in that segment and connected to the brand. Could that really be impacting your ability to get some short-term business in your hotels, when you can't -- you don't have the long-term stay?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [74]

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If you're talking about the hotels in that price point, I would say no. I mean the upper -- did you say mid-scale, Anthony?

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [75]

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Upper mid-scale. So I'd say a true that may be able to price at $80 for a transient customer or that customer may have in the past, looked at your hotels occasionally, but now they are staying in these newer brands that are opening up and the lower price points across the country?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [76]

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Yes, I don't think so. I mean when I think about some of the upper mid-scale competitors, they tend to be more kind of in that $110 to $150 range. And that's going to be against $75, $80 for ADRs in our system, maybe $90 generally. So I don't think so. And as we go around our system and speak with our operators, and we're talking about the business, it's rare that a new competitive opening is affecting our business. It happens, but it's very rare compared with other businesses I've been in, that I've been involved with. Competitive entry, is rarely a reason for what we're seeing in terms of any impact on our business.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [77]

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Got it. And you've talked in this call and last about shifting some properties to more of a residential model. Have you changed your overall, I guess, TAM or system size expectations over the past couple quarters? Do you still expect to be able to grow to the same size eventually as you and franchisees build hotels?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [78]

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Yes, I do. I -- we certainly see the same market opportunity that we have for the past couple of years. I think the only area where my thinking has changed a little bit on that is that the opportunity for conversion is greater than we expected it to be. We're really -- we had looked at a few conversions in the past and had chosen not to proceed with them. But as we look at them now, as we -- as our franchisees look at them, that's a whole category of growth that we did not really assign much value to, which we're very enthusiastic about. And on the premise of the question, Anthony, I would just suggest that we're not moving this business towards any kind of residential model or customer set. But there are certain of our hotels that have a bit more of that customer segment than others. And as we consider branding implications and the rest we're trying to take that into account in a way that's positive for shareholders.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [79]

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Just one follow-up on that. Conversions are great, then they're in-place cash flow. They can create, I guess, some brand confusion, depending on how the hotels are configured. How do you manage that? And when do you think you could see more franchise and new construction starts picking up across the system?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [80]

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You're certainly correct, that it's a -- that we have to be cautious about that brand confusion, but all of the conversions that -- the few that we've done, the others that we've approved, they're all quite similar to our existing boxes. They all have kitchens and all the rooms, they don't have restaurants. And they're approximately the same size. Heck, some of them even have already taken our color schemes. So that's -- in our experience so far is that's not a large risk, one that we've had to turn down opportunities for. And we have a brand standards committee, which works with our franchisees to make sure that we are true to our brand.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [81]

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Got it. And on the franchise and new construction side, when do you think there would be a bit more momentum there?

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [82]

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This coming year, in 2020. But we're -- we'd like to see our franchisees, of course, continue with their new development. But we also -- we like the conversion business as well. As you noted, it's faster in-place cash flow, but we'll have more in 2020 on the franchise new build side.

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Operator [83]

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This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Halkyard for any closing remarks.

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Jonathan S. Halkyard, Extended Stay America, Inc. - Executive Officer [84]

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Thank you. I'd just like to thank everybody for joining us this morning and for your support of our company.

Enjoy the rest of your week, and we'll look forward to speaking you in the coming weeks if we have meetings with you and if not, during our fourth quarter 2019 call in February. Thanks, everybody.

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Operator [85]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.