Image source: The Motley Fool.
Extended Stay America Inc (STAY)
Q4 2019 Earnings Call
Feb 27, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
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..
Robert Ballew -- Vice President of Investor Relations
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.
Bruce N. Haase -- President and Chief Executive Officer
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 systemwide RevPAR declined by 0.9%. Excluding the impact from cycling hurricane-related business in 2018, and and the renovation and disruption in 2019, comparable systemwide 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 five 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, the three of us had prior success in 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 in my conversation with our leadership teams, our field management, our franchisees have only served to solidify my confidence in our future. Our value creation strategy is focused around executing four 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 four 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's some incremental cost of 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 to our distribution channels. We will be able to adjust our revenue management strategy to decrease our dependence on transient guests delivered to 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 and 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 two 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 subsites, and we are receiving very strong indication of interest at very robust multiples. In fact, we are considering offers that 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 completely on-balance sheet development now under way 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. 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 three years. This Analyst Day will cover significantly more detail on these four 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 risk 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?
Brian Nicholson -- Chief Financial Officer
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 guest. Comparable systemwide 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 systemwide 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 innovation 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 systemwide 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 systemwide 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% 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 a 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 systemwide 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 systemwide 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 pre-tax 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 pre-tax 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. 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 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 systemwide 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 systemwide 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 4.3 times, 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 4 times. However, due to expected timing of both capital investments and asset sales. Our leverage may increase a quarter turn or so before beginning its decline back to under 4 times. 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 two 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 two hotels to the Extended State America banner in 2019. Yesterday, the Board of Directors of Extended stay America and the 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 five million Paired Shares for approximately $73.1 million. For 2019 and effectively beginning in August of 2019, we repurchased nine 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 six 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 systemwide 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 systemwide 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. 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.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Chris Woronka of Deutsche Bank. Please proceed with your question.
Chris Woronka -- Deutsche Bank -- Analyst
Hey, good morning, guys.
Bruce N. Haase -- President and Chief Executive Officer
Morning.
Chris Woronka -- Deutsche Bank -- Analyst
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 are you going to have a different strategy for, say, 100 to 150 hotels that had been discussed, I guess, previously?
Bruce N. Haase -- President and Chief Executive Officer
You're talking about 100 and 150 that were sort of at the lower end of the performance spectrum?
Chris Woronka -- Deutsche Bank -- Analyst
Yes, that's right.
Bruce N. Haase -- President and Chief Executive Officer
Yes. Well, first of all, I think the entire company needs to refocus on delivering more Extended State 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 the longer-term customer mix. And that's something we continue to look at.
Chris Woronka -- Deutsche Bank -- Analyst
Okay. 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 in 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?
Bruce N. Haase -- President and Chief Executive Officer
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 this 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.
Chris Woronka -- Deutsche Bank -- Analyst
Okay, very good. Thanks.
Operator
Our next question comes from the line of Anthony Powell of Barclays. Please proceed with your question.
Anthony Powell -- Barclays -- Analyst
Hi, hello. Good morning, everyone.
Bruce N. Haase -- President and Chief Executive Officer
Morning.
Anthony Powell -- Barclays -- Analyst
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 certain how that brand may impact your ability to grow franchisees over the next few years? And here I am talking about the overall competitive landscape?
Bruce N. Haase -- President and Chief Executive Officer
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 and that we are completely aligned and completely focused on the extended stay segment and delivering extended stay business and what any franchisee wants, 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, 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.
Anthony Powell -- Barclays -- Analyst
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 an overall industry for kind of improvement? And what kind of customers were kind of generating that incremental growth that you're seeing?
Brian Nicholson -- Chief Financial Officer
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 some time 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 guest in the property on a daily basis.
Anthony Powell -- Barclays -- Analyst
Are these residential customers? Or are they kind of business travelers? What specifically are these extended stay guests in the hotel for?
Brian Nicholson -- Chief Financial Officer
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.
Anthony Powell -- Barclays -- Analyst
Great, thank you.
Operator
Our next questions come from the line of Michael Bellisario of Baird. Please proceed with your questions.
Michael Bellisario -- Baird -- Analyst
Good morning, everyone. 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 at your segments broadly? And then how much market share gain is incorporated into that guidance?
Bruce N. Haase -- President and Chief Executive Officer
Yes, 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 investment and the focus that we're bringing to bear with our new Head of Revenue and our New Head of Operations.
Michael Bellisario -- Baird -- Analyst
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.
Bruce N. Haase -- President and Chief Executive Officer
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 the performance of all of our properties, that would include sort of lower-tier assets through a more residential or 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 be 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 does Kelly and Randy and some other folks in this company. So we got to be very careful in the segmentation. As we 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 where we 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 to the extent we have some further thoughts on that by the Investor Day later this year. We'll share them at that time.
Michael Bellisario -- Baird -- Analyst
Perfect. Thank you.
Operator
Thank you. Our next question come from the line of Shaun Kelley of Bank of America. Please proceed with your question.
Shaun Kelley -- Bank of America -- Analyst
Hi, good morning, everyone. And thanks for all the prepared remarks. 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. 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?
Bruce N. Haase -- President and Chief Executive Officer
Certainly, if we look at a segment tracing 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 and 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 performed 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 team to make sure that the 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.
Shaun Kelley -- Bank of America -- Analyst
Thank you for that. The follow-up I have would 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 regear up in 2021? Or what do you think about the physical asset quality? And how do you think you're approaching it 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?
Bruce N. Haase -- President and Chief Executive Officer
Sure. No, I appreciate. That's important. I mean, 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 few properties in South Florida that had already been under way. But after that, we will pause because we want to make sure our renovation strategy is well aligned with our brand strategy and is 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 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.
Shaun Kelley -- Bank of America -- Analyst
Thank you very much. Thank you.
Operator
Our next questions come from the line of Harry Curtis of Instinet. Please proceed with your question.
Harry Curtis -- Instinet -- Analyst
Good morning, everyone. Just maybe a bit more follow-up on Shaun's questions. Bruce, your comment about competing against new extended stay brand. I guess, my concern is that they have bigger distribution systems, but is the offset to that, that if you move your mix of residential hire, you're really in a different segment. I am trying to understand why you're less concerned about it.
Bruce N. Haase -- President and Chief Executive Officer
Yes. Sure. No, that'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 system. 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 a big brand things. They are very good at delivering transient guests. Our website, which we're going to relaunch later this year into next year is going to be optimized for extended stay. Our sales force, which is 125 people are 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.
Harry Curtis -- Instinet -- Analyst
Okay. So I guess the follow-up to that is, what are the you've been you spent 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.
Bruce N. Haase -- President and Chief Executive Officer
I think yes, I don't know, 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 the physical nature of the asset to a more residential model then 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. And 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 the life events or at this location you need to address.
Brian Nicholson -- Chief Financial Officer
And Harry, this is Brian. Another thing that I would add is the sort of there are two 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 had a lot of concentration in the markets in which we operate, generally speaking. So looking at a market like Charlotte, where we have eight hotels, one 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.
Harry Curtis -- Instinet -- Analyst
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.
Brian Nicholson -- Chief Financial Officer
Short answer is yes. But that would be about 2021 and beyond.
Harry Curtis -- Instinet -- Analyst
I'm sorry. So the answer is to the question is yes, it probably...
Brian Nicholson -- Chief Financial Officer
The answer to the question is, yes. 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.
Harry Curtis -- Instinet -- Analyst
Very good. Thanks very much.
Operator
Thank you. Our next questions come from the line of Smedes Rose of Citi. Please proceed with your question.
Smedes Rose -- Citi -- Analyst
Hi, thanks. I just wanted to follow-up 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?
Brian Nicholson -- Chief Financial Officer
Yes, good question, Smedes 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 of 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 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.
Smedes Rose -- Citi -- Analyst
Okay, thank you. And then I just wanted to ask, too. You mentioned, as you kind of try to shift your customer base to more longer-term in 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 around 26% were booked through third parties in 2019?
Brian Nicholson -- Chief Financial Officer
It means, we absolutely expect that.
Bruce N. Haase -- President and Chief Executive Officer
Brian and I both wanted to answer that question.
Brian Nicholson -- Chief Financial Officer
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.
Bruce N. Haase -- President and Chief Executive Officer
Yes. The issue with the OTAs is most of those stays are one or two 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 look through our website or through our channels have an understanding of the product and understanding of the services and they get them booked through an OTA or certainly through an opaque channel. Those customers have no idea that they're staying in the 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 cost, in terms of operations, in terms of our perception in social media and so forth.
Smedes Rose -- Citi -- Analyst
Okay, thank you.
Bruce N. Haase -- President and Chief Executive Officer
Sure. Thank you.
Operator
Our next question come from the line of David Katz of Jefferies. Please proceed with your question.
Kuan -- Jefferies -- Analyst
This is Kuan[Phonetic] for the team. Thanks for taking the question. 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 the franchising contract, more boots on the ground? How should we think about that.
Bruce N. Haase -- President and Chief Executive Officer
Sure. Yes, I spent a lot of years in franchising. And it's a great business model. We have 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 two development people. We have a half-time service person, and a lot of folks sort of kicking in, help around the edges. We're going to set up a dedicated, and we've already done this. We 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, its processes. And its relationships, and we're going to be we've already made an offer recently to someone that'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.
Kuan -- Jefferies -- Analyst
Thanks very much.
Operator
Our next question is come from the line of Joe Greff of JP Morgan. Please proceed with your question.
Joe Greff -- JP Morgan -- Analyst
Hey, guys, First question, you referenced the RevPAR index improvement in the fourth quarter and for the full year. What is it on an absolute basis, are you close to 100%? And where was it at a peak and when was that?
Brian Nicholson -- Chief Financial Officer
So you're asking about our RevPAR index relative to our internal comp set?
Joe Greff -- JP Morgan -- Analyst
Correct. That's the whole comp set.
Brian Nicholson -- Chief Financial Officer
Yes. For the year for 2019, we were close to 97%. For the fourth quarter, our RevPAR index was essentially 100%.
Joe Greff -- JP Morgan -- Analyst
And where was it at peak?
Brian Nicholson -- Chief Financial Officer
Joe, I don't remember a moment, but I can follow-up with you on that.
Joe Greff -- JP Morgan -- Analyst
Okay, great. Bruce, you talked about the four key pillars, and that the first one was on the guest experience. And part of your commentary talked about some of the costs associated with that. Can you talk about can you quantify the cost and whether or not that they're onetime in nature? Are they replicated beyond 2020? Do any leak into 2021?
Bruce N. Haase -- President and Chief Executive Officer
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 cost side of the equation, we believe, will be greatly swamped by the revenue for the midsize. We'll be continue to be really careful about cost.
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 in RevPAR index increases of those properties that we previously owned. So there's the model there, and we're very focused on that.
Brian Nicholson -- Chief Financial Officer
Thank you. And Joe, I want to give you a follow-up on RevPAR index. We 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 returned to prior peak until 2015. That we did look relatively favorable into 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.
Operator
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.
Bruce N. Haase -- President and Chief Executive Officer
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. And 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 that 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.
Operator
[Operator Closing Remarks]
Duration: 62 minutes
Call participants:
Robert Ballew -- Vice President of Investor Relations
Bruce N. Haase -- President and Chief Executive Officer
Brian Nicholson -- Chief Financial Officer
Chris Woronka -- Deutsche Bank -- Analyst
Anthony Powell -- Barclays -- Analyst
Michael Bellisario -- Baird -- Analyst
Shaun Kelley -- Bank of America -- Analyst
Harry Curtis -- Instinet -- Analyst
Smedes Rose -- Citi -- Analyst
Kuan -- Jefferies -- Analyst
Joe Greff -- JP Morgan -- Analyst
