U.S. Markets open in 8 hrs 51 mins

Edited Transcript of STAY earnings conference call or presentation 7-Aug-19 12:30pm GMT

Q2 2019 Extended Stay America Inc Earnings Call

Charlotte Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Extended Stay America Inc earnings conference call or presentation Wednesday, August 7, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brian T. Nicholson

Extended Stay America, Inc. - CFO

* Jonathan S. Halkyard

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

* Robert Ballew

Extended Stay America, Inc. - VP of IR

================================================================================

Conference Call Participants

================================================================================

* Anthony Franklin Powell

Barclays Bank PLC, Research Division - Research Analyst

* Bennett Smedes Rose

Citigroup Inc, Research Division - Director & Senior Analyst

* Brian H. Dobson

Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs

* 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

* Joseph Richard Greff

JP Morgan Chase & Co, Research Division - MD

* Michael Joseph Bellisario

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

* Stephen White Grambling

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thomas Glassbrooke Allen

Morgan Stanley, Research Division - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the Extended Stay America Second Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Rob Ballew, Vice President, Investor Relations.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, and welcome to Extended Stay America Second Quarter 2019 Conference Call. Both the second 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 this morning is 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 this morning, I would like to remind you that some of our discussions today will contain forward-looking statements, including the 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.

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Rob, and good morning, everyone. Thanks for joining us this morning to discuss our second quarter 2019 results. Before Brian and I get into the specifics, I want to thank our 8,000 associates for their hard work and efforts this past quarter in executing our operational and strategic plans. They work really hard to serve our millions of guests each and every day. And for that, I'm very grateful.

Now let's turn to our results for the quarter and updates on our other activities. Comparable system-wide RevPAR growth during the second quarter increased to 0.1%. After adjusting for onetime items in the second quarter, such as cycling hurricane business in Houston and Florida, renovation disruption and holiday shifts, our core RevPAR grew approximately 2% during the quarter or at a slightly faster pace than in the first quarter.

Adjusting for Easter, the month of April and May performed fairly well partially offset by a slow June. The slowdown in June was broad-based and was more pronounced in the back half of the month. Brian will address that in more detail later in the call.

Since I became CEO early last year, I have refocused our sales and operational efforts back toward our long-stay guests. Revenue growth among these core extended-stay customers increased during the second quarter, up around 1%, while our transient nightly business declined approximately 1%.

Channel growth was fastest on our proprietary digital channel, esa.com, which was up 7% compared to the second quarter of 2018, offset by declines in property direct revenue and global distribution systems revenue.

Our adjusted EBITDA during the quarter finished at $153.6 million. Hotel operating margins remain challenging, with labor costs, property taxes and property insurance rising significantly faster at this stage of the cycle.

We remain committed to minimizing expense growth, including investments to reduce utility expenses as well as keeping tight controls on overtime hours and working to reduce our turnover. Along those lines, our corporate overhead expenses in the second quarter and first half of 2019 are down more than 5% despite continuing to build out the development and franchise teams.

Our franchising efforts are picking up steam. During the second quarter, we grew our pipeline by 18% to approximately 8,700 rooms or more than 10% of our existing estate. Since the end of the quarter, that pipeline has continued to grow to 75 hotels or 9,200 rooms, or nearly 15% of our existing estate. Almost 75% of our pipeline comes from more than 15 current and future franchisees.

We're gratified by the accelerating pace of acceptance among the franchising community, and I know we will grow our pipeline further in 2019 and into 2020.

We opened our first franchise conversion hotel during the second quarter in Houston, Texas. And we expect several more conversions by our franchisees during the third and fourth quarters of this year.

We believe conversions represent a great opportunity for franchisees to grow their ESA footprint over the next few years and that existing third-party ESA hotel managers are well positioned to execute successful conversions.

I also want to update our shareholders on our Board's evaluation of the corporate structure, a process with which our Boards have been engaged for many months. After careful consideration of a variety of options, including discussions with potential transaction partners, our Boards of Directors have concluded that none of these options currently provide superior shareholder value creation. The Boards remain open to actions in the future, including those that would involve a change in our corporate structure. But the Boards also believe that there is significant value embedded in our ESA 2.0 strategy, a strategy which we intend to enhance through several specific actions.

First, while our progress thus far has been strong in growing our franchise pipeline, we believe we can be even more aggressive in growing our franchising business. To this end, we will increase our franchise sales and support staff over the next year, with a corresponding increase in results. We want to continue to move more quickly to a lower capital, higher ROIC business over the next few years.

Further, we will continue to improve the brand and operating performance of our business. While we've made great strides on both fronts of this cycle, we believe there is more room for improvement. We're currently in a nationwide search for a new Executive Vice President of Operations. We're in the middle of a company-wide effort to improve our service course through operational improvements and regional adjustments to our product offering. We discussed in past quarters our focus on General Manager recruitment and training. That effort has reduced GM turnover by 10 points, and it's still coming down. Our goal with these changes will be to grow market share profitably with our core extended-stay guests, a segment which we believe is growing, less prone to competitive predation and one which we continue to dominate.

We're currently reviewing a range of options for our lower-tier hotels, including continuing to sell and refranchise, selling unencumbered or rebrand, all with the goal of delivering value to shareholders and improving the brand quality and consistency across our portfolio.

Given the meaningful growth in our franchising pipeline and the current price of our shares, which we consider to be undervalued, we continue to evaluate the level of capital committed to new, on-balance sheet development versus capital returns to shareholders and may rebalance this allocation in favor of capital returns. We'll continue to provide updates in the future. But right now we believe our share price is significantly undervalued. And we will increase the pace of share repurchases so long as the valuation discount remains.

To that end, last night we announced an increase in the share repurchase authorization of $150 million, bringing our total outstanding available authorization to $263 million, which is approaching nearly 10% of our recent market capitalization. Combined with a dividend yield near 6% of recent trading prices, we believe we'll be able to return a significant amount of capital to shareholders over the next year.

As you know, we've established a track record of conservatively managing our balance sheet. We have reduced net leverage from over 5.5x at our IPO to under 4x in each of the last 9 quarters. We've consistently repaid secured debt in connection with portfolio asset sales, fixed nearly 2/3 of our debt at historically low interest rates and extended maturities to '23 and 2025. While our net leverage may increase slightly from 3.8x at quarter end, given our share price valuation, we believe these share repurchases are the right use of our shareholders' capital.

We nevertheless remain committed to a conservative financial policy and expect to maintain a net leverage ratio between 3.5x and 4x, depending upon the timing of asset sales and, of course, the lodging cycle.

This has been a year of technology innovation for ESA. More than half of our hotels are now using our new property management system. And we're on track to complete all company hotels by the end of October. We expect to begin rolling out the new property management system to franchisees in early 2020. The new system is significantly easier for our associates to use, allows upselling, more control over company policies and fee collections, as well as more efficient handling of centralized billing and accounts receivable.

Also by the end of October, we will have completed new network technology and broadband capabilities at all company-owned hotels that will allow faster Internet speeds for our hotel associates and guests as well as improved network security, support of a higher number of devices simultaneously and ultimately allow our guests to stream their favorite TV shows on the in-room television. We plan to roll this out to franchise hotels later this year and in 2020.

In the second quarter, we completed Phase 1 of our new CRM system, where we have collected and are beginning to analyze guest behavioral data longitudinally over the past 5 years. As we gain insight from this data, we are developing more personalized and targeted offers and expect to implement updates to our loyalty program, tweaks to direct marketing and improvements in our mobile app.

Speaking of mobile apps, we completed our new mobile app in June that brings our booking and loyalty application together in one completely redesigned and user-friendly mobile platform for both iOS and Android devices. The new application makes finding and booking a hotel room of ours easier. And we have plans for additional functionality in the next 6 to 12 months.

As industry RevPAR growth has slowed and we ended the 10th year of this economic cycle, we receive a number of questions on how Stay would do in a recession. I believe we're well positioned in the event of an economic downturn. First, we think a typical industry downturn would be a fairly modest RevPAR decline of between 2% and 5% rather than the steep 20% RevPAR declines the industry saw in the Great Recession.

Second, net supply growth at our prices has been significantly lower this cycle than in the last cycle, which we believe means less pressure on RevPAR. In fact, supply growth in the economy chain scale and midscale has grown at fewer than half the number of rooms compared to the prior economic cycle, even with nearly twice as many years in this cycle to allow for growth.

Third, unlike the rest of the lodging industry, which focuses on nightly transient business, we have 3 very different customer segments to draw on, including the same transient guests but also extended-stay demand from business clients ranging from 1 week to 2 months as well as longer-staying guests who have a more similar profile to apartment guests. If 1 of these 3 areas struggles, we believe we can make up a portion of that business amongst our other 2 segments. And as we are typically 10% to 15% lower in price than our system-wide comp set, we also believe we would be able to provide a strong substitute for guests who still need to travel but may be looking to economize in a downturn.

And lastly, as I mentioned, our balance sheet remains very strong. With just under 4x net debt-to-EBITDA, with a long-dated, flexible and low-cost debt load, we believe we could navigate any normal recession without changing our long-term plans or reducing capital returns to shareholders. Our next maturity is 4 years from now. Additionally, we have successfully stress-tested our balance sheet for recessions significantly worse than the last downturn.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Jonathan. As expected, the second quarter of 2019 was challenging due to cycling different hurricane comps in Florida and Houston as well as Easter shifting and renovation disruption. Comparable system-wide RevPAR increased 0.1% in the second quarter, beating our own comp set by 70 basis points. This was driven by a 220-basis-point increase in occupancy partially offset by a 2.7% decline in average daily rate, or ADR. We saw an increase in revenue from our core extended-stay guests in the second quarter of approximately 1%, while nightly transient business declined approximately 1% in the quarter.

Excluding the aforementioned impacts of hurricanes, holiday shifts and renovation disruption, our RevPAR would've grown at approximately 2.0% in the quarter. Our RevPAR index, excluding hurricane- and renovation-impacted markets, grew approximately 1.5% compared to our comp set. Within the quarter, we saw broad-based weakness in June, especially in the second half of the month, mirroring STR's reported results for economy and midscale chain scales.

During the second quarter, comparable company-owned RevPAR declined 0.1%, slightly worse than our system-wide results, which includes a relatively larger hurricane and renovation disruption impact. Absolute company-owned RevPAR increased 2.5%, reflecting the improved portfolio quality after asset dispositions. For the first half of 2019, comparable system-wide RevPAR declined 0.7%, which was impacted by approximately 2.5% from hurricane displacement business in 2018 as well as renovation activity in 2019.

Hotel operating margin declined 200 basis points in the second quarter to 54.4%. The decrease in hotel operating margin was driven by increased payroll expenses, property taxes and property insurance and higher marketing spend partially offset by a decline in utility expenses. For the first half of 2019, hotel operating margin declined 210 basis points due primarily to a 1% decline in comparable company-owned RevPAR and increased payroll expenses.

Corporate overhead expense, excluding share-based compensation and transaction costs, decreased 5.8% to $20.1 million during the second quarter and decreased 6.8% to $40.9 million for the first half of 2019. These decreases in corporate overhead expense reflect cost synergies realized in the third and fourth quarters of 2018.

Adjusted EBITDA in the second quarter was $153.6 million. Adjusted EBITDA during the quarter was impacted by the lost contribution of approximately $6.7 million from hotels that were disposed in 2018 and an increase in comparable hotel operating expenses. Adjusted EBITDA for the first half of 2019 was $270 million, reflecting lost contribution of approximately $13.6 million from disposed hotels in 2018, an increase in comparable hotel operating expenses and a decline in comparable company-owned hotel RevPAR.

Interest expense during the quarter decreased by $2.7 million to $29.8 million due to less outstanding net debt and a decline in the LIBOR spread on our term loan partially offset by an increase in LIBOR rates.

For the first half of 2019, interest expense declined $4.7 million to $59.4 million. Income taxes during the quarter declined $3.2 million to $11.2 million driven by lower pretax income as well as a slight decrease in our effective tax rate. Income taxes for the first half of 2019 declined by $2.9 million to $17.3 million driven by a decrease in pretax income.

Adjusted FFO per diluted Paired Share declined 8.6% in the second quarter to $0.53 compared to $0.58 in the same period in 2018. The decline was driven by an increase in comparable hotel operating expenses. Adjusted FFO per diluted Paired Share for the first half of 2019 decreased 11% to $0.89 driven by an increase in comparable hotel operating expenses and a 1% decline in comparable company-owned hotel RevPAR partially offset by decreases in income taxes and interest expense.

Net income during the second quarter decreased 9% to $59.7 million and 8.9% to $88.1 million for the first half of 2019 driven by the previously mentioned items to adjusted FFO.

Adjusted Paired Share income per diluted Paired Share in the second quarter decreased to $0.32 per diluted Paired Share from $0.35 in the same period last year. The decrease was due primarily to an increase in comparable hotel operating expenses partially offset by decreases in depreciation, overhead expense and net interest expense.

For the first half of 2019, adjusted Paired Share income per diluted Paired Share decreased to $0.48 compared to $0.54 in the same period of 2018.

We ended the second quarter with our net debt to trailing 12-month adjusted EBITDA ratio on a pro forma 554-hotel basis at 3.8x. No change from the end of the first quarter.

Our total cash balance was $303 million at the end of the quarter, or little changed from the end of 2018 and the first quarter of 2019. Gross debt outstanding was $2.44 billion.

Capital expenditures in the second quarter were $57.6 million, including $9.3 million for renovation capital, $13.9 million for development, land acquisitions and other ESA 2.0 costs and $9.2 million in IT capital. Capital expenditures for the first half of 2019 totaled $112.9 million, including $46.0 million for maintenance capital, including insurable events of $6.1 million as well as $24.1 million for renovations. We completed 7 hotel renovations in the first half of 2019 and started on 6 additional hotels in the second quarter.

We expect to start renovation activity on around 30 hotels in the second half of 2019. We expect to give an update on how these early renovated hotels are performing on our fourth quarter call.

Our own balance sheet development pipeline at the end of the second quarter stood at 19 hotels, while our franchise pipeline grew during the quarter to 52 hotels and has since increased to 55 hotels as of this morning. We've had 1 converted franchise hotel, converted to an ESA in the second quarter. And we expect several conversions by our franchisees in the third and fourth quarters as well, which we believe represents a great way to increase our system size in the near and medium term.

There are currently 8 hotels as of this morning under construction. And we continue to expect to open a small handful of hotels in the back half of 2019, with more opening in early 2020. Our total pipeline grew 18% during the second quarter and has grown 32% 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 September 4, 2019, to shareholders of record as of August 21, 2019. Our dividend yield is now approximately 6% at recent trading prices, which is significantly higher than our weighted average and marginal cost of debt.

During the second quarter, we did not repurchase any shares. As we said in our Q1 2019 conference call, we decided to suspend repurchases in light of consideration of various potential actions to create shareholder value. Yesterday, our Boards of Directors approved a $150 million increase in Combined Paired Share repurchase authorization, which brings our total outstanding remaining availability to $262.7 million. We expect to be very active repurchasing shares in the second half of 2019 at current trading levels.

Looking ahead to the third quarter of 2019, we expect comparable system-wide RevPAR growth will be between negative 1% and 1%. Our third quarter outlook reflects an approximately 1% drag from Hurricane Harvey and Irma business cycling as well as renovation disruption during the quarter.

Comparable system-wide RevPAR growth in July was approximately negative 0.4%, continuing some of the softness that we saw in June. We expect adjusted EBITDA of between $157 million and $163 million during the third quarter.

For the full year 2019, we update our guidance as follows: We expect comparable system-wide RevPAR growth of negative 1% to positive 0.5% and adjusted EBITDA between $550 million and $565 million, reflecting the lower-than-expected industry and chain scale RevPARs in 2019. The lower end of our RevPAR guide assumes that the weakness we have seen the last 2 months continues through the end of 2019, while the top end assumes the pace of revenue growth the industry saw in the previous 12 months. The adjusted EBITDA total includes lost contribution of approximately $21 million from assets sold in 2018.

We are lowering our expectation for capital expenditures in 2019 at the midpoint by about $40 million. We expect to be between $270 million and $320 million. The decrease in expected capital expenditures is driven by lower capital expenditures for development as well as renovation capital, largely due to timing but also due to lower absolute spend.

We expect our annual interest expense to be approximately $120 million, below our prior guidance by $6 million, due to the recent reversal in trends in LIBOR. We expect adjusted Paired Share income per diluted Paired Share of between $1 and $1.10 per Paired Share, a $0.03 decrease at the midpoint from our prior guidance driven by lower industry and company RevPAR expectations.

Through our dividend and Paired Share repurchases, we now expect to return between $240 million and $280 million this year to our shareholders, reflecting higher share repurchase activity, which represents roughly 8.5% to 10% 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 get the questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Michael Bellisario of Robert W. Baird.

--------------------------------------------------------------------------------

Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [2]

--------------------------------------------------------------------------------

Just first me in terms of leverage 3.8x currently. How are you thinking about how far you're willing to push that above the 4x upper bound, given your comments you made in the prepared remarks, and how you're thinking about valuation today at $15 a share?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Mike, as we've said before, we want to target staying between 3.5 and 4x. I think over the long term, absent real economic degradation, we'd like to move closer to that 3.5x. Here in the short term, we may get closer to 4x. We may push forward. We may bob over 4x for a very brief period of time. But we are committed to capital returns. We're obviously somewhat behind year-to-date and have some ground to make up here in the next 4.5, 5 months. But we do intend to execute on that.

--------------------------------------------------------------------------------

Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [4]

--------------------------------------------------------------------------------

Got it. That's helpful. And then just on your commentary about lower-tier asset sales, should we view those comments as an acceleration in potential asset sales for those particular properties especially relative to your prior 150-hotel target that you set forth?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Mike, it's Jonathan. No, I don't think you should view that as an acceleration. Rather, we are -- I think it's likely those sales would be completed not this year but in 2020. But furthermore, we're giving some consideration to dealing with those assets in a number of different ways, which could include, of course, a sale and refranchising, like we've done in the past. It could also include selling those assets or some portion of those assets unencumbered. And it could also include retaining many of those assets under a different brand. So what we are trying to solve for here is, of course, shareholder value creation first and foremost but also maintaining and improving the level of brand consistency that we have at ESA.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from Anthony Powell of Barclays.

--------------------------------------------------------------------------------

Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [7]

--------------------------------------------------------------------------------

Just a question on the Board review. You said that the terms currently available for any kind of transformational transaction weren't superior to the current plan. Could you maybe go into why you think that was, whether just the phase of the cycle, the stage of your franchising business real estate value? Just a bit more detail here would be great for all of us.

--------------------------------------------------------------------------------

Brian T. Nicholson, Extended Stay America, Inc. - CFO [8]

--------------------------------------------------------------------------------

It's really difficult for me to go into any more detail on that, Anthony, except that it was an extensive review. And as we all know, it was a fairly lengthy review. And so the exploration of those terms was a complete one. And as to why the terms were what they were, I wouldn't speculate on causes for that. But beyond that, I really can't offer much detail.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Understood. And just on the new developments, it seems like you're considering stepping back or pulling back from new builds on balance sheet, and the franchising activity has been concentrated on conversions. What's the status of the new development prototype? Has it gotten a lot of traction in the development community? And what do you think needs to be done there in order to speed the pace of franchise new build signings here?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

Yes. We -- it feels to me internally as though we've reached a bit of a tipping point with respect to franchise sales. We noted in our prepared remarks and in the release the meaningful increase we've had in just 1 quarter in the -- in our franchise pipeline. Part of that is due to the confidence our franchisees have in the prototype. We now have 6 or 7 of these hotels under construction. Our first one -- these are on our account -- the first one will open in the fall. And -- but you know what? That really hasn't been a concern of the -- of our franchisees for a year now. I think -- so it's been just a process of working with this community to get them along in their understanding of our business model, their understanding of the demand drivers. And it's really started to gain traction in the last few months.

The other contributing factor, Anthony, is the conversion. We mentioned we had the first one open in the second quarter. There's going to be many more by the end of this year. The first one is working quite well. The next ones, I'm sure, are going to work well. We're excited about that because it's certainly an opportunity for us to drive franchise fee revenue more quickly than we might were they developed by the franchisees. And they're excited too because they are putting capital to work and growing their ESA footprint.

So all of that really gives us, in part, a reason to say maybe we don't need to be as aggressive in developing our own hotels on our account. We have many in the pipeline, as we noted in the release. But we're also -- we think that the use of our capital to repurchase shares on a risk-adjusted basis is a pretty compelling use of capital right now even as compared to building our own hotels.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Maybe just to follow up, like on the franchise. I understand franchisees are converting hotels into the system. But what do you think needs to happen for them to start putting, say, a bit more risk into the system with new-construction development?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [12]

--------------------------------------------------------------------------------

I'm pretty happy with the pace right now. I mean we grew that pipeline 20% -- almost 20% in the quarter. So I think what needs to happen is happening. And the conversions are happening. But of the 75 hotels right now in the franchise pipeline, 6 or 7 of them are conversions. So the vast majority of the new franchise hotels at this point in the pipeline are going to be new builds.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Our next question comes from Chad Beynon with Macquarie Group.

--------------------------------------------------------------------------------

Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [14]

--------------------------------------------------------------------------------

First, Brian, you mentioned that the low end of your annual guidance implies the trends that you've seen in June and July. Can you guys just kind of help explain why we've seen that core deceleration in demand in June and July? Was it leisure? Was it the July calendar? Maybe some oversupply in other segments that kind of pushed down? Just anything that will give us the confidence that it won't get worse from here.

--------------------------------------------------------------------------------

Brian T. Nicholson, Extended Stay America, Inc. - CFO [15]

--------------------------------------------------------------------------------

Yes. I appreciate the question. We have -- we've seen and I think, from what I'm gathering from the rest of the industry, we're not alone in this. We have seen a deceleration in what I would call business transient. We don't have a ton of leisure business, I think as you're aware of. But we do have a pretty good proportion of our business that is transient, that's in the hotels less than 6 nights. And then the majority of our business is in the hotel 7 or more nights.

This was the first second quarter in many years that I'm aware of where we had more growth in 7-plus than in transient business. And that's just a function of what is typically in the market at that point in time, what's available to grow is transient during the -- sort of our high-season second and third quarter. And then we typically focus on and see more growth in longer-stay business in the fourth and first quarters. But as I alluded to earlier, we had about a 1% drop in our 1-to-6-night business that is primarily business transient, and we had about a 1% -- a little bit over 1% gain in our 7-plus business.

Over the course of the month of July, as I mentioned in the prepared remarks, our total RevPAR was down by about 0.4%. This quarter, we were up against some weather and renovation headwinds of about 100 basis points. So we'd be slightly positive absent those effects. And really the big driver, the big difference between the sort of all things being equal 1% to 3% that we've been running for the past couple of years and the slightly positive that we saw in July was that decline in business transient. It hasn't evaporated, it hasn't gone away, but it just -- it has been softer and it's been similarly soft since mid-June.

--------------------------------------------------------------------------------

Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [16]

--------------------------------------------------------------------------------

Great. Thanks. And then on future asset sales, Jonathan, you said it will be more in 2020. I think the divestitures have averaged about 17x free cash flow when rates were a little bit higher, maybe demand was a little bit stronger. Is this still what you're thinking about in terms of kind of target multiples? Or you maybe sacrifice a little bit of price to kind of eliminate future CapEx on some of those properties?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [17]

--------------------------------------------------------------------------------

Yes. Thanks, Chad. I mean those were pretty strong multiples for sure. So I wouldn't commit to those on the next round. And if we were to sell them unencumbered, that might affect the price as well. But we still feel as though we know that the demand for these assets is strong among our existing franchisees as well as from other groups who were not -- who did not prevail in the last sales process. So I'm not sure I'd put that 17x multiple out there right now. But we still see very strong demand at very accretive multiples on a free cash flow basis.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from Smedes Rose of Citi.

--------------------------------------------------------------------------------

Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [19]

--------------------------------------------------------------------------------

I just wanted to go back to the decision not to pursue strategic alternatives. And maybe could you just talk a little bit more around some of the considerations -- and only because it sounds like you're very confident in the current valuations and that the best use of free cash is to repurchase shares. But what were potential partners or acquirers, kind of what was their -- I mean was it a value issue? Was it complications around your current corporate structure? What were some of the -- just trying to understand what clearly -- maybe it was a disconnection between what you're seeing and what they were seeing.

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [20]

--------------------------------------------------------------------------------

Yes, Smedes, I'll do the best I can on that. I mean the considerations around this kind of discussion certainly involve, first and foremost, shareholder value creation. And that is a -- in considering any transaction or action that would transform the structure of the company, that ultimately comes down to judgments about how the market values the company's real estate and how the brand is valued. There are also considerations around ultimate control and management of the brand.

We do benefit under our current structure from the -- having the unified asset ownership, control of the brand and management of the assets, which gives us a lot of degrees of freedom around innovation and continuing to develop the brand and so on. So that -- generally speaking, I mean those are and always have been the considerations, that balance of the benefits of the owner-operator structure versus the potential valuation benefits associated with a disaggregated entity.

--------------------------------------------------------------------------------

Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [21]

--------------------------------------------------------------------------------

Okay. Okay. And then I just wanted to clarify something. In your RevPAR guidance, includes 200 basis points for the year from the negative impact from hurricane-related markets and renovation disruption. On the hurricane side, is that pretty much behind you now through the first half and would have less of an impact through the second half in terms of the comparables?

--------------------------------------------------------------------------------

Brian T. Nicholson, Extended Stay America, Inc. - CFO [22]

--------------------------------------------------------------------------------

There is some residual impact from the hurricanes. We will have that fully cycled by the end of this quarter. But through third quarter, of the 100 basis points of hurricane and renovation impact, about half of it is hurricane. That's down from, call it, 300 basis points in the first quarter.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our next question comes from Joe Greff of JPMorgan.

--------------------------------------------------------------------------------

Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [24]

--------------------------------------------------------------------------------

My first question relates to the Board's decision here. You said it was reached after an extensive exploration. I just want to question you on how extensive this was. As you said, it was pretty lengthy. Jonathan, did the Board work with outside financial advisers, legal and tax professionals? Did you engage on each here? Or was it simply an internal exercise?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [25]

--------------------------------------------------------------------------------

The Board did work with outside financial, legal and tax advisers during the review.

--------------------------------------------------------------------------------

Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [26]

--------------------------------------------------------------------------------

Okay. And to what extent did the Board actually speak with any shareholders? And what role did that play here?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [27]

--------------------------------------------------------------------------------

Brian and Rob and David Clarkson and I, we all -- I think as folks on this call know, I think we are very active in discussions with shareholders. We attend many conferences. We do non-deal roadshows. We do many calls here from the office. So we -- our engagement with the shareholders I think is quite extensive. And we did our best to make sure that, to the extent shareholders had views on these topics, that those were known internally.

--------------------------------------------------------------------------------

Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [28]

--------------------------------------------------------------------------------

All right. Then moving to a different topic. I think you said you're now with 55 hotels that are in the pipeline related to third parties as of the third quarter here. How many of those do you think open next year?

--------------------------------------------------------------------------------

Brian T. Nicholson, Extended Stay America, Inc. - CFO [29]

--------------------------------------------------------------------------------

Those 55, I would say, including those that will be conversions, I'd say 10 to 15. I think 15 would be very doable.

--------------------------------------------------------------------------------

Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [30]

--------------------------------------------------------------------------------

Got it. And then when you look at your implied second half revenue guidance, how much of that relates to franchise fees?

--------------------------------------------------------------------------------

Brian T. Nicholson, Extended Stay America, Inc. - CFO [31]

--------------------------------------------------------------------------------

Franchise fees, Joe, will be -- they'll continue to grow as we move through the second half. But it's obviously a fairly minimal contribution at this point. Relative to overall EBITDA, it might be $3 million to $5 million.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Our next question comes from Brian Dobson of Nomura.

--------------------------------------------------------------------------------

Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [33]

--------------------------------------------------------------------------------

So just turning to 2020 for a moment. I guess if RevPAR remains at these levels, you should see some margin compression. Do you think that your new hotel opening should be able to more than offset that compression next year?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [34]

--------------------------------------------------------------------------------

Yes. That's a good question. I think first the -- we do believe that the margin compression that we saw in second quarter is likely outsized relative to what we would see going forward. We had a fairly significant investment in digital marketing. But we wouldn't necessarily maintain that growth in digital marketing spend, although that has been helpful in driving 7-plus business to our own channels like our website and our call center.

We also have some IT projects going on that are primarily capital investment in nature but that have caused a fairly material increase in OpEx as we've done the new property management system, the WiFi expansion at hotel level. We've had some equipment. Some were done in circuits, et cetera, that over the course of this project have kind of caused a little bit of an OpEx spike that will go away as we move through this year.

That said, I think we have to get to -- it all becomes sort of a percentage game. If we have a, let's call it, a 1% decline in our operating margin on relatively stable, call it, flattish RevPAR, we're going to need a few dozen hotels to compensate for that. And we will get to that point of opening. I just -- I don't see it happening until maybe 6 to 12 months out.

--------------------------------------------------------------------------------

Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [35]

--------------------------------------------------------------------------------

All right. That's very helpful. And then in terms of your capital return, I guess would you consider running lower cash balances or using your revolver? And in total, how much, including dividends, do you think is possible, realistically possible, to return over the next 12 months?

--------------------------------------------------------------------------------

Brian T. Nicholson, Extended Stay America, Inc. - CFO [36]

--------------------------------------------------------------------------------

That's a good question. We have a share repurchase authorization now of a little over $260 million with cash on the balance sheet of a little over $300 million. Dividend payment is obviously coming up in other uses of capital. But then we are generating an awful amount of free cash flow. As we move through time, we're still a very high-margin business.

So while it's possible that we might touch the revolver, I don't know that we necessarily have to return the capital that we've laid out. Even at the high end of our range, I think we still maintain cash balances and still maintain a lot of the EBITDA growth activities that we've laid out, including renovation and some level of new builds.

--------------------------------------------------------------------------------

Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [37]

--------------------------------------------------------------------------------

And what do you think that total capital return picture might be?

--------------------------------------------------------------------------------

Brian T. Nicholson, Extended Stay America, Inc. - CFO [38]

--------------------------------------------------------------------------------

Well, we've guided to an increase at the midpoint of -- in total, it's about $240 million to $280 million. So we've guided to an increase at the midpoint of $15 million. The difference there, obviously, is share repurchases. And we're going to be taking care of that in a fairly brief period of time, a fairly brief window here.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Next question comes from Stephen Grambling of Goldman Sachs.

--------------------------------------------------------------------------------

Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [40]

--------------------------------------------------------------------------------

I have a couple of quick follow-ups. First on the Board review, one another one. Just given the evaluation took as long as it did and RevPAR deteriorated over the period, did the potential value for the different options evolve over the evaluation?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [41]

--------------------------------------------------------------------------------

I'm unable to provide any of those specifics, Stephen.

--------------------------------------------------------------------------------

Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [42]

--------------------------------------------------------------------------------

Fair enough. And then can you remind us how your franchise agreements are similar or different than your peers? And do you anticipate any change in terms as you build the base?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [43]

--------------------------------------------------------------------------------

I think our franchise agreements, generally speaking, are a lot more straightforward than our peers. We have done that deliberately, keeping the franchise fee and the system services fee very simple. I don't believe that we'll have to evolve or change those going forward. The fact that we do not have a points-based loyalty program eliminates quite a lot of complexity that otherwise might exist in a franchise agreement.

Other than that, the terms of our franchise agreements are industry standard. We're dealing with franchisees who are currently franchisees with many other brands. So that certainly helped us as well to keep it standard. But they're simple and straightforward, and I don't think we'll have to change them.

--------------------------------------------------------------------------------

Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [44]

--------------------------------------------------------------------------------

That's helpful. And then...

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [45]

--------------------------------------------------------------------------------

Go ahead. Sorry.

--------------------------------------------------------------------------------

Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [46]

--------------------------------------------------------------------------------

No. I was going to let you go ahead.

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [47]

--------------------------------------------------------------------------------

Well, I would also add that -- well, I mentioned in the call. We are going to increase the resources devoted to franchise sales as well as our franchise services organization. This is something that our current franchisees are asking for and we've committed to. And that will involve bulking up that franchise services organization, the establishment of teams both for the franchisees as well as our owned hotels. And we think all of these efforts will support an increase in the pace of our franchise sales.

--------------------------------------------------------------------------------

Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [48]

--------------------------------------------------------------------------------

That's helpful. Maybe one last one that's also a follow-up. Given you sensitized the model to a recession, how should we generally think about the sensitivity in the EBITDA to each point up or down of RevPAR, thinking about June-July trend as the baseline?

--------------------------------------------------------------------------------

Brian T. Nicholson, Extended Stay America, Inc. - CFO [49]

--------------------------------------------------------------------------------

Yes. The -- I think it's fairly simple. Each point of RevPAR is probably worth about $8 million to $10 million in EBITDA. So if we see a recession like, frankly, every recession I had experienced prior to 2007, 2008, we might see a dip of, call it, $40 million to $50 million in EBITDA from where we are today. And that would involve for us a little bit of a shuffling of the deck in terms of timing of capital projects but would not be really disruptive in terms of our plans overall.

Even if we saw the really draconian 15% to 20% drops in RevPAR that we saw in the last recession, I don't know that, that $8 million to $10 million would apply all the way down because there would be some changes to the model. We would have a more radical mix shifting toward 30-plus guests and our costs would drop.

And so I would expect an EBITDA decline, say more in the neighborhood of $100 million. And again, while that would mean more significant changes to our capital plans and we would -- we've kind of tightened the belt further, it's still something that we're very comfortable with our levels of leverage even in that kind of "doomsday" scenario.

--------------------------------------------------------------------------------

Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [50]

--------------------------------------------------------------------------------

So would the CapEx be more flexible in that scenario than operating cost?

--------------------------------------------------------------------------------

Brian T. Nicholson, Extended Stay America, Inc. - CFO [51]

--------------------------------------------------------------------------------

CapEx would be very flexible, yes, in terms of timing of (inaudible) in terms of timing of new builds but yes.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

Our next question comes from David Katz of Jefferies.

--------------------------------------------------------------------------------

David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [53]

--------------------------------------------------------------------------------

I wanted to ask about system growth. We look at, for example, a competing brand that is roughly half your size that is putting up mid-single digits unit growth and maybe even accelerate that into the back half of this year and next year. And we look at what you have, where the system has moved around but really has not grown meaningfully units in the context of an Extended Stay perk system that has about 3 million members in it, which is relatively small.

My question is -- how have you thought about your ability to grow that as a single-branded entity and when we think about the value that, that creates and your evaluation that this course is superior, value is a subjective or qualitative discussion. If we build a long enough tail, we could probably get, right -- I'm sure we would agree we could get to any value we wanted at the end of the day.

So how long should we be thinking about that 3 million members becoming something that's 10x that size like your competitors may have, competing brands may have? How long should we think about really getting that 625 hotels to something much bigger when we have case studies in the public arena on larger platforms that have grown much more quickly? And there may be 3 or 4 questions in there, I realize that.

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [54]

--------------------------------------------------------------------------------

Thanks, David. I think there are actually kind of 6. I'm just teasing. No, David, I appreciate that question. It's well posed. I'll offer the following thoughts.

First of all, our company is very different from some of the other companies that you're referencing, the brand families. We are a single brand, and we are one that has a direct line of communication through a direct sales force with large customers that together make up half of our business.

And so the loyalty program that we have is important. But it's not the type of loyalty program which are -- which some other hotel companies have invested in and spend quite a lot to maintain. I don't think our 3 million-member loyalty program gets to be 10x that amount, just given the size of this portfolio and the frequency that we have with some of our customers. I think our challenge with the loyalty program will be to continue to grow its value and also use it to mine the behavior and the visitation characteristics of our customers so that we can make our offers more compelling for them.

In terms of the value creation, we do think there's a line of sight to 1,000 Extended Stay America branded hotels in North America. We don't think that, that is constrained in any way by some of the success that other Extended Stay products have had. WoodSpring would be an example of that. And the reason is, is because we don't usually come up against them in competition for the corporate project business that is our bread-and-butter. We much more come up against competitors like Candlewood Suites and then other nontraditional lodging options like short-term apartments and the like and conventional hotels. And the unit growth, supply growth in those competitive sets is not that dramatic.

And the final thing I would add in terms of time line is that nothing that we're doing in this -- in some of these enhancements to our ESA 2.0 strategy would preclude our Board in the future from deciding to take a different course. Rather, we believe that everything that we're doing, whether it be improvements to operations, acceleration of franchising and certainly repurchases of our own shares, serve to grow the value of the real estate and the brand. And therefore, we think that it preserves that optionality for any different course in the future.

--------------------------------------------------------------------------------

David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [55]

--------------------------------------------------------------------------------

Okay. I think you've answered 5 of the 6. Look, are there strategies that you can pursue to help you benefit from the scale that may be outside of your company that may benefit either RevPAR or unit growth or loyalty in some way?

I mean you're obviously fighting the good fight. But from where we sit, it doesn't necessarily appear to be a fair one when you're trying to grow a business and get a value commensurate with that growth against much larger platforms, right? I mean the market has provided a series of case studies that suggest single brands have a tough battle. What else can you do?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [56]

--------------------------------------------------------------------------------

There's a couple of ideas I would offer in response to that. I do think while there are -- there are certainly scale benefits like the ones you've described, there are also many case studies that would show that a lack of focus tends to be in this economy of scale. And so I do think that, that is a benefit that we have both in terms of management and marketing that we can focus on this one particular segment and one -- and a small number of use cases.

There are ways to benefit from scale or essentially rent to scale of others. They could be by attaching offerings to our loyalty program that we would -- that would cost money, but there are ways to do that. Many others, not in lodging so much, but in airlines and rental cars and retail do that. That's something that we can certainly do. And the second I alluded to in my remarks and one of the questions around solutions for the lower-ADR hotels in the portfolio that we may choose to rebrand them either with our own brand or through an existing brand in lodging and take advantage of existing brand awareness rather than creating our own brand.

So there are a couple of ways for a company like ours to do that, to access the scale that exists elsewhere. It comes with a cost. But I think I would also rely upon the focus that we get from being a single brand and that there's value in that.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

Our next question comes from Thomas Allen with Morgan Stanley.

--------------------------------------------------------------------------------

Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [58]

--------------------------------------------------------------------------------

Most of my questions have been asked and answered, but just one last. Were there offers for either the brand, the real estate or the whole company? And if there were, how many bids were there for each of those?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [59]

--------------------------------------------------------------------------------

Thomas, I'm unable to comment on any of those specifics.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

Your final question comes from Chris Woronka of Deutsche Bank.

--------------------------------------------------------------------------------

Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [61]

--------------------------------------------------------------------------------

You might be disappointed. My questions do not relate to the strategic review. But I did want to ask, in the quarter, your RevPAR was -- I mean you had occupancy gains, rate decline, and, apologies, so I'd missed something earlier, but can you kind of talk about whether that was mix driven or something else that was part of a conscious strategy to drive arc?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [62]

--------------------------------------------------------------------------------

There was a mix component to that, Chris. As I mentioned earlier on the call, we saw about a 1% decline in our 1-to-6-night business. That transient business tends to be higher rated than our longer-stay business. But we did see a gain in our 7-plus business that slightly more than canceled out the decline in 1 to 6. We do think that, that, frankly, is good for us in the longer term especially now that we're hitting the end of the summer because we had built a base of that longer-stay business that tends to stay with us through slower, lower occupancy periods.

And frankly, those are guests who we're built to serve. We have made a conscious effort to try to appeal to those guests more because -- not only in terms of the room layout and the back of the house, the way that we're staffed, the way that our sales effort is built, the way that our other internal channels are built. We are really designed to serve those longer-stay guests well. They tend to appreciate their stays with us more and rate us more highly on social media. And so we think that while it is a short- to medium-term benefit to have more of those guests in our hotels right now, it's also a longer-term benefit because they tend to spread a good word for us as -- after they stay with us.

--------------------------------------------------------------------------------

Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [63]

--------------------------------------------------------------------------------

Okay. Just a quick follow-up to that is if you -- as you start coming out of the renovations this cycle, do you think the mix profile changes there? And I know in the prior round of renovations several years back, you got a pretty nice rate lift especially in the earlier rounds. Is that -- do you still see that happening this time or is something different?

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [64]

--------------------------------------------------------------------------------

Yes. Chris, I would say that we would expect it to increase our appeal relative to our comp sets to business transient guests. And so I think we would see as more of that business is available, we would take more than our fair share of it going forward. But I think it also really improves our appeal to the 7-to-29-night guests, those folks for whom a short-term apartment is not really an option but who are in a market long enough that a traditional hotel is really not a very good option either.

We were -- through our digital marketing programs, we were able to drive an increase in those 7-to-29 guests who came in through our website and through our call center. And we think that the renovations will only strengthen our ability to do that as we go forward.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

Ladies and gentlemen, we reached the end of the question-and-answer session. I would like to turn the call back to Jon Halkyard for closing remarks.

--------------------------------------------------------------------------------

Jonathan S. Halkyard, Extended Stay America, Inc. - President, CEO & Director [66]

--------------------------------------------------------------------------------

Thanks very much. Thanks, everybody, for joining us this morning. We appreciate your support. And we look forward to speaking with you in a few months to discuss our third quarter results and our progress on ESA 2.0. Thanks.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.