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Edited Transcript of STAY earnings conference call or presentation 27-Feb-20 1:30pm GMT

Q4 2019 Extended Stay America Inc Earnings Call

Charlotte Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Extended Stay America Inc earnings conference call or presentation Thursday, February 27, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian T. Nicholson

Extended Stay America, Inc. - CFO

* Bruce N. Haase

Extended Stay America, Inc. - President, CEO & Director

* 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

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* Harry Croyle Curtis

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

* Joseph Richard Greff

JP Morgan Chase & Co, Research Division - MD

* Michael Joseph Bellisario

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

* Shaun Clisby Kelley

BofA Merrill Lynch, Research Division - MD

* Smedes Rose

Citigroup Inc, Research Division - Director & Senior Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Extended Stay America's Fourth Quarter 2019 Earnings Call.

(Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Robert Ballew, Vice President of 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's Fourth Quarter 2019 Conference Call.

Both the fourth quarter earnings release and an 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 Bruce Haase, Chief Executive Officer; and Brian Nicholson, Chief Financial Officer. After prepared remarks by Bruce and Brian, there will be a question-and-answer session.

Before we begin this morning, I would like to remind you that some of our discussions today will contain forward-looking statements, including the discussion of our 2020 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 26, 2020. 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-K filed yesterday evening with the SEC.

With that, I will turn it over to Bruce.

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [3]

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Thanks, Rob, and good morning, everyone. Thank you for joining us this morning to discuss our fourth quarter 2019 results, my first call since I became CEO in November.

Before I discuss our key priorities for Extended Stay America in 2020 and beyond, I'd first like to highlight a few financial highlights from our fourth quarter of 2019 and our full year.

First, after a very soft October, our RevPAR trends improved significantly in November and December of last year. RevPAR for the fourth quarter finished down 0.8%, which was above our guidance. We also significantly outperformed our competitive set by a strong 2.1% during the quarter. And we're happy to report the recent stronger RevPAR trends have continued into 2020. For the full year 2019, comparable system-wide RevPAR declined by 0.9%. Excluding the impact from cycling hurricane-related business in 2018 and the renovation and disruption in 2019, comparable system-wide RevPAR would have increased by approximately 1%.

Of course, capital return is an important part of our value proposition. In fact, through dividends and share repurchases, we've returned more than $300 million to paired share shareholders in 2019 or nearly 14% of our recent market capitalization. And that includes nearly $115 million in the fourth quarter alone. Over the past 5 years, we've returned more than 55% of our recent market capitalization to shareholders.

Finally, in late 2019, we transitioned to a new leadership team with deep experience in the extended stay segment. In addition to my appointment as CEO, Kelly Poling joined Extended Stay America as our new Chief Commercial Officer. Kelly is uniquely qualified to lead our commercial engine with deep marketing and distribution experience in the extended stay segment of the lodging industry. Randy Fox also joined the company as EVP of Property Operations. Randy is one of the few lodging operation professionals that has deep experience in managing extended stay assets on a national basis. Kelly and Randy not only have significant extended stay experience, but the three of us had prior successful working relationships in the extended stay business, addressing performance goals similar to the ones that I will outline shortly for Extended Stay America. Together with the continuity of service from our existing management team, this team is going to hit the ground running. Finally, we are focused like never before on the customer experience. Mike Kuenne, an ESA veteran, was recently promoted to lead a new function as our Chief Customer Experience Officer.

I would now like to turn on our strategy to create shareholder value. I believe we have significant untapped opportunity in our company and our brand. And my conversation with our leadership teams, our field management and our franchisees have only served to solidify my confidence in our future. Our value creation strategy is focused around executing 4 key pillars. First, we are focused on improving the guest experience and property-level financial performance. Second, we're going to more strategically curate and extract value from our REIT assets. Third, we're going to grow the ESA brand to an asset-light franchising strategy. And finally, we will continue to return significant capital to our shareholders while maintaining a prudent balance sheet.

Let me elaborate a bit on each of these 4 pillars. First, we are rededicating this company to the execution of the basics of our high-margin extended stay operating model. I believe that our operating performance has not reflected full potential of our business. Our property operations team is focused on delivering an improved guest experience and our commercial engine is focused on delivering more extended stay guests to our properties that are a good match for our product and our operating model. To ensure that we provide a great guest experience, we have initiated a multifaceted property operations improvement program. We will be launching a rigorous quality assurance program across all ESA-branded properties in April. We're upgrading talent across our property operations staff in the field. And we will be aligning our incentive compensation programs to the guest experience as well as financial performance. We're also testing certain modifications to our labor model to ensure that we more consistently provide a favorable guest experience. And while there are some incremental costs to these initiatives, we believe the medium-term revenue upside is significant.

As we strive to improve the on-property guest experience, our commercial team will be laser-focused on driving the right customers through the right channels at the right price to our properties. Extended Stay America is unique as we are the only lodging company solely focused on the extended stay segment and the only revenue generation system exclusively focused on delivering extended stay guests. That means we can optimize our property distribution channels to focus on extended stay business delivery. In 2020, we will focus on optimizing our proprietary distribution channels, esa.com, our call center and our sales force, to deliver more extended stay guests. We will be relaunching esa.com in early 2021 with a new look and functionality that will be optimized for mobile devices. And unlike our competitors, we can target all of our marketing efforts, our media spend and our social media programs on the extended stay segment. And as we improve proprietary business delivered through our distribution channels, we will be able to adjust our revenue management strategy to decrease our dependence on transient guests delivered through the OTAs and through opaque channels. By decreasing our dependence on these transient guests that are not a good fit for our operating model, we can alleviate stress on our lean labor model, help limit cost increases in a rising wage environment and improve our Net Promoter Scores on social media. Our core extended stay guests are generally very pleased with the experience and they leave significantly higher reviews than transient guests that are delivered through the OTAs. And we've already begun this transition to our core guests, with a 9% increase in room nights occupied from our core extended stay customers over the last 2 months alone.

Secondly, we are developing a more strategic and proactive curation strategy for our REIT assets. The company is fortunate to have some extraordinary real estate. Many of these sites were developed many years ago and are impossible to replicate today. We have identified a number of sites that may lend themselves to a higher and better use other than a mid-scale extended stay asset. We are currently marketing several such sites, and we are receiving very strong indication of interests at very robust multiples. In fact, we are considering offers with multiples generally more than double our recent trading multiple. We are currently evaluating our entire portfolio for other opportunities to create shareholder value in excess of that which we can create by improving the financial performance of our properties. And this would include assets that lend themselves both to a higher and better use as well as certain assets that may no longer properly represent the extended stay brand. We are targeting to close some of these transactions later this year.

Third, we will more aggressively grow the ESA brand through franchising. In the past, the company focused on both on-balance-sheet corporate development as well as franchising. And as the franchisee community has warmly embraced our prototype, we believe it is no longer necessary to initiate additional on-balance-sheet development to jump-start our franchise system. Instead, we anticipate completing the on-balance-sheet development now underway and then expect to dramatically curtail and possibly eliminate on-balance-sheet corporate development going forward. This company is taking franchising seriously, and we believe that we can grow the Extended Stay America brand dramatically through franchising. And as the only franchisor exclusively focused on the extended stay segment, we believe we have a unique competitive advantage that cannot be replicated by the transient brand families. We expect to invest additional resources in 2020 to take advantage of this opportunity.

The fourth pillar of our value creation strategy is strong capital returns to shareholders. The company is committed to returning significant amounts of capital through dividends and share repurchases, all while maintaining strong financial discipline. We have a well-covered 8% dividend yield at recent trading prices, and we expect to repurchase shares with cash from operations as well as a portion of any asset sale proceeds that we expect to close during the year. We will maintain a prudent balance sheet while returning that capital to shareholders. Brian will touch on that in more detail later on in the call.

In terms of our capital commitment to renovations, while we have a handful of hotel renovations we expect to complete this year in South Florida, we expect to pause our renovation program for the rest of 2020. First, we want to ensure that our renovation program is closely aligned with our asset management and curation strategy I mentioned earlier. And secondly, we believe we have a significant opportunity to improve the guest experience by focusing on basic operational improvements. And as we review guest feedback from Medallia and other social media sources, we believe we can improve the guest experience through our renewed focus on quality and condition of our property, and many of these initiatives do not require significant renovation capital.

This summer, we plan to host an Analyst Day in New York City, where we will lay out the company's plans for the next 3 years. This Analyst Day will cover significantly more detail on these 4 key pillars. We will provide further information on this event in the near future.

There has been much discussion in the media and among the research community about the coronavirus and the risks it may have on the lodging industry. While we are not immune to a slowdown in aggregate demand, we believe our position is far better suited to withstand any disruption from the virus than our lodging peers. First, we have no international hotel exposure, where most of the cases are currently located. Second, we do not have significant inbound international guests at our locations. Third, we do not have any significant number of hotels in urban core locations where we -- one would expect any initial outbreaks to occur. The vast majority of our hotels are in suburban locations. We will continue to watch events and we are prepared to take precautions on this issue.

Finally, I'd like to conclude my prepared remarks by stating how enthusiastic I am to be at this company. I strongly believe in the business model. I strongly believe in our segment in the industry. I strongly believe in our company and our associates. We have the right team to execute on these initiatives. And I'm really excited to be here with nearly 8,000 associates and work with them to deliver a better guest experience and to deliver better financial performance to our shareholders.

I'll now turn the call over to Brian to discuss our fourth quarter financial results, our balance sheet and our 2020 outlook.

Brian?

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

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Thank you, Bruce.

We ended 2019 on a stronger revenue trend than most of 2019 as we increased our business from our core extended stay guests. Comparable system-wide RevPAR during the fourth quarter declined 0.8%, well above the midpoint of our guidance range and 2.1% better than our comp set. After a very tough environment in October, comparable system-wide RevPAR increased 0.1% in November; and increased a solid 1.8% in December, which was 4.3% better than our comp set. The decline in the quarter was driven by a 4% decline in ADR, partially offset by a 240 basis point increase in occupancy.

During the quarter, we saw increased revenue on our website, at our call center and among our OTA partners, while we saw declines from property direct and GDS business. Affecting RevPAR this quarter was renovation disruption, which was an approximately 0.8% drag on results; as well as cycling on Boston area gas leak business from the prior year, also approximately a 0.8% drag on RevPAR. Excluding these impacts, comparable system-wide RevPAR would have increased by approximately 0.8% in the fourth quarter. Company-owned hotel RevPAR declined 1.7% during the fourth quarter.

For the full year 2019, comparable system-wide RevPAR declined 0.9%. Excluding the impacts of cycling hurricane-related business in 2018 and renovation disruption in 2019, RevPAR would have increased approximately 1.0% for the year. We grew our RevPAR index by approximately 60 basis points for the full year 2019.

Hotel operating margin declined 280 basis points in the fourth quarter to 48.3%. The decrease in hotel operating margin was driven by increased payroll expenses, property taxes, property insurance and maintenance expense; as well as decline in comparable company-owned RevPAR. For the full year 2019, hotel operating margin declined 220 basis points due primarily to a 1.3% decline in comparable company-owned RevPAR and increased property-level payroll expenses.

Corporate overhead expense, excluding share-based compensation and transaction costs, increased 36% to $26.7 million during the fourth quarter. The increases in corporate overhead expense were driven by CEO and related transition costs and by legal settlement expenses, which combined totaled approximately $8 million during the quarter. For the full year 2019, corporate overhead expense excluding share-based comp and transaction costs increased 6% to $88.1 million.

Adjusted EBITDA in the fourth quarter was $108.8 million. Adjusted EBITDA during the quarter was impacted by the aforementioned $8 million in expenses and corporate overhead, a decline in comparable system-wide RevPAR and an increase in comparable hotel operating expenses. Excluding $10 million in incremental costs from CEO and related transition costs and net legal settlement compared to our prior guidance, adjusted EBITDA would have been near the top end of our guidance range from November of 2019. Adjusted EBITDA for the full year 2019 was $535 million, reflecting lost contribution of approximately $21.0 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 $2.1 million to $31.9 million. Interest expense for 2019 totaled $127.8 million, in 2019, compared to $124.9 million in the prior year. Income taxes during the fourth quarter declined $5.4 million to $1.5 million, driven by lower pretax income and a lower effective tax rate. Income taxes for the full year 2019 declined by $12.8 million to $29.3 million, also driven by a decrease in pretax income and a decrease in our effective tax rate.

Adjusted FFO per diluted paired share declined 9.8% in the fourth quarter to $0.37 compared to $0.41 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 full year 2019 decreased 10.4% to $1.81, driven by an increase in comparable hotel operating expenses and a 1.3% decline in comparable company-owned RevPAR, partially offset by a decrease in income tax expense.

Net income during the fourth quarter decreased 39.5% to $23.8 million. The decrease in net income was driven by a decline in comparable system-wide RevPAR, an increase in comparable hotel operating expenses and the aforementioned incremental $8.0 million in overhead expense, partially offset by a decrease in income tax expense. Net income for the full year 2019 declined 22%, driven by a decline in comparable system-wide RevPAR, an increase in comparable hotel operating expenses and cycling a gain on asset sales in 2018, partially offset by fewer impairment charges and lower income tax expense.

Adjusted paired share income per diluted paired share in the fourth quarter decreased to $0.14 per diluted paired share from $0.21 in the same period last year. The decrease was due primarily to an increase in comparable hotel operating expenses, the aforementioned $8 million in incremental corporate overhead expense and a decline in comparable system-wide RevPAR, partially offset by a decrease in income tax expense. For the full year 2019, adjusted paired share income per diluted paired share decreased to $0.95 compared to $1.14 in the same period in 2018.

We ended the fourth quarter with our net debt-to-trailing 12-month adjusted EBITDA at 4.3x, a slight increase over prior quarters due to the decline in adjusted EBITDA combined with investments we've made in our business and in our own shares. As a reminder, we have no maturities until May 2025, and more than 80% of our debt is fixed at attractive rates with a weighted average cost of debt of 4.7%. Our total cash balance was just above $360 million at the end of the quarter. Gross debt outstanding was $2.69 billion. We are committed to bringing our leverage back down to under 4x. However, due to expected timing of both capital investments and asset sales, our leverage may increase 0.25 turns or so before beginning its decline back to under 4x. We do believe our shares remain an attractive use of our capital, but given our leverage target, we expect to continue repurchasing our shares but at a pace of repurchases that will be somewhat moderated going forward until we close on asset sales. Over the medium term, our asset dispositions, reduced on-balance-sheet development activity, more targeted renovation capital and growth in EBITDA will help to delever our balance sheet. We'll certainly keep you apprised of our progress on asset sales.

Capital expenditures in the fourth quarter were $83.3 million, including $13.4 million for renovation capital, $35.3 million for new hotel development and land acquisition costs and $8.4 million in IT capital. Capital expenditures for the full year 2019 totaled $261.3 million. This includes $40.6 million for IT investments, $47.7 million for renovations and $77.2 million for hotel development and land acquisition costs. We completed 16 hotel renovations in the full year of 2019. Our owned balance sheet development pipeline at the end of the fourth quarter stood at 16 hotels, while our franchise pipeline grew during the quarter to 59 hotels. Our total pipeline stood at 75 hotels at the end of 2019. We opened 2 hotels on balance sheet and also purchased and converted an extended stay hotel for approximately $10 million, representing a projected stabilized cap rate of approximately 14%. Additionally, franchisees converted 2 hotels to the Extended Stay America banner in 2019.

Yesterday, the Board of Directors of Extended Stay America and of ESH Hospitality, Inc. declared a combined cash dividend of $0.23 per paired share payable on March 26, 2020, to shareholders of record as of March 12, 2020. Our dividend yield is now approximately 8% at recent trading prices, which is significantly higher than our weighted average and marginal cost of debt.

During the fourth quarter, we repurchased 5 million paired shares for approximately $73.1 million. For 2019 and effectively beginning in August of 2019, we repurchased 9 million paired shares for an aggregate purchase of $130.5 million. Since the end of the quarter, we've repurchased an additional 2.2 million paired shares for approximately $31 million, meaning we've retired more than 6% of our diluted paired share count in the last 6 months. Our current total outstanding remaining availability for paired share repurchases is $101.1 million.

Looking to the first quarter of 2020, we expect comparable system-wide RevPAR growth will be flat to plus 2%. Our RevPAR growth quarter-to-date has been around 2%. We expect adjusted EBITDA between $107 million and $112 million during the first quarter.

For the full year 2020, we expect comparable system-wide RevPAR growth of negative 0.5% to positive 1.5% and adjusted EBITDA between $505 million and $525 million, reflecting a challenging RevPAR environment as well as wage, property tax and property insurance expense pressure, together with some additional investments in our franchising business, which as Bruce indicated, we are serious about growing aggressively. Our adjusted EBITDA guidance includes $6 million to $8 million of EBITDA contribution in 2020 from hotels opened or purchased in 2019 as well as hotels opened or expected to open in 2020. We expect these new hotels will have stabilized contribution between $25 million and $30 million. Our guidance for 2020 does not include any potential impact from COVID-19, which we believe is too early to speculate on what impact may or not be in store for the industry and for ourselves in 2020, although as Bruce indicated, we do believe Extended Stay America is relatively well insulated, compared to other lodging operators, from material COVID-19 impact.

Our capital expenditure guidance for 2020 is $210 million to $240 million, down from our pace in 2019. This includes $80 million to $90 million in hotel development, $25 million to $30 million for renovation capital and $15 million to $20 million for IT and corporate capital expenses. We expect our annual interest expense to be approximately $135 million.

We expect adjusted paired share income per diluted paired share between $0.78 and $0.90 per paired share, and we expect adjusted FFO per diluted paired share of between $1.68 and $1.77. These ranges do not include any additional share repurchases. Though our -- through our dividends and share repurchases, we expect to return between $215 million and $235 million to our shareholders prior to funds from asset sales, representing roughly 10.5% to 11.5% of our recent market capitalization. We also expect to use a portion of proceeds from any completed asset depositions for incremental share repurchases, with the remaining proceeds to be used to retire debt or to keep dry powder on our balance sheet.

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 the line of Chris Woronka of Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [2]

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Bruce, maybe just to clarify a little bit on the refocusing on the kind of the core extended stay guests. Does that apply to the entire owned portfolio? Or is that -- or are you going to have a different strategy for, say, 100 to 150 hotels that had been discussed, I guess, previously?

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [3]

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You're talking about the 100 and 150 that were sort of at the lower end of the performance spectrum.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [4]

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Yes, that's right.

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [5]

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Yes. Well, first of all, I think the entire company needs to refocus on delivering more extended stay business. And Kelly and the commercial team are really focused on that throughout the entire asset base. Today, transient business represents about 37% of our business. When we went public a number of years ago, that was in the mid-20s. And that level of transient business, as you know, really creates a lot of havoc in our property operations, expensive business to deliver. The customers we deliver are not necessarily a good mix or a good match for our product and our operating model. So we're really very focused on moving that transient business to a lower figure. We're optimizing our distribution channels to do that, and that's one advantage that we have that some of our transient competitors don't have is that we can optimize all of our distribution channels around the extended stay customers. So that is really a strong focus. And as you pointed out, there are some assets in our portfolio that are more suited to even a longer-term customer mix. And that's something we continue to look at.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [6]

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Okay, appreciate that. And then a follow-up to that is just as we think -- and I know you'll probably give more details at the Analyst Day. But on the context of you ran 77% at $68 and 52% margin in 2019, how do the basic economics work as you shift to presumably higher occupancy, lower rate? And how do we think about margin impact?

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [7]

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Yes. I mean what we've seen, what our franchisees that have purchased portfolios of our assets have demonstrated is that there may be a decrease in rate, but there will be an increase in RevPAR due to occupancy. So you got to be careful about that mix. Obviously, if we deliver those customers through our proprietary channels, we're not paying OTA fees and opaque fees. So that's an important part of the margin story. So that is something we have to -- it doesn't change overnight. We have to do it carefully. We are not going to take dramatic actions to cut off large portions of our transient guests, and that will change over time. But what we've seen our franchisees do that have adopted the approach that we are on the path of is higher occupancy, a bit lower rate, higher RevPAR. That also translates into higher margins because of housekeeping and churn in the properties and lower OTA fees. So we have seen some very dramatic top line results from our franchisees who have adopted this model. And we think a lot of that potential exists here.

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Operator [8]

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Our next question comes from the line of Anthony Powell of Barclays.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [9]

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Bruce, you mentioned a few times your advantage that you believe you have versus your transient competitors. One of those competitors recently launched a new mid-scale extended stay brand. Could you maybe assess certainly -- or how that brand may impact your ability to grow franchisees over the next few years? And can you talk about the overall competitive landscape?

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [10]

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Yes, happy to do so. We don't mind the competition. I think that the fact that a number of competitors, including Choice, who have entered that market with some strong brands is good. It highlights the attractive nature of the business. It's a big niche. It is an underserved niche. And that does not scare us in terms of competition. In fact, I have a lot of respect for our competitors. I have a lot of respect for what they do. They're very good at what they do, but they don't do what we do. And what we do is unique in the industry in that we are completely aligned and completely focused on the extended stay segment and delivering extended stay business. And what any franchisee wants -- when we sign up with a brand, obviously, we have a good prototype. It's been proven. But at the end of the day, what every franchisee wants is business delivery from their brand. And that's what we're really set up to do. We're set up to deliver the right kind of business that's a good mix for the prototype and the operating model. We're going to stay very true to the operating model because it's such a high-margin product. And we're going to be incredibly successful; that we have a low-cost operating model, a low-cost franchise offering. And we have the best-recognized brand in the industry. I mean Extended Stay America owns a segment through our branding. So we're going to be really very optimistic about franchising. We have a great value proposition. We have a great prototype that we've proven. And we're happy to have others [in the pond with us].

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [11]

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And as a follow-up, you noted the improvement in RevPAR growth from November, I guess, through now. How much of that was through your efforts versus having overall industry [for kind of] improvement? And what kind of customers were kind of generating that incremental growth that you're seeing?

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

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Anthony, this is Brian. I'll say, and we've talked about this on prior calls, that there has been a recognition that our business has been too transient, and we did put some efforts into place sometime ago that began to bear fruit in the fall this year to drive more extended stay business. I'd say the difference now is that we are doubled down on that effort to continue to drive more extended stay business. It's a singular focus of Bruce's. Kelly and Randy are absolutely supportive of that, and it extends beyond pricing and inventory management to channels, to just, frankly, the way that we are prepared to meet and serve the guests in the property on a daily basis.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [13]

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Are these residential customers? Or are they kind of corp and business travelers? What specifically are these extended stay guests in the hotel for?

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

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Right now, Anthony, it's a mix, although we do have, at least in some hotels, more kind of residential mix than we have had in recent years. Our occupancy in January was actually the highest it's been for any January since we've been a publicly traded company. And some portion of that was because we have a more residential guest mix in some hotels.

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Operator [15]

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Our next questions come from the line of 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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Just on your 2020 RevPAR guidance. Can you maybe give us a sense of what your baseline assumption is for the industry or maybe better yet your segments broadly? And then how much market share gain is incorporated into that guidance?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [17]

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It's a good question, Mike. Our market share gain, at least in recent months, has been pretty phenomenal. We -- at least relative to our own comp set, we've had weeks where we've been pushing 500 basis points in terms of outperformance. We don't have that expectation set for ourselves for the remainder of the year. Our expectation is actually significantly more modest. As you know, the outlook for the economy segment and the mid-scale segments are not particularly bright this year. But we do expect to outperform, some of that a function of the extended stay model, some of that a function of some of the investments and the focus that we're bringing to bear with our new Head of Revenue and our new Head of Operations.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [18]

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Got it. And then just one more follow-up on the lower-tier hotels. I know, Bruce, you sort of left it open ended in one of your prior responses. But maybe to put a finer point on it, I guess, has the Board made a formal decision yet about the best path forward for these assets? Or is it really -- is [the ultimate now] clearly more fluid for these hotels as the year progresses? How should we think about the potential for -- I know you guys have discussed before about reviving a lower-tier brand. And would there be any CapEx costs associated with that? That's what I'm trying to get at.

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [19]

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Sure, yes. The short answer to your question is no. The Board hasn't made any decision on that. And we haven't given the Board a proposal yet. So that is still a bit fluid. We're certainly looking at the opportunity to improve performance of all of our properties, and that would include sort of those lower-tier assets through a more residential or a longer stay model. And we believe there is certainly some opportunity there. However, at the same time, as I think we indicated, we are looking at curation of the portfolio. We're looking at curation both sort of at the high end of the portfolio in terms of assets that may -- that we have that may be higher and better use opportunities. And we're also looking at the lower end of the portfolio in terms of some assets that may need to exit the system. In terms of rebranding, we're going to be really careful. I have a lot of experience in rebranding and repositioning, as do Kelly and Randy and some other folks in this company. So we've got to be very careful on segmentation. As we've said before, Extended Stay America owns the category. It's a really important asset, so we have to be really careful about rebranding or using that very strong asset that we have on our brand. So we'll look at it. It's not something we're -- have any plans to do in the immediate future. It could be an option down the road. But right now, we're really focused on curation of the portfolio, property improvement. And if to the extent we have some further thoughts on that by the Investor Day later this year, we'll share them at that time.

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Operator [20]

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Next questions come from the line of Shaun Kelley of Bank of America.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [21]

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Bruce, maybe just to start, I think some of your -- you've alluded to, obviously, a significant remix and we're starting to already see it come through some of the numbers. Can you talk a little bit about what this might mean on the operating front? Again, I appreciate we're probably going to get a lot more color on this in the summer. But when you think about a leaner labor model or what you can do on the operating front as you shift to kind of reembracing or -- a more residential model, are there moves you can make like closing the lobbies at night, not having 24-hour staffing? Like I think some of these things are more standard at your prior employer. Are these initiatives that will be looked at either for the whole portfolio or a portion of the portfolio? And how do you think about that?

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [22]

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Certainly, if we looked at a segmentation strategy, that could be a part of that model. Our property operations focus right now is not necessarily on cost cutting, although as we deliver more extended stay guests, that will naturally happen through lower housekeeping hours and so forth, which is a variable expense. But what we're really focused on in property operations is not cost cutting, although we're going to continue to be very prudent about that, making some very modest investments in property operations and management, in our quality assurance function which will launch in April. But what we really want to do is improve the guest experience at the property because the opportunity at the property level is not a cost opportunity. It's a revenue opportunity. And that's what we're going to focus on. There is a direct and clear correlation between our Net Promoter Scores and our social media scores and revenue, and we can see that in our assets. The assets that we have that perform very well in social media that have very high Net Promoter Scores have much higher RevPAR indexes than assets that don't. So our focus and Randy's focus, and the entire operations team, is really using the tools that we now have in QA, delivering the right kind of customer experience, delivering the basics, delivering a clean and well-maintained room every time to every customer. We're putting in some more operational processes to make sure that happens. We're putting some more management in terms of the -- a team to make sure that oversight is there. And we really believe that's where the opportunity is to drive revenue. And we can't continue to cost cut our way into profitability here, but we can maintain our costs. And by doing the basics right, we think there's a good opportunity to increase the top line.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [23]

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And the follow-up I have will be on the renovation capital. So clearly, pausing the renovation activity for this year. But can you give us a little bit of a clue as to how you think about maybe medium or long term? Because we have seen sort of, over the years, a fairly consistent need for like kind of rounds of renovation as it relates to this portfolio. And is that something that's going to re-gear up in 2021? Or what do you think about the physical asset quality? And how do you think you're approaching it? I appreciate you may not be able to give us numbers yet, but how should we think about you guys approaching the renovation piece for 2021 and beyond?

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [24]

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Sure. No, I appreciate. That's important. I mean the first answer is that we're committed to continually renovating and maintaining our asset base at a very high level. And that will not stop. We have paused in 2020. We're doing a few properties in South Florida that had already been underway, but after that, we will pause because we want to make sure our renovation strategy is well aligned with our brand strategy and it's well aligned with our asset management strategy. But we do expect to complete sort of that revamping of how we want to approach renovations this year. We certainly will be back in the market for renovating assets perhaps on a more selective basis in 2021 once we have completed that strategy. But I think the good news is that when we look at our social media scores, when we look at what customers say about us on TripAdvisor and the feedback that we get from customers, we don't get a lot of feedback that says, "We didn't enjoy our stay because your hotel wasn't renovated or it's not brand new." The feedback we've got is, "There was something in my room that didn't work. My room wasn't clean." Maybe the service wasn't up to standards. Those are things we can attack this year. Before I spend or we spend a lot of money on renovating our properties, I want to make sure our operational house is sound and that we can maintain these properties and we can keep them clean and we can provide the right service, and then we'll see the lift from renovations that we need.

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Operator [25]

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Our next questions come from the line of Harry Curtis of Instinet.

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Harry Croyle Curtis, Instinet, LLC, Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [26]

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Just maybe a bit more follow-up on Shaun's questions. Bruce, your comment about competing against new extended stay brands. I guess my concern is that they have bigger distribution systems, but is the offset to that, that you -- if you move your mix of residential higher really in a different segment? I am trying to understand why you're less concerned about it.

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [27]

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Yes. Sure. No, it's a good question. And I think that is something that the general industry may not recognize. I think many franchisees do recognize that difference, though. You're absolutely right. They have much bigger distribution systems. They have bigger loyalty programs. They have -- they are very strong, but they're very strong in delivering transient guests. And that's really where it ends [with the big brand things]. They are very good at delivering transient guests. Our website, which we're going to relaunch later this year or into next year, is going to be optimized for extended stay. Our sales force, which is 125 people fully focused on delivering extended stay business, nobody else has anything like that. Our call center agents are trained in delivering extended stay business, which is a much more highly considered sale because of the high average purchase versus a transient stay. So we've optimized our channels to deliver what franchisees in this segment want, which is extended stay business. So I don't minimize the competition. They're very good franchisors. I've spent a lot of effort and blood, sweat and tears as my peers have in some of those companies. They're very good, but they don't do what we do.

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Harry Croyle Curtis, Instinet, LLC, Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [28]

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Okay. So I guess the follow-up to that is, what are the -- you've been -- you spend a great deal of time in building more of the residential model. What are the unique challenges that you've encountered, particularly as you want to maintain your guest service for the nonresidential customers?

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [29]

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I think -- yes. I don't know if I'd say we spend a lot of time building a residential business in my prior life. I think our assets -- some assets lend themselves because of their location, because of the physical nature of the asset, to a more residential model than a less-residential model. And we have the ability to put -- to bifurcate our channels and put in the right kind of business for those assets. We've done that in the past. We do that here today to some extent. Our customers generally travel because they have a need for an extended stay experience. They are not generally traveling from one hotel to another. They're generally not traveling because they're part of a loyalty program and want to get points. So there is some natural segmentation of customer mix just by nature of the fact that we are a considered purchase when you have life events or -- at this location you need to address.

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [30]

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And Harry, this is Brian. Another thing that I would add is that sort of there are 2 realities that we can take advantage of that allow us to do that mixing more carefully and more surgically, if you will. First, most of our hotels are owned by us. And so we can control the way that we bring in guests to those hotels. And second, we have a lot of concentration in the markets in which we operate, generally speaking. So looking at a market like Charlotte, where we have 8 hotels, 1 of which is basically brand new, some of which are older. Some are exterior corridor. Some are interior corridor, all owned by ESH Hospitality. We have the ability to essentially mix individual hotels to be more residential, while other hotels are more corporate, and you don't have the problems associated with essentially a mix of guests at an individual hotel.

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Harry Croyle Curtis, Instinet, LLC, Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [31]

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Okay, I appreciate that. And just one quick follow-up on CapEx following up again on Shaun's question. As we look into, say, 2021, as you draw down or complete the 16 on-balance-sheet developed hotels, what -- do you think that, that translates into lower total CapEx in 2021, '22? Or would that be premature to jump to that conclusion?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [32]

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Short answer is yes. That will be [about] '21 and beyond.

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Harry Croyle Curtis, Instinet, LLC, Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [33]

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I'm sorry. So the answer is -- to the question is yes. It probably...

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [34]

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The answer to the question is yes. I -- again, there is still some uncertainty about what the renovation program looks like exactly; what kind of time frame that's on, whether we talk about a 6-, 7-, 8-, 10-year cycle. But regardless, we will not spend as much in renovation capital in 2021 and beyond as we will in development capital in 2020. So longer term, our capital needs will decline.

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Operator [35]

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Our next questions come from the line of Smedes Rose of Citi.

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Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [36]

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I just wanted to follow up some of the -- on some of the margin questions. Can you just talk about what sort of pace of increase you're seeing just for wages and benefits? And how does that tie into kind of maintaining your margin in 2020 given your RevPAR guidance?

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

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Yes, good question, Smedes. The -- in terms of our actual payroll, our actual hourly wages, we're running at a year-over-year increase right now of about 5%. What we can -- what we call payroll and related, which includes benefits and other costs, is actually slightly above 5% right now. In addition to that, we would expect our payroll expense overall to be up a bit more than 5.5% because we are making some marginal improvements in the operations of the hotels, although we're talking about a couple hundred basis points or less. There are some other areas, and we've highlighted these before, where we are able to drive costs either to be flat or down. Our utilities expense essentially has not risen on a per-occupied-room basis during our life as a public company, despite utility rates rising because we have taken steps through capital and other steps to decrease our usage on a per-occupied-room basis of electricity and of water in particular. But payroll is a challenge. In terms of percentages, we're actually seeing larger increases in property tax and in property insurance, although those are smaller dollar amounts to start with.

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Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [38]

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Okay. And then I just wanted to ask, too. You mentioned, as you kind of try to shift your customer base to more longer term and residential, would you expect the OTA and third-party bookings channels to decline in lockstep with that? I just noticed in your K that it was about 26% were booked through third parties in 2019.

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

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Smedes, we absolutely expect that.

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [40]

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Brian and I both wanted to answer that question.

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [41]

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Yes. The OTAs, as we use them today, are sort of a channel of last resort, if you will. It fills in at the end. And so if we're successful in generating more extended stay demand earlier within the booking window, then there's, frankly, just less demand left over for OTAs, and we're working very hard to make sure that there's less left over for OTAs.

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [42]

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Yes. The issue with the OTAs is most of those stays are 1 or 2 nights. And that kind of churn of customers really causes a lot of pressure to our operating model. So to the extent we can move that out, we can lower our costs. And those that book through our website or through our channels have an understanding of the product and understanding of the services they get. When they book through an OTA or certainly through an opaque channel, those customers have no idea that they're staying in an extended stay property. They have no idea that there's not a full breakfast in the morning. They have no idea that they don't have daily housekeeping. So there's a real disconnect between the customer expectations and what we can deliver. So to the extent we can mitigate that, that would certainly provide multitude of benefits in terms of costs, in terms of operations, in terms of our perception in social media and so forth.

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Operator [43]

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Our next question come from the line of David Katz of Jefferies.

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Unidentified Analyst, [44]

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This is [Kuan] for the team. Bruce, if we can go back to your third point of the 4-point strategy regarding your increased franchising efforts. Can we just dig into that a little bit further with more granularity to the extent that you can, meaning, how do you plan on attacking that? Is that just the terms of a franchising contract, more boots on the ground? How should we think about that?

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [45]

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Sure. Yes, I spent a lot of years in franchising. And it's a great business model. We've had a lot of relationships through those years. We have actually made in this company, I think, remarkable progress in franchising with very few resources. We have 2 development people. We have a half-time service person and a lot of folks sort of kicking in and help around the edges. We're going to set up a dedicated -- and we are -- we've already done this. We've set up a dedicated sort of business unit focused on franchising. That means we're -- and this is in our -- baked into our guidance, the investment that we need to make in this model. It's people. It's processes and it's relationships. And we're going to be -- we've already made an offer recently to someone to -- who's going to come in and lead our service function. We'll be actively recruiting for more development professionals and additional sort of overhead that would go along with that. But yes, it's -- just it's a matter of focus. It's a matter of resources. And it's a matter of getting the word out to the right types of developers about what the opportunity is.

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Operator [46]

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Our next questions come from the line of Joe Greff of JPMorgan.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [47]

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First question. You referenced the RevPAR index improvement in the fourth quarter and for the [first]. What is it on an absolute basis? Are you close to 100%? And where was it at peak, and when was that?

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

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Joe, you're asking about our RevPAR index relative to our internal comp set.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [49]

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Correct. That's the whole comp set.

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [50]

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Yes. For the year for 2019, we were close to 97%. For the fourth quarter, our RevPAR index was essentially 100%...

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [51]

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And where was it at peak?

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [52]

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Joe, I don't remember at the moment, but I can follow up with you on that.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [53]

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Okay, great. Bruce, you talked about the 4 key pillars and that the first 1 was on the guest experience. Part of your commentary talked about some of the costs associated with that. Can you talk about -- can you quantify the costs and whether or not that they're onetime in nature? Are they replicated beyond 2020? Do any leak into 2021?

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [54]

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Yes. I mean certain of these costs, like setting up our quality assurance function which we're doing through an outsourced provider, which is standard in the industry, will be an ongoing function. There are certain tweaks to the labor model we are experimenting with this year to see if they result in the revenue improvements that we would like to see from that, but they're not dramatic. And anything that we do in terms of the costs side of the equation, we believe, will be greatly swamped by the revenue improvements. So we'll be -- continue to be really careful about costs. And we believe, as I said, that revenue opportunity by improving the guest experience from where we are is pretty dramatic. And we've seen that. And again, we've seen the model. We've seen the model from our franchisees that have bought our assets. We've seen revenue -- double-digit revenue increases and RevPAR index increases at those properties that we previously owned. So there's the model there, and we're very focused on that.

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Brian T. Nicholson, Extended Stay America, Inc. - CFO [55]

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And Joe, I want to give you a follow-up on RevPAR index and still don't have the hard numbers in front of me for like each year since we've been a public company, but I do know that -- relatively early in this cycle because our occupancy returned to prior peak around 2010, while our competitors' occupancy didn't return to prior peak until 2015, that we did look relatively favorable to our comp sets early in this cycle. Certainly, though, since everybody else has hit prior peak, looking at a period of the last few years, our RevPAR index is very, very strong right now.

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Operator [56]

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We have reached the end of the question-and-answer session. I will now turn the call back over to Bruce Haase for any closing remarks.

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Bruce N. Haase, Extended Stay America, Inc. - President, CEO & Director [57]

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Okay. Thanks. I appreciate all the questions and appreciate your interest and support for the company.

I'm delighted to be here. I love the business, love the operating model. We have a great group of associates and a management team that can really make some improvements and make some progress at this company. It didn't come up, but I think it's important to note that I'm completely aligned with our shareholders. My compensation is almost completely equity-based. So I want all of our shareholders to understand that we are completely focused on running this business to deliver the best possible returns we can to our shareholders. We're going to run better properties. We're going to have a stronger extended stay distribution system. We're very committed to curating our portfolio. We believe there are opportunities to realize value out of our REIT assets, and we're going to be extremely focused on that. Franchising is an untapped opportunity at this company as well. And as Brian said, we'll continue to be very shareholder friendly in terms of capital returns. So once again, great to be here.

We look forward to speaking with you in May. And I'm sure we'll be speaking with many of you before that. Thanks, and have a good day.

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Operator [58]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.