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Extended Stay America Inc (STAY)
Q3Â 2020 Earnings Call
Nov 10, 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 Third Quarter 2020 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, Investor Relations. Please go ahead.
Rob Ballew -- Media Contact
Good morning, and welcome to Extended Stay America's third quarter 2020 conference call. The third 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. The accompanying presentation has supplemental data on recent trends and comparison to recent industry and segment results.
Joining me on the call this morning are Bruce Haase, Chief Executive Officer and David Clarkson, Chief Financial Officer. After prepared remarks by Bruce and David, there will be a question-and-answer session.
Before we begin, I'd like to remind you that some of our discussions today will contain forward-looking statements, including a discussion of our fourth quarter and 2020 outlook and expectations regarding the COVID-19 pandemic. 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-10K filed with the SEC on February 26th, 2020 and our form 10-Q filed yesterday with the SEC.
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 with the SEC.
We also refer to RevPAR index, which refers to a percentage score calculated by comparing RevPAR on a comparable systemwide basis to an aggregate RevPAR of a group of competing hotels, generally in the same market, based on weighted average individual property results.
With that, I'll turn it over to Bruce.
Bruce N. Haase -- President & Chief Executive Officer
Thanks, Rob, and good morning, everyone. I'm very proud of our performance during the quarter as we beat not only our own expectations but outperformed all industry and competitive benchmarks. Our comparable systemwide RevPAR declined 14.7%, a significant improvement from both the decline in the second quarter and has exceeded the guidance we provided in early August.
Our third quarter year-over-year RevPAR performance was more than 20 points better than the mid-priced extended stay segment and we also gained more than 30 points of RevPAR index compared to our comp set. This performance was driven by the strength of our singular focus on the extended stay segment.
We are a pure play on extended stay and we believe that to be a significant competitive advantage. Extended stay revenue generated from our proprietary distribution channels, our website, and our call center increased slightly year-over-year in the third quarter despite declines in ADR across the board and some very difficult market conditions in some of our largest markets due to the pandemic.
Our relative RevPAR performance improved each month during the third quarter and occupancy has been running close to 2019 levels since early August. While some of our verticals have been hurt such as IT consulting, pre-openings and events, and ADR is down across the country, our field sales and operations teams have demonstrated strong performance from important verticals such as construction, supply chain and medical workers while also developing new customer segments.
Third quarter adjusted EBITDA of $112.7 million increased by nearly $40 million compared to the previous quarter, coming in well ahead of our expectations and guidance. And as a result, we generated more than $60 million in free cash flow during the quarter.
Our strong performance was driven by motivated and engaged associates at all levels throughout this Company and nearly 8,000 associates have rallied around our mission, to serve our core extended stay guests. And as a result of the efforts of our associates, we were able to pay our frontline management bonuses, increase the wages of our frontline hourly field employees, and continue to hire in many areas of the country; unheard of today in this industry, all while maintaining strong cost control at our hotels and at the corporate office.
Thank you, colleagues, for your hard work and dedication this quarter. Motivated and engaged employees focused on a common set of goals drive strong performance. The numbers bear this out for Extended Stay America as we have nearly doubled our associate engagement and Glassdoor scores from a few years ago.
Engaged associates result in more satisfied customers, which in addition to our other operational initiatives have resulted in a nearly 25% improvement in our social media scores and large increases in our net promoter scores this quarter. As social media scores and NPS are highly correlated with RevPAR, we are taking strong action to build upon these improvements for the long-term with initiatives such as our recently launched quality assurance program.
During the third quarter, we not only successfully managed through the pandemic but we also continued to invest in the future of the Company and the ESA brand. Given the relative performance during the pandemic, I'm sometime asked about the Company's prospects for the post pandemic period that we all hope will be coming sooner rather than later.
I believe investors should not consider our recent strong performance to be something that will fade when the pandemic ends, but something that will instead become the basis for an improved performance post pandemic, improved of course not only from current levels of profitability but also improves relative to our pre-pandemic performance.
Our recent performance during the pandemic demonstrates the depth of the extended stay market. In the midst of the current disruption of the lodging industry, we have been able to operate at nearly 80% occupancy and when the pandemic ends, most of those current demand drivers will remain. But we'll add back additional sources of higher rated demand, like various consulting customers, event driven business, and corporate business in the seven to 29-day linked segment that should allow us to maintain higher occupancies at higher rates which we will believe will translate into improved profitability.
The depth and power of the extended stay demand and its related industry leading profit margins is something that I not believe we fully accept pre-pandemic. With that in mind, we are taking steps with our revenue generation platform that is not only driving our current relative outperformance but which I believe will take the Company to new levels of performance when the pandemic ends.
Improving our commercial engine and our core hotel operations is one of our highest areas of value creation opportunity. We have made substantial progress on both of those fronts, upgrading talent in many positions, implementing new strategies to improve our call center and our website and continuing to remain focused on driving core extended stay customers into our hotels.
These efforts are already paying off. Revenue from our proprietary channels in the third quarter was nearly flat compared with the same period in 2019 and we saw the largest single month's revenue generated by our website esa.com in the Company's history, during the month of July.
And for the month of September, revenue from extended stay guests was up 7% with extended stay occupancy up 18% compared to 2019, largely offsetting a 40% drop in transit revenue. This protection from our commercial engine is unprecedented, and I think it highlights how unique our value proposition is to both franchisees and to our shareholders.
Extended Stay America will deliver strong results in good times as well as bad. And it's important to note that we've achieved a strong third quarter result despite difficult market conditions in our highest RevPAR markets, and we expect to gain further traction as these markets return to normal. And with our lean operating model, increases in revenue will flow to the bottom line at a higher rate, driving EBITDA and margin.
Going forward, we expect to build shareholder value not only by improved performance of our owned hotels, but also by growing the number of hotel properties operating under the ESA flag through franchising. And we also have a strong focus on creating value by curating our own hotel portfolio.
We've made progress in the third quarter in further developing our asset segmentation strategy for our owned assets. We also made progress during the quarter further developing our asset segmentation strategy for our REIT assets, as we strive to maximize the value of our REIT through more proactive asset management.
We'll be targeting renovation investment in those assets with the highest potential to drive above market RevPAR performance. And in those instances, where one of our hotels is more valuable for a higher and better use by a non-hotel investor, we will seek to realize that excess value for our shareholders.
Simply put, our asset disposition strategy is to strategically curate the portfolio of assets that we can transact at multiples significantly above the Company's current trading levels. This is made possible by the fact that we have assets in hotels located in irreplaceable premium locations. In addition to our operating performance, we believe the value inherent in our REIT portfolio is another source of shareholder value that is unappreciated by the market today.
We will further quantify these disposition opportunities and expect to share some more on this important strategy in 2021. We continue to work to facilitate our shift to an asset-light unit growth strategy through franchising, upgrading talent in that group, and adding more resources to support the franchising system.
I truly believe that Extended Stay America has the most compelling value proposition in the industry today, both for developers that want to build new extended stay hotels as well as owners of existing extended stay product that may wish to convert.
The awareness of the ESA brand and our singular focus on the extended stay segment in everything we do, coupled with our proven prototype and our industry leading performance through the pandemic, positions us to be the leading extended stay franchisor in the industry.
While the lodging industry lending environment is not favorable to new construction development at the moment, we continue to see strong interest among developers for the future and significant activity with respect to conversion from competing brands. We expect to close additional conversion opportunities into the ESA brand during the fourth quarter.
Discussions with future and existing franchisees remained very productive and I strongly believe that once the financing markets improve, we'll be able to deliver on significant brand growth through franchising.
And finally, we remain committed to a balanced capital allocation strategy. The strength of our model and our strong cash flows allows us to invest in the business, repay debt, and return capital to shareholders. This quarter, we generated more than $60 million in free cash flow.
We paid all amounts outstanding under our $350 million REIT revolver while continuing to invest in the business and maintain our hotels, while others in the industry defer capital and significantly trim staff that may damage their long term growth prospects. David will focus more on cash flow in just a few moments.
As I shared in the last quarter, despite the challenges in the lodging environment, I'm convinced more than ever that our unique business model, the talent and extensive segments specific industry experience with our team, the strength of our corporate culture will all lead to significant growth and value creation opportunities for ESA in the coming years.
I am confident that we can continue to outperform during these difficult times, fully participate in better times when they arrive, execute our growth plans, and create significant shareholder value in the process. The best days for this Company are ahead of us, which of course includes growing adjusted EBITDA to 2019 levels and beyond in the years to come.
And now, I'll turn the call over to David, who I am thrilled has assumed even greater responsibilities in our senior leadership team as our new Chief Financial Officer. David will discuss our third quarter results, our fourth quarter guidance, in addition to some further details on our dividends. David?
David Clarkson -- Chief Financial Officer
Thank you, Bruce. Although I'm a long standing state veteran and have had the opportunity over the years to interact with many of the people listening to this call, I'd like to start off with this as my first call as CFO of Extended Stay America by thanking Bruce and the Board's for their support.
I'm honored and I look forward to continuing to work with our investors and analysts, enhancing shareholder value through the execution of our business strategies, improving our organization, and continuing to strengthen our already strong processes and controls. I would like to thank my team and colleagues for the smooth transition and hard work over the last several months.
In the third quarter, comparable systemwide RevPAR declined 14.7% due to the COVID-19 pandemic compared to the same period in 2019, driven by a 13.7% decline in ADR as well as a 100 basis points decline in occupancy. Comparable system wide RevPAR improved throughout the quarter with July down approximately 19%, August down 14%, and September down 10%. Both August and September benefited from the shift and strength of Labor Day.
About 200 basis points of the ADR decline was the result of a shift in mix for longer stay guests with another 300 basis points resulting from larger occupancy declines in higher rated markets relative to the lower rated non-Top 25 markets. The decrease in RevPAR during the third quarter was driven by a 40% decrease in nightly transient revenue and a 12% decrease in our weekly revenue, partially offset by a 5% increase in our monthly plus business.
In total, our core extended stay revenue saw a slight increase in the quarter, highlighting the strength of our commercial engine and our unique focus on this segment of the industry. For the first nine months of 2020, comparable system wide RevPAR declined 16.9% driven by a 12.9% decrease in ADR. Revenue from third party channels declined 44% during the quarter, predominantly from OTAs. ESA channel saw revenue declines of only 3%, and in the month of September actually increased 3%, again highlighting the strength of our commercial engine.
The Company's RevPAR index increased over 33% year-over-year to 129 in the third quarter, with relative gains in both occupancy and rate. We believe we will continue to see very strong RevPAR index scores compared to 2019 levels for many years to come. Hotel operating margin declined 650 basis points in the third quarter to 47.3% compared to the same period in 2019. However, this represented a 560 basis point increase from the second quarter.
The decrease in margin was driven by decreased Company-owned hotel RevPAR, an increase in charges related to guest non-payment, and PPE expenses for our field associates. This was partially offset by decreases in marketing expense, largely OTA Commission's, room expense, and a slight decrease in labor costs even with occupancy nearly flat. Hotel operating margins for the first nine months of the year declined 780 basis points to 45.1%, showcasing that even in the worst event in industry history, we can maintain very high operating margins.
Corporate overhead expense, excluding share based compensation and transaction costs was $21.5 million in the third quarter of 2020. Adjusted for severance costs, overhead was approximately flat compared to the third quarter of 2019. Adjusted EBITDA in the third quarter was $112.7 million, a nearly $40 million increase sequentially and well above our expectations as we saw strong improvements in our RevPAR change year-over-year as the quarter advanced. This was down from $156.3 million a year ago however. The decline in adjusted EBITDA during the quarter compared to the prior year was driven by a decline in RevPAR, partially offset by a 3.5% decrease in comparable property level expenses.
Adjusted EBITDA for the first nine months of the year was $284.8 million, compared to $426.3 million in the first nine months of 2019. Net interest expense during the quarter decreased by $4.2 million to $32.3 million due to a lower LIBOR rate and transaction financing costs in the third quarter of 2019 related to the sale of senior unsecured notes.
The Company had an income tax benefit of approximately $7.1 million in the third quarter compared to $10.5 million in income tax expense in the same period of 2019. Adjusted FFO per diluted paired share declined 25.9% in third quarter to $0.40 per share, compared to $0.54 in the same period in 2019. This decline in adjusted FFO per diluted paired share was driven by a decline in comparable systemwide RevPAR, partially offset by an income tax benefit, reduced hotel operating expenses, and a reduction in paired shares outstanding.
Adjusted FFO per diluted paired share for the first nine months of 2020 was $0.88 compared to $1.43 in the first nine months of 2019. The Company had net income of $31.5 million during the quarter, compared to net income of $53.2 million in the same period of 2019. The decrease in net income was driven by a decline in comparable systemwide RevPAR, partially offset by a decrease in hotel operating expenses, and an income tax benefit.
The Company had a net income of $30.6 million for the first nine months of 2020, compared to net income of $141.3 million for the same period in 2019. Adjusted paired share income per diluted paired share in the quarter was $0.19 compared to income of $0.33 in the same period in 2019. The decrease was primarily due to the decline in RevPAR, as well as increased depreciation, partially offset by an income tax benefit, lower hotel operating expenses, and a reduction in paired shares outstanding. Adjusted paired share income per diluted paired share for the first nine months of 2020 was $0.22 compared to $0.81 in the same period in 2019.
The Company ended the third quarter with $396 million in cash and restricted cash and total debt outstanding of $2.7 billion, due in part to the Company's significantly improved operating position, with the Company currently generating positive cash flow since June, we repaid the $350 million outstanding under our REIT revolver in the third quarter. Excluding this REIT payment, our cash position increased by approximately $64 million, even with significant capex investments during the quarter.
Our primary use of free cash flow in the near and medium term will be to ensure sufficient liquidity is maintained, invest in our core business, and prudently return capital to shareholders. Capital expenditures in the third quarter totaled $39.6 million, including $2.9 million for renovation capital, and $16.7 million for new hotel development.
The Company opened one new purpose-built ESA during the quarter, while a franchisee converted one hotel to the ESA banner during the quarter. As a reminder, after we complete the on balance sheet hotels in process, we expect to grow unit count predominantly, if not exclusively, through franchise growth rather than through on balance sheet development.
Our total pipeline stood at 65 hotels at the end of the third quarter. And as Bruce mentioned, we expect several conversions from franchisees in the fourth quarter to the ESA banner.
Our RevPAR trends have been quite consistent over the last six weeks or so, running down versus last year between 11% and 14% nearly every week. Our expectation that those trends will continue and that our fourth quarter comparable systemwide RevPAR will decline between 11% and 15% compared to the same period of 2019. This is a wider range than we typically provide. The field is appropriate given the general economic and travel uncertainty, including the increasing number of COVID cases.
We expect adjusted EBITDA for the fourth quarter to be between $78 million and $88 million. For the full year 2020, we expect comparable systemwide RevPAR declines between 15.5% and 16.5% and adjusted EBITDA between $363 million and $373 million. We expect capital expenditures for the year to be between $170 million and $190 million, as we deferred slightly less maintenance than previously planned as a result of our stronger performance.
We have lowered our net interest expense estimate to $130 million due to lower LIBOR rates and the revolver pay down at ESH Hospitality and modestly increased our depreciation expense expectations for the year to between $203 million and $206 million. The Company did not repurchase any paired shares during the third quarter, and our current total outstanding remaining authorization for paired share repurchases remains $101.1 million.
Yesterday, the Board of Extended Stay America, Inc. declared a cash dividend of $0.01 per paired share payable on December 8th, 2020 to shareholders of record as of November 24th, 2020. This will mark the third consecutive quarter of a distribution of $0.01 per share.
ESH Hospitality will of course continue to ensure it meets its REIT requirements and will also continue to seek to minimize income taxes for the consolidated enterprise, including distributions to shareholders of at least 90% of its taxable income.
Accordingly, the Company expects to make a catch up distribution in the first quarter of 2021. We are pleased to be in a position to return capital to our shareholders and expect the range of this catch-up distribution in early 2021 will be between $0.15 and $0.20 per share. The final amount will vary depending on the final taxable income at ESH Hospitality and is subject to the approval of the Board.
Operator, let's now go to questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Your first question comes from the line of David Katz with Jefferies. Please proceed with your question.
David Katz -- Jefferies LLC -- Analyst
Hi, good morning, everyone, and thanks for taking my question. I wanted to sort of get into the -- a bit deeper into the notion of unit growth, and talk about sort of the key benefits, barriers, issues and risks around conversions, which is sort of topical across the industry? And whether that's -- those are financial or sort of practical execution opportunities that you have?
Bruce N. Haase -- President & Chief Executive Officer
Sure. Yes, thanks, David. Happy to answer that question. Thanks for your interest. In terms of unit growth, as we've stated we're working through our pipeline of on-balance sheet development. We opened a new hotel in Tampa, I think just yesterday, and we'll be opening some more and working through that pipeline of on-balance sheet development over the coming months.
So, we really are shifting to a franchise development unit growth strategy. Our timing is difficult right now with the pandemic, obviously. We believe we have an extremely strong value proposition given our strong brand and our singular focus on the extended stay industry, particularly our distribution channels that are unique in the industry, so no one can really deliver the -- I think the brand and the type of business that we can deliver.
But, unfortunately, the financing environment is different. We have a great deal of interest in the third quarter in both new and existing franchisees looking to develop. But unfortunately, given the uncertainty in the market, given COVID, given debt markets, that interest hasn't necessarily translated into executed contracts.
I feel very confident it will and I feel very confident that when the markets come back, we'll be first in line for new development, given the performance that we have and our strong value proposition. In the meantime, we have had some luck in conversions. The conversion opportunity in extended stay is not nearly as expensive as it is in the transient business, because we require full kitchens and there's a much more limited universe of potential conversion opportunities.
Lots of transient owners over the years have looked at trying to find ways to convert transient hotels to extended stay hotels, but the economics of that are very difficult and I haven't actually seen that work yet.
But the good news is that we do have a pipeline of conversions coming in the fourth quarter and some that we believe will come in the first quarter of next year as well. So we're working through those as we speak. We're not in a position to announce numbers, but it's an opportunity, it's not a massive opportunity, but I think it's a bridge to get us to a better new development market.
David Katz -- Jefferies LLC -- Analyst
Got it. Thank you very much.
Bruce N. Haase -- President & Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Anthony Powell -- Barclays -- Analyst
Hi, good morning. You talked about curating your portfolio and maybe renovating some of the assets that you own and the restructure. Could you maybe go more into what you're thinking there and what's the goal there? Is it to try to capture a higher rate of customer or some more detail will be great?
Bruce N. Haase -- President & Chief Executive Officer
Yes, sure, appreciate it. So, there's really two legs to that question. The first is really in terms of making more strategic investments in our REIT portfolio. Obviously, we have 550 hotels that we own. Not all those hotels are equal. We have some hotels that are in extraordinary circumstances or -- sorry, extraordinary locations, with strong demand drivers, more white-collar high-rated business that we think that we can attract.
So, we're really looking at being more strategic in terms of rolling out a new renovation program and focusing our renovation dollars on those assets where we believe we can drive above market rate and RevPAR growth over the coming years. So, the first part of it is really looking at more strategic and renovation investment, not just throughout the whole system, but really targeting at least in the first wave, that renovation investment in those assets, where we really think we can move the needle dramatically.
Second part of your question is sort of more on the curation side and we've talked about that before. We have a portfolio that was built 20, 25 years ago, by some very smart real estate developers and we have markets that have evolved to the point where you wouldn't develop a mid-scale lodging asset on that dirt today, and we have a number of opportunities that we're working through currently that are in negotiation, in due diligence and various stages.
For non-hotel uses where the buyers value add asset at a much higher level than a hotel owner would. So, we're working through those and we hope to have something to announce shortly. But our general policy is not to announce that until the ink is pretty close to being dry on those deals.
So -- but there's a number of opportunities that we're going to -- that we're working through as we said on the call. We will continue to refine that analysis and continue to look through our portfolio and try to develop that set of opportunities where we believe that there are assets that are we believe to be more valuable in other hands and other uses compared to the best possible value that we can drive out of that as a mid-scale extended stay asset. So that work continues.
Anthony Powell -- Barclays -- Analyst
Yes, thanks. And a lot of the peers that owned hotels in maybe the upper mid-scale or up-scale segment seem to have expanded their extended stay mix. In a normalized environment, could you maybe get some of that business that went to those higher priced segments or how do you see the overall competitive landscape evolve for this extended stay business evolving now?
Bruce N. Haase -- President & Chief Executive Officer
Yes, I mean, there's not extended stay -- there's many different tiers to the extended stay market. And I think we've definitely, with our brand -- our brand is extremely strong and we've done a lot of research, consumer research in terms of the strength of our brand. Our brands resonates not only with sort of core -- our core customers, but also resonates and is attractive to customers of competitor brands that are at higher price points than we are.
So through our renovation strategy and through the strength of our brand we do think we have the opportunity to steal some share from some of those higher rated brands in those higher rated segments and that's really the core of that idea.
Anthony Powell -- Barclays -- Analyst
Thank you.
Bruce N. Haase -- President & Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Chad Beynon with Macquarie Group. Please proceed with your question.
Chad Beynon -- Macquarie Group Limited -- Analyst
Good morning. Thanks for taking my question. Regarding your fourth quarter EBITDA guidance, it appears that you're assuming a similar, I guess, negative relationship to EBITDA decline to revenue as you saw in the third quarter. Can you just talk about maybe some of the things that go into this? Are we assuming that seasonality and just the uncertainty around COVID? And obviously from an absolute revenue standpoint, bring that down, and you're just not able to get any additional operating leverage, just some more color there would be helpful? Thanks.
Bruce N. Haase -- President & Chief Executive Officer
Sure. David, would you like to take that one, please?
David Clarkson -- Chief Financial Officer
Sure, Chad. This is David. Sure. Good morning, Chad. Thanks for the question. Yes, you observed correctly that we're essentially assuming a continuation of recent trends. Our RevPAR has been down, as I mentioned in my prepared remarks, between 11% and 14%, for most of the last six weeks or so. Quarter-to-date thus far, we're kind of right in the middle of our range, down about 13.5%.
Meanwhile, our expenses have been also pretty steady and pretty predictable. Our largest hotel level expense of courses is payroll. Most of our staff positions are fairly fixed in nature. And so, we're seeing kind of inflationary increases in those roles. Housekeeping is the exception and because of our longer length of stay this year, we're seeing declines in housekeeping. So payroll is generally running about flat year-over-year and we expect that to continue in Q4.
Other expense areas, we're continuing to see savings in breakfast costs and OTA commissions. Those savings are being slightly offset by increased PPE costs and increased cash credit. So net-net on the expense side, we're expecting property costs to be slightly lower than last year. But as you, I think referenced, it's -- most of our expenses are pretty fixed in nature.
So to the extent our revenue declines year-over-year, it's hard to flex a lot of that and drive a lot of operating expense savings to the bottom line. But I think we're being smart in allocating our payroll appropriately. Where there are hotels with lower occupancy we're pulling back; where there are hotels running high occupancy, which is most of our hotels were, kind of running in accordance with our labor model, we have done things like clean rooms less frequently every other week as opposed to every week for people staying weeks and months at a time, that's something that we'll continue to evaluate and give guests the option to do.
You know, when it comes to seasonality in the business, our business is less seasonal than the traditional hotel company. And this year with a higher mix of extended stay business, we should be even less seasonal than we normally are. And holidays have been good for us during the pandemic because it's sort of an easier comp as a year ago, the more transient business checked out.
And so, Labor Day, for example, we were only down 2%, which was much better than our trends in surrounding weeks. And so, to the extent that pattern holds in Q4, Thanksgiving and Christmas, I'd expect this to be closer to the top-end of our RevPAR range.
That said, we did not bake into our forecast any changing trends as a result of COVID cases going up, and some states certainly are imposing a few more restrictions to combat the pandemic. So we've not seen any of that reflected in our numbers and we've not baked that into our outlook, but I think that -- hopefully that helps, Chad.
Chad Beynon -- Macquarie Group Limited -- Analyst
Yes, that's great. Thank you, David. And then Bruce, you noted growth through franchisees versus on-balance sheet, but given the improvement in the extended stay brand in your recent RPIs, does this open up opportunities for traditional M&A? Or is the focus going to continue to be with franchisee growth? Thank you.
Bruce N. Haase -- President & Chief Executive Officer
Sure. Yes, I think you should think about the opportunity with franchisee growth. Obviously, we're open to M&A. We would be very open to a brand acquisition. But there's just not -- there's not many out there. I mean, most of the brands are locked in with other brand families and there's really not a whole lot in terms of brand acquisition opportunities out there, but if we could find something that would fit, that would certainly be something that we'd be interested in.
Chad Beynon -- Macquarie Group Limited -- Analyst
Okay. Thank you both. Nice quarter.
Bruce N. Haase -- President & Chief Executive Officer
Thank you. Thanks.
David Clarkson -- Chief Financial Officer
Thanks, Chad.
Operator
Your next question comes from the line of Stephen Grambling with Goldman Sachs. Please proceed with your question.
Stephen Grambling -- Goldman Sachs & Co. -- Analyst
Hi, thanks. In the opening remarks, you referenced that you still see opportunity from some of the more dense population locations, which maybe haven't covered yet. What does the path of recovery there require and what might be the interplay with a stronger demand in less densely populated markets look like?
Bruce N. Haase -- President & Chief Executive Officer
Yes, I'll start and ask David to chime in as well. Really, we've seen -- well first of all, I think our results are strong despite the fact that we have high concentrations in the Northeast and Boston and New York City area in Washington DC, Florida, the Bay Area in California, Seattle, those are some of our highest RevPAR markets. Those are some of our densest markets in terms of unit count and those have been some of the markets that had been hardest hit, not just for us, but for the entire industry.
So we're pretty pleased with the results we've had despite our concentration in those high RevPAR markets. We're seeing some improvement but slower. We continue -- in every single one of those markets that I've highlighted, we continue to outpace our concept by a strong margin, even though we're down substantially from where we were last year.
So I think that's -- those markets will obviously recover and hopefully use of a vaccine will start to move the needle, and as those markets recover in terms of rate and it's primarily a rate issue, not necessarily for us an occupancy issue in those markets that is a tide that will lift us up as well. But the pace of that recovery in those markets are -- it is uncertain. David, would you add anything that that.
Stephen Grambling -- Goldman Sachs & Co. -- Analyst
Understood. I know [Speech Overlap].
David Clarkson -- Chief Financial Officer
Yes, I'd just add real quickly that the markets where we're down the most, some of which Bruce mentioned, the Bay Area, Seattle, Boston, DC area, those are the markets where the industry is down the most. And in some cases -- in most cases, those markets are down, you know 70% or so industrywide and our index growth in those markets is the highest. So I think it's really just going to take those markets sort of returning more to normal, and there should be some nice uplift for us there.
And I'd also point out that in each of our Top 20 markets, our RevPAR index growth is positive. So I think that highlights that just systemwide what we're doing and the uniqueness of our business model and the focus of our sales team on driving extended state business is paid off for us in every market.
Stephen Grambling -- Goldman Sachs & Co. -- Analyst
That's good color. As another related follow-up, you also noted, very positive growth in the website direct, and I think you said in July. Is there any way to frame or quantify how much of this is driven by shifting consumer demand due to COVID versus your actions? I mean can you just remind us about how you think that's a longer-term opportunity for improving distribution?
Bruce N. Haase -- President & Chief Executive Officer
Yes, sure. I think I really appreciate that question because I think that is something that's really underappreciated. There is no one in the industry that has fine-tuned their distribution channels to focus on extended stay like we have. So we really do have a very unique asset of the industry, not just our sales force, our distribution channels which -- our proprietary distribution channels, given our website and our call center.
You know, we've made -- we have new leadership throughout the commercial engine. We have made some changes to how we market. We've made some changes to our existing website. We're in the process of building a new and a much better website that will be launched in the first quarter. But in the meantime we haven't stopped trying to optimize our e-commerce spend and we haven't stopped trying to optimize the booking pass on our website in the promotions that we're doing and those are paid off.
I don't think there's been any sort of systemic shift in booking patterns from customers. I think what we're seeing in terms of our distribution channels is changes to the new management team and the commercial engine has made to drive those changes. So I think there's more to come there. You know, we continue to invest in that area and I think there is no doubt that we will certainly have the best distribution channel -- extended stay distribution channels in the industry by far.
Stephen Grambling -- Goldman Sachs & Co. -- Analyst
That's it. Thanks so much.
Bruce N. Haase -- President & Chief Executive Officer
Sure, thank you.
Operator
Your next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.
Chris Woronka -- Deutsche Bank -- Analyst
Hey, good morning, guys.
Bruce N. Haase -- President & Chief Executive Officer
Good morning.
Chris Woronka -- Deutsche Bank -- Analyst
Wanted to ask you about the -- good morning. Wanted to ask you about the -- your, I guess, monthly extended stay customer and as we think about at some point, you rotating a little bit back toward more transient shorter term. How quickly can you pivot that?
And maybe the question is, can you remind us of kind of the mechanics of those longer-term stays in terms of how -- what the lead time is on renewals, and then, how quickly you can convert them to -- those same rooms to shorter-term, higher rated stays?
Bruce N. Haase -- President & Chief Executive Officer
Sure. Yes, appreciate that. Thanks, Chris. Yes, we are, in some markets, actually already doing that. We're doing that through pricing. We have a number of markets where we're -- and a number of hotels, and we revenue manage on a hotel-by-hotel and district-by-district basis. We have a number of properties where we've been consistently over 90%, and we're able to push rate by through revenue management.
Most of our customers are on a sort of a month-to-month basis. We do have some that are on 60 days, but those are the minority of our business. So, we certainly do have the ability to shift that mix as we see demand coming in particularly from higher rated extended stay business, which is seven to 29 night business for us.
As we see that come-in as we see some transient come in we will take opportunities to revenue manage our way back to a more favorable guest mix, but in terms of the lead time, it's -- think of weeks, its weeks not months, to move the needle there.
Chris Woronka -- Deutsche Bank -- Analyst
Okay, very good. And then, on the franchise side, certainly understand and appreciate your comments about the financing issues that are out there, those are very real. But can you give us a flavor of kind of what your prospect pipeline looks like in terms of the franchise? Are these guys that are -- own different extended stay product? Do they own a different limited service product? Is there any way to kind of just categorize them to figure out when their liquidity situation is going to improve?
Bruce N. Haase -- President & Chief Executive Officer
Yes. I don't know, if we can -- we have a -- our pipeline is pretty diverse. We have individual franchisees when you think of traditional hotel [Phonetic] franchises that we're talking about. We have existing very large scale, existing extended stay owners, both in our brand and competitor brands that we're talking to, and we have commercial real estate developers that are also looking at the brand. So, it's a fairly diverse group of franchisees, which I think is healthy.
And I think it's hard to characterize. I think each one you have to kind of look at on an individual basis. But right now, there's just not, I think the competence in the market to particularly for new development to pull the trigger. There is a lot of, like I said, activity on some portfolios in extended stay hotels that are being purchased by some of the folks that we're working with on the franchise side. That seems to be -- buying a stabilized asset is, I think an easier thing for people to get their heads around in this market than taking on development risk. So that seems to be where most of the action is right now.
Chris Woronka -- Deutsche Bank -- Analyst
Okay, appreciate that. Very helpful. Thanks, guys.
Bruce N. Haase -- President & Chief Executive Officer
Thank you.
David Clarkson -- Chief Financial Officer
Thank you.
Operator
Your next question comes from the line of Smedes Rose with Citi. Please proceed with your question.
Smedes Rose -- Citigroup -- Analyst
Hi, thank you. I wanted to ask just a little bit more about the long-term guests that you mentioned in your opening remarks. You saw RevPAR for that monthly guest go up by 5%. And then, you just mentioned on the previous question about maybe mixing that down a little bit as more short-term transients comes back. And I just wanted to ask you, what percent of occupancy is the monthly guests now? And it's kind of who is that? Is it more people staying for personal reasons or is it a mix of personal and longer-term business or more corporate business I guess?
Bruce N. Haase -- President & Chief Executive Officer
Yes, sure. Thanks Smedes. I'll turn it over to David in a minute to give you some of the data there. But just in terms of the character of those guests, and we think of long-term guests as folks that are staying with us 30 nights plus, and that really does encompass both folks that are staying with us for personal reasons and folks that are staying with us for business reasons, particularly on the business side.
I'd highlight construction. We have a number of hotels that have construction crews that are on multi-month, maybe multi-year projects could stay with us. We certainly have still temporary medical workers staying with us. We have logistics workers staying with us. Our business customers, as we think we pointed out before, are folks that need to be physically present for their jobs. They do not have the opportunity to stay on Zoom calls all day to do their business. So, that business is there. That business can be 30 plus. It can be weekly business.
On the personal side a lot of that is really locally driven business. And that's really where our field sales force comes in to find pockets of that business. These are folks that are in life transitions. These are folks that are moving. These folks are looking for housing. We've had many guests that have stayed with us and I've got a lot of emails from guests that are having home-schooling their kids in our properties because of the pandemic and the economic dislocation, they've had to move cities. So that is the nature of those guests.
And, as I said, that's generally, the residential personal business is usually generally the lowest rated part of the stack. So, as we see other segments improve over time, we will be able to revenue manage more carefully that group. David would you -- could you add some details on the mix numbers?
David Clarkson -- Chief Financial Officer
Sure. So, Smedes, our room night mix in Q3 was about 58% of our occupied rooms were people staying 30 or more nights, which is about a 10 point increase over the prior year. And that shift all came from one through six night's stay, which went down from 33% a year ago to 23% this year. And so the seven to 29, the weekly stayed flat at about 20%.
Smedes Rose -- Citigroup -- Analyst
Okay. And just -- so the 58% that's the longer-term stay, sorry to put -- make you sort of go down this rabbit hole. But what -- I mean, what percent of that, what's the breakdown of that between the sort of life transition personal stay customer versus the more business-oriented customer?
Because the reason I'm asking is because I'm thinking about pricing power for next year and it seems that that life transition customer is going to have a lot less ability to pay a higher rate. So, I'm just sort of wondering what's kind of the pool, I guess, of potentially replacing that customer over time.
Bruce N. Haase -- President & Chief Executive Officer
Yes, I think, I'll ask David, I'm not -- perhaps we have some estimates on that, I'm not sure we necessarily for all customers have the purpose of their stay when they check-in, but maybe David can estimate that. But you're right, I think that -- particularly the -- we have a rate that is a stay of 60 nights, where you pay 30 nights in advance. That is our -- generally our lowest rated source of business. That is something we did rely on extensively during the pandemic, particularly when it started, and we had been able to success -- and that's generally again, largely residential, if you will, or personal business.
And as markets have improved, we have moved out of that. But I think the real opportunity for us is not necessarily to pick up a lot more transit business because that's not really what we want to do. We will pick up some of that, but I think the opportunity going forward will be to shift out some of that personal business to medium-term extended stay, sort of extended stay that -- business that's in the seven 29 night stay length, which we really suffered greatly in this pandemic.
You know, the IT consulting work that we had, the pre-opening work for restaurants and retail establishments that we had, I mean all of that sort of, whitish, gray-ish color extended stay business really got hit. Government business, we go in that category, as well. A lot of that travel really got hit during the pandemic. So, I think the opportunity is not to really replace that personal -- low rated personal stay business with a transient business, which is disrupted to our business model.
But as those other corporate segments, weekly corporate segments come back to transition into that. But David do we have any estimates on the mix of personal versus corporate business in the 30-plus?
David Clarkson -- Chief Financial Officer
It's difficult to tease that out with a lot of precision, but I'd say of the 30-plus, probably a third of that are people staying on more discounted rates, with us two months or longer rate. And as Bruce mentioned, as we've moved through the pandemic, we've successfully been able to reduce the amount of discount that we've been offering for those folks. But there still remains opportunity to shift that longer stay mix to higher paying 30 plus, and also higher paying seven to 29, sort of corporate, as things begin to come back.
Smedes Rose -- Citigroup -- Analyst
Alright, I appreciate it. And then, David, maybe you could just, you talked about the catch-up dividend in the first quarter. Just in general, I mean, how are you guys thinking about capital return in addition to that either through just instituting a more normalize dividend or share repurchase or as we kind of move through this?
David Clarkson -- Chief Financial Officer
Sure. So the catch-up dividend I referenced, we plan to pay in Q1 and that will kind of get the REIT dividends for 2020 up to 100% of the taxable income, which is what we've targeted as a pay-out ratio for the REIT in recent years. That's what's most tax efficient for us and we're pleased to be able to return that capital to shareholders.
I think, going forward in 2021, my expectation is that we will reinstitute a regular quarterly dividend from the REIT equal to roughly 25% of what we think the REIT's taxable income will be for the year.
In the past, we've also paid a dividend from the C-Corp. I do think that additional returns of capital to shareholders over and above the REIT distribution, whether it'd be from C-Corp dividends or from share repurchases, will be quite limited in the near term, but certainly is something that we will continue to discuss with our boards, at least quarterly. But just paying a dividend at all, I think, differentiates us from a lot of our peers and next year our REIT dividend will be, I think a reasonable dividend yield for us.
Smedes Rose -- Citigroup -- Analyst
Okay. Thank you, guys. Appreciate it.
David Clarkson -- Chief Financial Officer
Thank you.
Bruce N. Haase -- President & Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Joe Greff with J.P. Morgan. Please proceed with your question. I apologize, the next question comes from the line of Dany Asad with Bank of America. Please proceed with your question.
Dany Asad -- Bank of America Merrill Lynch -- Analyst
Hi, good morning, guys. David, in your prepared remarks you made your capital allocation priorities pretty clear and we can definitely appreciate that we're not in a place where we can get formal guidance here, but can you maybe just help us think about the priority of free cash flow and maybe in buckets? So, how much on-balance sheet development his left? And then, how much -- you know, what those ROI projects you guys mentioned, make up? And then, if there's any IT spend, when we think about next year's priorities?
David Clarkson -- Chief Financial Officer
Sure. So with respect to our development capex we've got -- after having opened one hotel today, we've got five hotels under construction. Cost to complete construction on that group of hotels is about $25 million, half of which I'd expect we'd fund in Q4 with the remaining into next year.
Our IT capex is kind of on the $10 million to $15 million -- in the $10 million to $15 million range annually. This year, our maintenance capex will be something on the order of $75 million to $85 million. We did defer some projects this year as a result of the pandemic and wanting to maximize liquidity. So some of those will get pushed into next year.
With respect to ROI investments on the hotel, Bruce talked about that a little bit. Well, we're not ready to provide guidance for next year on that. We're still working on those plans and we typically provide guidance for the year both operating and capital allocation during our call in Q1, which I'd expect we would do this year.
But generally speaking, with respect to capital allocation, certainly we want to invest in our hotels to maintain them and where appropriate invest in ROI projects. We'll continue to pay the REIT dividends, roughly 100% of taxable income. To the extent there are asset sales, which there are some in the pipeline, we would expect to do a combination of paying out a dividend to the extent there's a taxable gain on that, which is the most tax efficient thing for us to do.
And depending on the quantum of proceeds, potentially repay some debt. As you may know, we have $50 million outstanding on our C-Corp revolver. And so, proceeds, I'd expect could go toward repayment of that. And we're happy to put cash on our balance sheet and reduce our net debt in that way as well. So hope that helps.
Dany Asad -- Bank of America Merrill Lynch -- Analyst
That's super helpful. My follow-up is actually on a prior question that was asked, can you guys -- I think it was -- Stephen was talking about just distribution channels. Can you just remind us how much of your proprietary channels make-up of the total mix, and if that's materially different than it would have been last year or in a more normalized environment?
Bruce N. Haase -- President & Chief Executive Officer
Yes, sure. Yes, it is materially different than last year. You know, it was part of our longer-term plan pre-pandemic to reduce our reliance on the OTAs and GDS channels and the opaque channels, which delivered a lot of transient business to us that was not necessarily a good fit for us. So the pandemic did accelerate that mix shift for us. Our goal now is to keep that mix shift to pretty much where we see it today, and to grow the rates in our proprietary channels as we can.
But what we're seeing just very generally we've look at -- our two main proprietary channels are our call center, and our -- you know, our internet channel, and those two channels in terms of mix are up about 5% over where they were last year. The call center was in the mid-20%s and now in the low-30%s. Our Internet mix in the third quarter of last year was below 20% and now it's in the low-20%s.
So we certainly have seen that shift. It shifted out of the OTA channel, which is down; shifted out of the opaque channel, which is down as well. Generally, those are transient channels.
Dany Asad -- Bank of America Merrill Lynch -- Analyst
Very helpful. Thank you.
Bruce N. Haase -- President & Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Michael Bellisario with Baird. Please proceed with your question.
Michael J Bellisario -- Robert W Baird & Co. -- Analyst
Good morning, everyone.
Bruce N. Haase -- President & Chief Executive Officer
Good morning, Michael.
Michael J Bellisario -- Robert W Baird & Co. -- Analyst
Just one question on flow-through as you guys are starting to think about 2021 and as you're looking out to 2022, where does that flow-through shakeout relative to the historical, call it, 60% to 70% range that you guys achieved pre-pandemic and kind of taking into account all the structural changes and the cost savings that you guys might realize in the coming years?
Bruce N. Haase -- President & Chief Executive Officer
David, would you take that?
David Clarkson -- Chief Financial Officer
Yes. You know, we're in the process of putting together our operating plan for next year right now. I think the amount of flow-through will largely be dependent upon what is the revenue recovery. The larger the increase in revenue, the higher the flow-through. So, I'm not in a position now to sort of give flow-through guidance for next year. We'll do that on our call during Q1.
Michael J Bellisario -- Robert W Baird & Co. -- Analyst
I guess maybe, though, as you think about relative to pre-pandemic, can you maybe walk through some of the puts and takes that have occurred in 2020 that might lead it to be higher or lower or the same?
Bruce N. Haase -- President & Chief Executive Officer
Yes. So I think the puts and takes will be some of the things I highlighted that we observed in Q3, which are breakfast costs, which have been down since the pandemic. We, at some point next year, might look to reinstate that if conditions warrant. The housekeeping frequency is another thing that we'll continue to think about. We've been cleaning rooms every other week.
We may continue that. We may give guests the option to have weekly housekeeping. On the flip side, to the extent sort of the shorter term business comes back, particularly through OTAs, OTA commissions would go up, as with some of the required housekeeping.
So, I think there's a lot of -- sort of things that are cross-currents, if you will. You know, I think what -- as I mentioned, what's most important is the extent of the revenue recovery. I think there are some changes that we can make, whether it'd be breakfast and housekeeping, which will help our flow-through, but there will be some headwinds as well.
Michael J Bellisario -- Robert W Baird & Co. -- Analyst
Got it. Thank you.
Operator
Your next question comes from the line of Thomas Allen with Morgan Stanley. Please proceed with your question.
Thomas Allen -- Morgan Stanley -- Analyst
Thanks for fitting me in. Just in your prepared remarks, you talked about a number of strategic initiatives that you'll discuss more next year. Comparing to your 2016 Investor Day, you discussed many of the same thing, so improving revenue management, tiering on portfolio, investing where there are returns, selling where there is valuable real estate. I guess, like the broader question is what's left to be done or what do you think prior management teams kind of missed? Thank you.
Bruce N. Haase -- President & Chief Executive Officer
Sure. Thanks Thomas for the question. I think we've been fairly transparent as we've gone through the quarterly process of discussing where our plans are. We do -- hopefully, we'll have the Investor Day when the dust settles a little bit next year, to expand on those plans.
I think -- I don't think -- I think the only -- I think the main difference is that we're really focusing on our core business here, and we're going to focus on maximizing the value of the segment. And we're going to focus on being the very best extended stay player in the industry.
And I think that's, at a very high level -- I think that's the difference. I think the prior management team did -- I think chase ADR a little bit, chase transient customers there. I think the asset curation strategy was different. It did not focus on higher and better used assets, it focused on refranchising, focused on balance sheet development. We're shifting that to franchise development.
But I think at the core of it all is a singular focus and, and a singular focus on what we're best at, which is being a pure play, in the extended stay business and maximizing the value of what I think is the most attractive segment in the hotel industry.
As we said, not just performing well, when times were terrible, like they are now, but you know building our commercial engine, building our operating strategies, so that as the market comes back, we will participate in that comeback and -- or more.
And I think we have the opportunity to do that. We have the opportunity to do that through more selectively, and strategically investing in our best properties and more strategically curating our portfolio to find value dislocations that exists.
So, as I said, I think we've been pretty transparent on what we're doing. I think we would like to put a bow around all that, as we get some more certainty in the market next year and look forward to that.
Thomas Allen -- Morgan Stanley -- Analyst
Helpful. Thank you.
David Clarkson -- Chief Financial Officer
Thank you.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Bruce Haase for closing remarks.
Bruce N. Haase -- President & Chief Executive Officer
I just like to thank everyone for their interest and their questions. Good solid quarter. We realize we have a lot of work left to do. We believe there's a lot of upside that we can continue to go after. And we look forward to any follow up questions that you have and we believe that we're transparent and open and look forward to further discussions over the coming days.
So thanks and have a great day, everybody.
Operator
[Operator Closing Remarks]
Duration: 69 minutes
Call participants:
Rob Ballew -- Media Contact
Bruce N. Haase -- President & Chief Executive Officer
David Clarkson -- Chief Financial Officer
David Katz -- Jefferies LLC -- Analyst
Anthony Powell -- Barclays -- Analyst
Chad Beynon -- Macquarie Group Limited -- Analyst
Stephen Grambling -- Goldman Sachs & Co. -- Analyst
Chris Woronka -- Deutsche Bank -- Analyst
Smedes Rose -- Citigroup -- Analyst
Dany Asad -- Bank of America Merrill Lynch -- Analyst
Michael J Bellisario -- Robert W Baird & Co. -- Analyst
Thomas Allen -- Morgan Stanley -- Analyst
