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Extended Stay America Inc (NASDAQ:STAY)
Q4 2020 Earnings Call
Feb 26, 2021, 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 and Full Year 2020 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to your host, Rob Ballew, Vice President of Finance and Investor Relations. Please go ahead.

Rob Ballew -- Vice President, Finance and Investor Relations

Good morning and welcome to Extended Stay America's fourth quarter 2020 conference call. Both the fourth quarter earnings release and 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 industry and segment results as well as information about our 2021 strategic priorities.

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 would like to remind you that some of our discussions today will contain forward-looking statements, including a discussion of our first quarter and full year 2021 outlook. Actual results may differ materially and adversely 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 yesterday evening 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-K 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 of an individual property results.

With that I will turn it over to Bruce.

Bruce N. Haase -- President, Chief Executive Officer

Thanks, Rob and good morning everyone. It's a pleasure to be with you here today as we report positive financial results during a very difficult lodging environment in 2020. While we are proud to report that Extended Stay America significantly outperformed our competitive sets and our mid-scale extended stay competitors last year we're even more pleased to report that we have made significant progress executing on many of our long-term strategies during 2020. I'll briefly cover the status of these strategic initiatives this morning.

More now than ever Extended Stay America is focused on maximizing the value of our dominant position in the extended stay segment to drive long-term value for our shareholders. We are a pure play in extended stay and I believe that is a significant competitive advantage. The extended stay segment business model is unique and the profit maximization strategy and tactics are materially different from other lodging segments. None of our competitors can match our experience in extended stay. The Company's marketing, distribution and operational resources are dedicated and optimized for the extended stay consumer.

During 2020 the value of our focus on the segment, together with our segment experienced management team was very evident in our financial performance. No one knows the needs of the extended stay traveler better than our management team and our 7,500 associates all over the country.

I'd like to take a moment now to thank our field associates in particular for their dedication and hard work during an incredibly challenging year for the industry and our country. These are frontline workers and it is their efforts that have enabled our success last year. More than ever ESA has embraced our mission and lived our values. Extended Stay America's mission is to serve guests working to make a better life for themselves and their families and that's just what our associates did all throughout the country during a very difficult year.

While other hotel companies had to make difficult short-term decisions, Extended Stay America continued to invest in our people, our assets and our infrastructure without losing focus on the execution of our longer-term value-creating strategies. Our strategies are integrated into a plan designed to maximize the value of our REIT assets, ensure that our renovation capital is targeted at those assets with the highest RevPAR potential, drive more business through our proprietary distribution channels and accelerate the growth of our franchise business. And for those assets with limited RevPAR potential that may not fully benefit from the improvements to our commercial engine or warrant long-term capital investments, we are continuing our efforts to realize accretive value for our shareholders through our asset disposition strategies.

Before I update you on the progress we've made with our strategic initiatives, I'd like to quickly review some financial performance highlights. During the fourth quarter as we did throughout all of 2020, we significantly outperformed against multiple industry and competitive benchmarks. Our comparable systemwide RevPAR declined 9.4% during the quarter, which exceeded the guidance we provided in early November. Our fourth quarter year-over-year RevPAR performance was more than 10 points better than other mid-price extended stay brands and we also gained roughly 40 points of RevPAR index compared to our competitive set.

For the full year comparable systemwide RevPAR declined 15%, which is significantly better than the roughly 50% decline experienced by the industry and the approximately 30% decline experienced by our mid-price extended stay competitors. Our performance during the pandemic relative to the industry was also substantially better when compared to the entirety of the last recession. This highlights the resiliency of our business model, the strength of our team and the ability of the business to quickly adapt as extended stay demand environment changes.

For the quarter, adjusted EBITDA of $89.3 million was also ahead of our expectations and guidance, driven by stronger than expected revenue, especially in the back half of December. For the full year, Extended Stay America generated positive free cash flow even while investing more than $70 million in new-build capex, over $20 million in renovations and as always we continue to invest in our hotels in the normal course of business. In fact, only three of our owned hotels had negative adjusted EBITDA in 2020.

While we have certainly demonstrated that our business can outperform during the worst crisis ever to hit the lodging industry, we also believe that the many strategic initiatives we launched during 2020 have set the stage for outperformance during the coming recovery. We believe that investors should more widely appreciate the unique characteristics and stability of our business.

I would like to now turn to some of the major strategic initiatives we've been working on that will drive our long-term performance as the industry recovers from the pandemic. The Extended Stay America brand's powerful assets and assets that [Indecipherable] fully leveraged in the past.

During 2020 we conducted a significant amount of consumer research to better understand the needs of various extended stay customer segments and how those segments relate to the ESA brand. One thing that came through loud and clear in the research is just how powerful the Extended Stay America brand name is and it's powerful not only with our current guests, but also with guests in higher-priced extended stay segments. The research indicated that our brand name has extremely high recognition among consumers across all extended stay price points, which of course is not surprising given that we own the category name [Phonetic]. But in addition to strong awareness, our brand is also very strong in terms of familiarity, consideration and choice compared to other extended stay brands. In fact, our research showed the guests are more likely to consider us for a stay of 10 nights a more than any other extended stay hotel brand in the industry, including those brands at the top end of the segment that normally charge rates more than twice what we do.

Given the affinity of higher rated guest segments to the Extended Stay America brand, together with our footprint of existing products in high RevPAR markets, we are excited today to announce the launch of a new step-up brand Extended Stay America Premier Suites. We will launch Premier Suites in the second quarter with 32 new construction and extensively renovated hotels in key markets across the country. We expect Premier Suites to command an approximate $15 ADR premium from our current price point and feature a number of improved amenities from our core brand, including an enhanced breakfast offering, larger TVs and a signature betting package to name a few.

Premier Suites will effectively segment our REIT portfolio and provide an opportunity to price discriminate these superior assets from our existing product. As the initial brand launch will be accomplished through the rebranding of existing product that already meets our high standards, the capital required to reposition these hotels to Premier Suites is largely limited to finance changes as well as updates to our marketing and distribution channels. We estimate the total capital cost to be less than $2 million in the aggregate.

The Company is fortunate in that we have a number of assets in high-quality, high-RevPAR markets with strong corporate extended stay demand that will be good candidates to reposition to the Premier Suites brand. As we complete the repositioning of our initial 32 assets into the brand, we will continue to evaluate our REIT portfolio for assets in other markets that could benefit from the Premier Suites brand. It's important to note that we will be very disciplined in our investment approach. As each asset and each market is unique, we will conduct a thorough underwriting of each asset we proposed to reposition to Premier Suites to ensure that the investment meets our return requirements. We will continue to share more information as we continue to evaluate asset repositioning opportunities to Premier Suites.

In addition to the opportunity to reach higher RevPAR customer segments and drive performance of our owned assets, the introduction of Premier Suites will enhance our franchise development program. Premier Suites will generally serve our new-build brands for franchisees, but we're also considering high-quality conversions that meet our brand standards. Our franchise development partners have been asking for a means to price discriminate their new construction assets from the existing state. And we believe that ESA Premier Suites provides an ideal solution to both achieve an ADR commensurate with the quality of this product while retaining the incredibly strong equity in the Extended Stay America brand.

In addition to Premier Suites, we are also rebranding our core hotels to Extended Stay America Suites. The suites modifier is recognized by consumers as offering something more. Our research has indicated that the use of the word suites not only better reflects our current product offering, but it also increased staying days [Phonetic] among our guests and our target customer segments.

We will refresh all existing marketing channels to Extended Stay America Suites in the next few months and make certain signage changes at our properties to reflect the new branding. This change will be done with a small incremental investment to the physical properties of approximately $4 million in capital largely by changing the most prominent sign at each hotel. The core brand will become our primary target for franchisee conversions going forward into which we expect a number of additional franchisee conversions in 2021, including three that we announced just this week in Oklahoma.

The new brand architecture, Extended Stay America Suites and Premier Suites marks the transition from a single branded company to a multi-brand portfolio under the Extended Stay America brand umbrella. This really capitalizes on the strength of our brand and it's reflective of our unsurpassed expertise in the segment.

Segmentation allows us to properly position high-potential product in high RevPAR markets to attract higher-rated guests and it focuses our renovation capital on those assets with the greatest potential return. Brand segmentation is also critical to build our franchise business by providing additional product offerings that meet the needs of extended stay hotel owners and developers. We will of course work closely with our franchisee partners to ensure a successful rollout for both the core and step-up brand.

The opportunity to build a substantial franchise business is now more compelling than ever before. I firmly believe that Extended Stay America has the most compelling value proposition in the industry both for developers that want to build new extended stay hotels and for owners of existing extended stay product that may wish to convert. The awareness and equity of the ESA brand now with two brand options at different price points together with our singular focus on the extended stay segment in everything we do coupled with our proven prototype and industry leading performance through the pandemic really positions us very well to be the leading extended stay franchisor in this business. Franchising remains a strong growth opportunity for the Company. And we believe that once credit markets start and construction resumes, we should be able to achieve systemwide net unit growth of 5% to 7% a year through franchising over time.

Turning to additional areas of focus for 2021. I'd like to share the progress we have made developing a more robust extended stay commercial engine. In 2020, we established a strong commercial leadership team with significant extended stay experience. We began putting into motion several important commercial improvements. As a result, even in the midst of the pandemic we realized a number of significant records and accomplishments. We hit all-time company records for monthly website revenue as well as three consecutive record months for average order value at the call center. As a result of the early implementation of a number of our strategies across our proprietary distribution channels, revenue through our call center and our website was largely flat in 2020 compared to pre-pandemic 2019. This is a remarkable accomplishment during the pandemic, but it's only the beginning.

Our proprietary distribution channels are our most cost-effective and profitable customer acquisition channels. And we are focused on driving more higher rated business through these channels and we have a number of strategies to do just that in 2021.

Next month we will launch a completely redesigned and replatformed esa.com. Our new website will improve and simplify the core booking process with a strong focus on the mobile experience. This will serve as our primary digital marketing platform for our brands. We expect the new website to drive both increased traffic, while increasing our conversion rate. We believe the revenue potential of the new website is significant and we have additional plans in place to better leverage technology to improve the performance of our call center, use customer data more intelligently to improve the performance of our digital advertising, better leverage our guest database and relaunch our loyalty program. We'll share more about these initiatives throughout the year.

We're also focused on the productivity of our sales force. Extended Stay America is unique with the only national sales force dedicated to the extended stay customer. Throughout our field and national sales teams, we expect significant increase in production from our sales teams this year as we leverage our successes with construction, temporary medical and distribution verticals with gradually improving corporate account business as the COVID vaccines roll out.

Our revenue management opportunities are also unique to the industry. Our occupancy levels across the brand now rival the pre-COVID levels. And unlike the rest of the industry that is still reaching full occupancy, we can now turn much of our attention to driving higher rate. This is a significant competitive advantage as it will likely be years before the rest of the industry is able to do so. All of these efforts lead to a path for significant revenue improvement. In the coming years we think these initiatives will allow us not only to return to 2019 RevPAR levels well before the industry, but also exceed those levels.

As we drive higher-rated guests to our properties, we also continue to focus on the guest experience. During 2020, we gained significant increases across many of our guest satisfaction metrics, including our net promoter and social media scores. To support the guest experience, last year we significantly upgraded talent across our property management operations from new Regional Vice Presidents of Operations to General Managers of our hotels. In 2021, our operations team will focus on retaining new talent and continuing to drive guest satisfaction.

Brand segmentation is but one strategy to maximize the value of our REIT assets. We recognize that certain assets may not fully benefit from segmentation and the improvements to our commercial engine. In addition, some of these lower EBITDA per key assets may carry a relatively higher ongoing capital burden relative to the EBITDA they produce. As we previously discussed the core tenet of our strategy is to proactively manage our REIT assets. Our disposition strategy is focused around those assets, which may not be good long-term fits for the brand and at the same time are also more valuable to non-lodging owners with a higher and better use compared to continue operation as a mid-scale lodging asset.

Our objective remains the same. We will transact at multiples substantially in excess of the trading multiples of the Company. We have a number of such assets now under contract that we expect to close in the coming months and quarters.

In addition to assets that may not be good long-term fits for the brand, we'll also be opportunistic when we find extreme value dislocations in the portfolio. The recent example of an extreme value dislocation was the sale of the single hotel in California for $65 million last year or use as affordable housing. We transacted this property at a 2% cap rate, representing $443,000 per key and a pre-COVID multiple in excess of 20 times. This transaction alone resulted in the payment of $0.12 of the $0.35 special dividend we made in the first quarter of this year. We're encouraged and optimistic with the progress of our asset disposition initiative and we believe there are significant additional opportunities in our REIT to transact at highly accretive multiples.

We can not only realize accretive value from our portfolio and return capital to our shareholders, but we can simultaneously reduce the capital intensity of the business while improving the quality of the REIT, improving the quality of Extended Stay America brand and opening up new markets for franchise development.

We believe our real estate portfolio has significant value creation upside to our shareholders that is not reflected in the current price of our shares. We look forward to sharing further details as we announce additional transactions throughout the course of the year.

All of these initiatives will be undertaken while continuing to maintain a balanced capital approach, investing in the long-term growth of the Company, deleveraging our balance sheet and judiciously returning capital to shareholders.

I am more confident now than ever that Extended Stay America will be the leading extended stay hotel company and brand in the years to come and that the best days are ahead for this Company. The organization is more motivated and more focused around the common set of goals, priorities and values than I've ever seen before. I am confident we'll be able to achieve what we set out to do over the coming years.

Before I ask David to go into more detail on our results, I'd like to spend a couple of minutes discussing ESG and diversity equity and inclusion, which continue to grow in importance at STAY. We've made a lot of progress in this over the last year, including adding renewable energy usage and we've began tracking our carbon emissions. In recent months, we also held crucial conversations which was the development series that centered around sharing information to create awareness and develop the skills necessary to value differences in backgrounds, circumstances and beliefs, just like our associates and guests. We as a company are committed to diversity equity Inclusion and believe that that is a key differentiator in our success.

We are proud to have four women serving on our Board of Directors representing the value we place on both gender and ethnic diversity. On our senior leadership team, 40% are women or persons of color and over 70% of our overall associates are women or persons of color. And just a few weeks ago for the first time in ESA part of management's compensation will be tied to ESG and DEI objectives in 2021. And our Board's nominating and governance committee charters were amended to become the nominating and ESG committee that will regularly review and advise on ESG diversity equity inclusion. I look forward to updating you on the progress we make in these initiatives in 2021 and beyond.

I'll now turn the call over to David to discuss our fourth quarter results, our first quarter and select 2021 guidance and further expand on our capital allocation priorities. David?

David Clarkson -- Chief Financial Officer

Thank you, Bruce, and thank you to each of my ESA colleagues for their hard work and strong finish to the year. In the fourth quarter comparable systemwide RevPAR declined 9.4% due to the COVID-19 pandemic compared to the same period in 2019, driven by a 7.3% decline in ADR as well as a 170 basis point decline in occupancy. Our RevPAR index in the fourth quarter climbed to 140, a 40% increase and as of last week we have now seen a remarkable 65 consecutive weeks of RevPAR index gains.

As we anticipated RevPAR was stronger year-over-year during the seasonally lower occupancy weeks in late November and December and it was actually flat to slightly positive during the final three weeks of the year. The decrease in RevPAR during the fourth quarter was driven by a 43% decrease in nightly transient revenue and a 2% decrease in our weekly revenue, partially offset by a strong 18% increase in our monthly plus business. The strength in our 30-plus business was driven by a 21% increase in room nights. I'm pleased with the ADR trends for our monthly guests, which was down only 3% in Q4 compared to a 15% decline earlier in the pandemic. Consequently, we were able to be more aggressive increasing rates in many markets due to stronger occupancy. In fact, in each of our top 25 largest markets, we had positive index gains relative to our competitive set in both ADR and RevPAR.

In total revenue from our core extended stay guests increased 12% in the quarter, highlighting the strength of our commercial engine, the effectiveness of our field sales team and the benefit of our unique focus on this segment of the industry. For the full year 2020, comparable systemwide RevPAR declined 15% driven by an 11.6% decrease in ADR.

Revenue from third-party channels declined 40% during the quarter, predominantly from OTAs while revenue from ESA's proprietary channels increased 4%. As Bruce highlighted, we are just beginning to realize the improvements from our commercial engine as we continue to execute on these initiatives and as more and higher-rated sources of demand return, we expect the impacts to continue to grow.

We've talked a lot about the resiliency of our business model and rightly so, but we are not just a defensive play. We can and have outperformed in an upcycle as well. Between 2009 and 2019 RevPAR for our portfolio of currently owned hotels is up 69% ahead of each of the chain scales up to and including upper upscale.

Hotel operating margin declined 580 basis points in the fourth quarter to 42.5% compared to the same period in 2019, driven by the decline in RevPAR and flat comparable hotel operating expenses. Among our property expenses, we continue to see elevated levels of expense from guests non-payment and PPE for our field associates as well as increases in property insurance, largely offset by decreases in marketing expense, namely OTA commissions and room expenses.

Hotel operating margin for the full year 2020 declined 730 basis points to 44.5% highlighting that even during a global pandemic we continue to make very high operating margins, margins that are much higher than the industry reports during normal times.

Corporate overhead expense, excluding share-based compensation was $20.1 million in the fourth quarter of 2020 down $6.7 million from the same period in 2019. Adjusted for the CEO transition expense in the fourth quarter of 2019 net overhead decreased approximately $3.5 million this past quarter.

Adjusted EBITDA in the fourth quarter was $89.3 million above our expectations, driven by stronger RevPAR and down from $108.8 million a year ago. The decline in adjusted EBITDA during the quarter compared to 2019 was driven by the decline in RevPAR, partially offset by a decrease in corporate overhead expense. Adjusted EBITDA for the full year 2020 was $374.1 million compared to $535 million in 2019, a decrease of 30% which I think is remarkable given the industry and country backdrop. Net interest expense during the quarter decreased slightly by $0.3 million to $31.6 million compared to the same period in 2019 due to lower LIBOR rate.

The Company had an income tax benefit of approximately $12.4 million in the fourth quarter compared to a $1.4 million income tax expense in the same period of 2019. For the full year 2020 we had an income tax benefit of $24.5 million compared to income tax expense of $29.3 million in the prior year. Of note, while our cash and financial statement taxes are usually reasonably close, in 2020 and 2021 that will not be the case. For example, despite booking an income tax benefit for 2020, we had a cash outlay for taxes during the year and in 2021 while we expect our financial statement tax rate to return closer to our historical norm and we expect to pay federal taxes on 2021 activity, we expect to receive a federal tax refund of between $70 million and $75 million in mid 2021. The anticipated federal tax refund is related to certain taxable losses in 2020 in the CARES Act loss carryback rules. This should result in a positive cash inflow from taxes for the year on a consolidated basis in 2021. We continue to monitor legislative activities to see if there will be any changes to 2020 or 2021 tax laws which could affect our taxes this year or in future years. Adjusted FFO per diluted Paired Share declined $0.01 in the fourth quarter to $0.36 per Paired Share compared to the same period in 2019. The decline in adjusted FFO per diluted Paired Share was driven by a decline in comparable systemwide RevPAR, partially offset by income tax benefit, the decrease in corporate expenses and a reduction in Paired Shares outstanding. Adjusted FFO per diluted Paired Share for the full year 2020 was $1.24 compared to $1.81 in 2019.

The Company had net income of $65.7 million during the fourth quarter compared to net income of $23.8 million in the same period of 2019. The increase in net income was driven by a $52.5 million gain on an asset sale, an income tax benefit and a decrease in corporate overhead, partially offset by a decline in RevPAR. The Company had net income of $96.3 million for the full year 2020 compared to net income of $165.1 million for the full year 2019.

Adjusted Paired Share income per diluted Paired Share in the quarter was $0.16, an increase of $0.02 from the same period in 2019. The increase was due primarily from an income tax benefit, a decrease in corporate overhead and a reduction in Paired Shares outstanding partially offset by a decrease in RevPAR. Adjusted Paired Share income per diluted Paired Share for the full year 2020 was $0.37 compared to $0.95 in the same period in 2019.

The Company ended the fourth quarter with $410 million in cash and restricted cash, an increase of $14 million from the end of the third quarter and had total debt outstanding of approximately $2.7 billion. The Company anticipates paying down its $50 million revolver at the C Corp during the first half of 2021.

Capital expenditures in the fourth quarter totaled $47.7 million including $7.3 million for renovation capital and $13.9 million for new hotel development. For the full year, capital expenditures totaled $192.7 million, including $72.4 million of new hotel development and $20.9 million in renovations.

At year-end we had four owned hotels under construction with cost to complete between $10 million and $15 million. While the capital investment associated with our own balance sheet development is now nearly complete, the earnings from that investment will continue to ramp up and provide a tailwind to our growth in revenue and EBITDA.

In the fourth quarter, the Company opened two hotels while our franchisees opened seven hotels. For the full year 2020, the Company opened seven hotels while our franchisees opened 10 for net unit growth of approximately 2.5%. Our total pipeline stood at 56 hotels at the end of 2020.

The management team and the Boards continue to frequently review capital returns to shareholders. As you may recall, we declared a special $0.35 per share dividend in December that was paid in January, making the total amount of capital declared or returned to shareholders $140 million during the year. Yesterday, the Board of Directors of ESH Hospitality, Inc. declared a $0.09 dividend per share payable on March 26th, 2021 to Extended Stay America, Inc. and Paired Shareholders of record on March 12 which indicates an implied annualized yield of approximately 2.25% well above our hotel peers. We continue to anticipate that our REIT will pay out close to 100% of its pre-tax income including any gains on asset dispositions. We are pleased to be in a position to resume paying a meaningful dividend each quarter.

The Company did not repurchase any Paired Shares during the fourth quarter and continues to have $101.1 million in authorization remaining. We expect share repurchases through at least the first half of 2021 to be limited as we invest in our Company's growth and we are mindful of our long-term net leverage target of between 3.5 and 4 times.

Turning to the first quarter of 2021 we expect comparable systemwide RevPAR to decline by 3% to 6% compared to 2020, which corresponds to a 9% to 12% decrease compared to the first quarter of 2019. We expect adjusted EBITDA of between $78 million and $84 million in the quarter.

In January, our RevPAR was down approximately 4%. As I mentioned, because of our higher current mix of long stay business, our RevPAR change versus the prior year has been better in traditionally lower-demand months which was the case in January. And so while the year-over-year RevPAR decline will be larger in February down in the range of 10% to 12% to our pre-pandemic levels, our absolute RevPAR is increasing month to month which I also expect to be the case in March.

Like many of our peers we are optimistic that recent progress with the development and rollout of vaccines and declining COVID case counts will translate to increased economic activity, travel and lodging demand. However, given the uncertainty with respect to the timing and pace of this recovery, we don't think full-year guidance for RevPAR, adjusted EBITDA or net income are warranted a this point.

For the full year, we expect capital expenditures in the range of $155 million to $175 million. We expect net interest expense of between $126 million and $130 million, the tax rate between 10% and 12% and depreciation expense of between $202 million and $207 million.

Operator, let's now go to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question is from Chris Woronka of Deutsche Bank. Please go ahead.

Chris Woronka -- Deutsche Bank -- Analyst

Hey. Good morning, guys and thanks for all the details on the new -- on the brand extension and such. My question is how the new brand -- the Premier Suites might look from a margin perspective. Obviously, you're expecting higher rates and it seems as if the incremental ongoing expenses are not that different. You have breakfast and then maybe a few other things. But how do you look at the margin potential of those assets?

Bruce N. Haase -- President, Chief Executive Officer

Sure. This is Bruce. I'll start off. Thanks, Chris, for your question. Just as a little background, we did a lot of research in putting this together. I mean, we did a lot of research on our brands and what was really -- we knew the brand was strong. But I guess what surprised us a little bit is how strong this brands is at higher price points, really across the entire segment.

We've got a lot of equity in terms of, not just awareness, but in terms of trial, in terms of use, in terms of consideration. So we really saw an opportunity to marry that strong brand with some white space we see in the industry sort of between where we sit today and where candle light is, which is a pretty wide gap and marry that up with the footprint of assets that we have in high RevPAR markets with good corporate demand. So that was sort of the thesis for putting this together. But you're correct.

In terms of designing the brand, we didn't want to go too far. We want to innovate around our core and not become something that we're not. So we really very carefully talk to B2B buyers, corporate accounts, literally thousands of extended stay consumers and ask them what they really wanted and it came down to a really -- a much more limited menu of amenities and services. We started out thinking maybe we have to have more common space or breakfast. But we found out that the customers that we're targeting really didn't want that. They wanted upgraded bedding, they wanted a better breakfast, they wanted to better TV, they wanted a fresh clean product. So that's what we're trying to deliver. And we have levers -- we have some assets now which are -- we think is going to -- are going to benefit from that new branding that are already meeting that criteria. But new branding is certainly going to help differentiate them from the rest of the state. And you're correct that the costs are minimal, the flow through -- the incremental flow through should be higher.

And David, you can probably give some more color on how we're thinking about that issue.

David Clarkson -- Chief Financial Officer

Yeah. Thanks and good morning. Good morning, Chris. Yeah, as you said, it's -- there will be some incremental expense associated with the amenities that we expect to offer a little bit of labor and breakfast are the primary adds there. We do think that the revenue will flow through at a higher rate than our existing margins something in the 60% to 75% flow through range on that incremental revenue, so it should expand margins by, I don't know somewhere between 200 basis points and 300 basis points at those properties, which get the Premier Suites brand.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, very helpful. And then as a follow-up, given that you put a lot more focus on the 30 plus night stays in 2020 and rightfully so, the question is how quickly can you pivot away from those if you do see the transient, some of the corporate and other transient demand coming back. I guess, to be more specific, what percentage of an average hotel is spoken for, for 30, 60 or 90 days out?

Bruce N. Haase -- President, Chief Executive Officer

Yes, sure. We've already begun pivoting from some of our very highly discounted rates. As we noted in the call, we are not at a point where we're still trying to reach for occupancy. We've pretty much gotten back to the pre-pandemic levels and now we're taking the opportunity and we have actually for the last few months taken the opportunity to try to drive rate and we're really not locked in -- every hotels different but in general we're not locked into long-term commitments at low rates that we can't get out of.

Our revenue management function works on a market by market, a hotel-by-hotel basis to set those rates such that we can respond to improving demand environment, which we're seeing in some markets now. We've already taken off some of the highly discounted 60-day plus rates that we offered during the height of the pandemic to fill up our properties and we'll continue to do so as we see demand improving.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, very helpful, Thanks guys and terrific job in 2020.

Bruce N. Haase -- President, Chief Executive Officer

Thanks, Chris. I appreciate it.

Operator

The next question is from Joe Greff from J.P. Morgan. Please go ahead.

Joe Greff -- J.P. Morgan -- Analyst

Good morning, guys. You kind of talked about this in a couple of different ways, but I just wanted to simplify it maybe further in terms of understanding your operating leverage as we go throughout the course of the year and how you're thinking about one point of RevPAR sensitivity to EBITDA profitability.

Bruce N. Haase -- President, Chief Executive Officer

David, would you like to take that one?

David Clarkson -- Chief Financial Officer

Sure. So, one point of RevPAR growth generally equates to about $6 million to $8 million of incremental EBITDA for us on an annual basis, but that's sort of incremental RevPAR growth. On a year-over-year basis, of course there is inflation with the -- on the expense base. So that same 1% of RevPAR growth to $6 million to $8 million of EBITDA doesn't hold, but on an incremental basis 1% of RevPAR is $6 million to $8 million in EBITDA.

Joe Greff -- J.P. Morgan -- Analyst

Got it. And then just been picturing that holding you any kind of sort of guidance beyond 1Q, but when you look at your portfolio and how the portfolio outperformed over the last 12 months, do you think you get back to 2019 RevPAR -- absolute RevPAR levels in the second half of '21. What would be the impediment for that to happen or not to happen rather?

Bruce N. Haase -- President, Chief Executive Officer

Well, I'll start and let David fill in some details. We do see an improving demand environment. Our occupancy is largely flat with last year. Year-over-year ADR has consistently improved since the beginning of May. Looking at some of our proprietary channels using our call center for example, we continue to see year-over-year ADR growth for the last few months at our call center. We're seeing monthly bookings up on a year-over year-over-year basis. January bookings were a little bit ahead of our budget. So we are seeing some improvements.

We have a lot of initiatives as we described in the call with regard to our commercial engine improving our call center productivity, improving our website, but we're still operating in an environment where competing against transient hotels that are down substantially more than we do. So we have to operate within that environment.

I think to the extent the transient business comes back in the second half of the year and starts filling up some of those transient hotels with business that is not necessarily a good fit for us, the ADR environment could improve a bit and we could see some further upside from what we're currently -- because I would hope conservatively budgeting internally. So I don't want to go too far out on a limb, but I think there is a shot of that, but it's not something we want to guide to at this point, but David perhaps you have some more thoughts?

David Clarkson -- Chief Financial Officer

Yeah, I mean I think that, I think that answers it well.

Joe Greff -- J.P. Morgan -- Analyst

Thank you.

Operator

The next question is from Smedes Rose from Citigroup. Please go ahead.

Smedes Rose -- Citigroup -- Analyst

Hi, thanks. I just wanted to ask you, for the Premier Suites and I think you announced several that are coming under construction, are any of those on balance sheet or those are all third-party developers?

Bruce N. Haase -- President, Chief Executive Officer

No, what we're doing now is we have 32 hotels that are on balance sheet that are either new construction that have recently opened, new construction that are soon to be opened for existing hotels in our states that we have previously performed what we called a transformational renovation on. So the brands will be launched with those assets that are on our balance sheet. We have had discussions with franchisees and we expect additional growth going forward will be from the franchise community, there may be some repositionings from existing franchise assets as well, but we're launching the brand with our assets and our capital in terms of the modest amounts required to change the signage.

Smedes Rose -- Citigroup -- Analyst

Okay and then I just wanted to ask and I know this is probably going back a few years. So I may not be remembering correctly but if I recall Extended Stay lodge is kind of a multi-tiered renovation program where there is like a platinum room renovation and a gold renovation and they were supposed to kind of price -- differentiate across different price points in various markets and then the company had to pull back from that a little bit and I guess my question is, we've seen in the past it's easy for -- easier for brands to kind of work down into offering lower price point products and it's more difficult to offer higher price point products when you're coming from a lower base. And I'm just kind of, you talked a lot about the customer research, but I guess what kind of gives you confidence that you can introduce the product at such a significant premium to where you are now?

Bruce N. Haase -- President, Chief Executive Officer

Yeah, well, I think what we've already seen with some of the highly renovated product and new builds that we're going to position into the brand, we are seeing -- even during the pandemic, we're seeing positive performance in those hotels. We're seeing rate performance improvements in those hotels and we think the branding and our ability to differentiate those products with our sales force and through our distribution channels is going to continue to improve the performance, but we're being very disciplined in how we look at it.

We really have to -- we're looking at markets where there is a sort of a cross-section of higher rated corporate demand higher RevPAR markets and product that we have that we believe will set the brand. So we're being disciplined about it. We being disciplined about the markets that we're going after and our commercial engine and our sales force is anxious for this because they have been trying to price discriminate between assets of different quality within a single brand, which is very difficult to do. So this really gives us -- this branding really gives us permission -- gives permission to our sales force to ask for more.

It's an easy way to explain to the consumer why it's a better product, why they should pay more for it and when we get customers into our distribution channels into our website, into our call center, it gives another opportunity to sell a product that is more appropriate for customer that wants something more. So we're not -- as you said, we're not reaching for an upscale or even an upper mid-scale -- maybe slightly upper scale segment, but we're not reaching too far here. So if we were going head-to-head against TownePlace or some of those competitors at those price points, I would share your concern, but I think this is an innovation closer to home that I think will be very successful.

Smedes Rose -- Citigroup -- Analyst

Okay, thank you. Appreciate the detail.

Bruce N. Haase -- President, Chief Executive Officer

Thank you.

Operator

Next question is from Brian Dobson from Jefferies. Please go ahead.

Brian Dobson -- Jefferies -- Analyst

Hi, good morning.

Bruce N. Haase -- President, Chief Executive Officer

Good morning, Brian.

Brian Dobson -- Jefferies -- Analyst

So to your goal of 5% to 7% net unit growth, I mean that's impressive. That would place you at the high-end of the peer group. Could you expand a little bit on how much of that growth could be driven by your new brand compared with organic growth in your legacy product?

Bruce N. Haase -- President, Chief Executive Officer

Yeah, I think our growth will be driven by franchising going forward. And if you look at our base of roughly 650 properties throughout the country, 5% to 7% translates into 30 to 40 executed franchise agreements per year. I think that is very doable. I think it's even more doable now that we have a segmented approach to the market. We have -- while it won't be pure, we have a conversion brand and we have a new construction brand.

I think that gives franchisees more comfort that are developing with us and once the credit markets continue, as we said, continue to improve and once we get to more of a stabilized environment, there is no reason that this company can't execute 30 to 40 to.45 franchise agreements per year. When I was at WoodSpring, which was an unknown brand with a commercial engine that pales in comparison to what we had, we were close to those levels obviously before it was acquired by Choice and with the value proposition that we have at Extended Stay America and the power of this brand, I'm highly confident we can get to those levels over the course of the next couple of years.

Brian Dobson -- Jefferies -- Analyst

That's great. And then just I guess looking in the rear view mirror at the fourth quarter, could you give us a little bit more color on the type of sequential RevPAR improvement that you saw during that quarter and maybe what you think the driver of that sequential improvement was?

Bruce N. Haase -- President, Chief Executive Officer

David, would you like to take that please?

David Clarkson -- Chief Financial Officer

Sure. Yes, so I think we've talked about this on each of the last couple of calls, but we've got certainly a larger base of Extended Stay business now than we had a year ago and that was a big benefit to us in what are traditionally the lower demand weeks and months of the year and so as we move through Q4, our RevPAR growth improved sequentially from down 13% to down 10% and then down 6% and January was better still at down 4%.

Now that we're kind of entering the months where typically there is more transient demand and RevPAR is picking up month to month, I think our year-over-year RevPAR growth will start going the other way a little bit in February, expect it to be in the down 10% to 12% range. So it's really been a story of long stay business providing us a good base of occupancy. As we've moved through 2020, we were able to push rate more and more on each of our length of stay buckets and expect to be able to continue to do that as we move through 2021, but really, December and January has been the best months on a year-over-year basis because of the comping against the lower demand period in the prior year.

Brian Dobson -- Jefferies -- Analyst

Great, thanks very much.

David Clarkson -- Chief Financial Officer

Thank you.

Bruce N. Haase -- President, Chief Executive Officer

Thanks, Brian.

Operator

The next question is from Michael Bellisario from Baird. Please go ahead.

Michael Bellisario -- Baird -- Analyst

Good morning, everyone.

Bruce N. Haase -- President, Chief Executive Officer

Good morning.

David Clarkson -- Chief Financial Officer

Good morning.

Michael Bellisario -- Baird -- Analyst

Bruce, just back to the Premier Suites brand, how did you guys evaluate how big the white space was in terms of number of hotels because it sounds like it's -- the brand is a little bit more market-specific or market focused. So how are you thinking about it? Is it 100 hotels, is this several hundred hotels? What's really the longer-term target or opportunity set for this particular brand?

Bruce N. Haase -- President, Chief Executive Officer

We're not -- we have certainly gone through our portfolio of REIT assets, which we continue to go through and sort of match up products that we have in certain markets where we think it will work very well in terms of the demand drivers and certainly the opportunity set there for our own estate is substantial. Not that we will do all of them because as I said, we got to be pretty disciplined in terms of capital and some of the underwritings might not work out as well as we think they will right now but there is a substantial portion of our own estate, which we think has the potential to be repositioned should the numbers work out and when we look at the segmentation opportunity and you look at the impact that we have with our existing estate and if we can be successful in separating the ADR and the customer mix between our existing estate and the Premier Suites brand, that opens up a lot more territory for development. So we think it's substantial. I mean it's in the many hundreds not then tens or the thirties.

Michael Bellisario -- Baird -- Analyst

Got it, that's helpful and then back to one of the prior questions. Previously the company maybe even before your time on the Board on-again, off-again explored moving downstream for some of the lower quality properties. What's your latest thinking there or is this off the table for now?

Bruce N. Haase -- President, Chief Executive Officer

Yeah it's off the table for now. We looked at it and that was -- to be quite honest. That was a consideration that I thought warranted investigation when I first got here, but what we found was that our brand is so strong, those lower tier properties actually disproportionately benefit from their association with us. So the analysis that we went through was that we take the ESA brand off of some of those lower properties and make up another name, performance is going to decrease. So we've really taken a different approach to those lower tier properties as we described in the call today.

We're really looking to create value from those lower tier properties, not by rebranding them as something else and risk performance degradation but through our disposal program and that's really where our asset disposition program is focused right now. It's on that lower tier and we think that we have an opportunity to create a lot of value, clean up the REIT portfolio, improve our RevPAR, improve the brand, improve franchise opportunities if we can really transact with that segment of the estate that isn't a good fit for the brands and fortunately we think we have some opportunities to do that.

They won't be to lodging buyers, they will be to buyers that have alternative uses for the property where we believe we can trade at accretive multiples. So long answer to your question, but yeah, creating a down brand is off the table.

Michael Bellisario -- Baird -- Analyst

Got it. Thank you.

Operator

The next question is from Dany Asad from Bank of America. Please go ahead.

Dany Asad -- Bank of America -- Analyst

Hey, good morning, everybody. Bruce, just a follow-up on that last question. So your strategy of maximizing the value of the REIT assets has been working, but is the expectation going forward that you'll be taking a bit more of an active approach with hiring brokers and all for these asset sales or is it just because of the nature of these assets that you'll rely more as a one-off transaction and reverse inquiries and going down that path.

Bruce N. Haase -- President, Chief Executive Officer

Yeah, well, I think we go down -- we're going down both paths. We're trying to be disciplined about how we do it. We do get a lot of inquiries. We have a lot of good relationships with brokers. We have a very talented Chief Investment Officer that works on these dispositions every day and I think we have a lot of activity. We obviously closed Milpitas in the fourth quarter, which was not a lower-end asset, it was an asset that was what we call a value -- such a large value dislocations that doesn't make sense to transact on that asset, but we're really focusing as I said on sort of this group of assets that we've identified that are generally lower EBITDA per key. They probably won't benefit as much from the improvements in the commercial engine.

They have higher capex requirements relative to their EBITDA than the rest of the estate and that's where we're really focusing our activity and we think obviously if we sold those assets to hotel buyers, we get sort of a market multiple for it because a franchisee is not going to pay more for those than what they're worth as a hotel, but we believe there is a number of pockets of demand in the real estate market right now where we can transact those assets at substantially higher multiples than the overall trading multiple of the company and that's really what we're focused on there. We have a couple of such assets in terms of groups of assets under contract right now. Hopefully, we'll have one completion to announce before our next call. We have a number of other transactions that are in various stages of completion. So there are multiple transactions and multiple opportunities that we are pursuing now to make that happen

Dany Asad -- Bank of America -- Analyst

Got it. And then just for my follow-up, I know it's still early days, but do you have a sense for like of the owned assets, how much you know, like either if it's a mix or a number or any -- give us any direction on like how many assets could be kind of fall into this bucket of opportunistic value creation where like on a per key basis they could be just trading differently than where kind of the stock currently trades?

Bruce N. Haase -- President, Chief Executive Officer

Yeah, that's, that's not something we're comfortable disclosing right now. I think I'll leave it as we have multiple transactions consisting of multiple properties that are under either contract or in various stages of completion at this time.

Dany Asad -- Bank of America -- Analyst

Got it. Thank you.

Bruce N. Haase -- President, Chief Executive Officer

Thank you.

Operator

The next question is from Stephen Grambling from Goldman Sachs. Please go ahead.

Stephen Grambling -- Goldman Sachs -- Analyst

Hey, good morning. Apologies if I missed the comment on this, but a lot of your peers have talked about cost cuts and better margins as a result of the pandemic and some of the learnings and even when Bruce, you came in, you kind of alluded to some margin opportunities through some of the changes you were making in the business. Can you help us think through, maybe longer-term how the model is changing, how that could influence margins and maybe tie into that I think you said in the opening remarks that your mix of OTAs was flat. How do you think about the distribution going forward and how that will influence?

Bruce N. Haase -- President, Chief Executive Officer

Yeah, I'll let David answer most of that, but yeah, the mix of OTAs is lower. I mean that's a substantial I think permanent margin improvement opportunity for us. Our relative proportion with OTAs is down in the '20s rather than sort of the high-30s to 40s before we were chasing that business before. So I think not necessarily related to the pandemic, but it's related to how we run the business. Our OTA business will be lower going forward, which was obviously a very expensive channel, but I'll let David expand on some of the other drivers of margin and costs.

David Clarkson -- Chief Financial Officer

Yeah, sure. So in 2020 and into 2021, there have been a handful of expenses that are quite a bit different as a result of the pandemic between breakfast, OTA commissions as you mentioned, higher cash credit expense from guests non-paying etc. So I think long-term we, unlike a lot of other more full-service hotel companies don't have a lot of labor and other things which we can cut to sort of change the operating model. Our labor is lean as it is with margins typically above 50% at the hotel level and currently above 40% in these sort of depressed RevPAR times. There is not a lot for us to do to change the operating model to lean it out. You've hit on some of it with the OTA commissions. We don't expect long-term to get back to an OTA contribution similar to what we had in 2019.

In 2019, 38% or so of our revenue was people staying one through six nights. That's too much for us. That comes in often cases with OTA commissions, that comes with more transactions at the front desk, that comes with higher usage of the breakfast, more housekeeping clearings etc. So I think the opportunity for us is really to continue to focus on the Extended Stay customer and take that one to six down relative to where it was in 2019. Now, our current mix is not where we'd like it to be either. We've got sub-optimal amount of 30 plus business in-house now. So somewhere between where we were in 2019 and where we were in 2020 I think is optima, but OTA commissions, some housekeeping costs are where I see there being benefits on the margin side relative to 2019.

Stephen Grambling -- Goldman Sachs -- Analyst

And then maybe an unrelated follow-up. As you were thinking about launching this brand, I guess what was the feedback that you were hearing from corporate partners as you were thinking about this because if I recall there was a moment in time a couple of years ago before, Bruce, you were in the CEO seat where there was some renovations going on to try to kind of I guess shorten the average length of stay and maybe push up pricing.

Bruce N. Haase -- President, Chief Executive Officer

Yeah, sure. I mean we are very focused on sort of that corporate business in the seven to 29-day length of stay. That is our bread and butter. That is business that we're very good at accommodating. It's generally higher rated business and that is certainly part of the reason we are going after those customers with Premier Suites. Our sales force as I mentioned has been looking for a brand like this, something that is completely consistent, fresh and new to attract those corporate clients.

We spoke to a lot of B2B buyers throughout the research process and the feedback we got from them was not dissimilar to the feedback we got from direct consumers in terms of what they were looking for. So I think in terms of improving the productivity of our sales force I think this is going to be huge and I know that our marketing and our e-commerce and our distribution channel professionals are excited to be able to have more than one product to sell so that we can sell the right product to the right customer.

Stephen Grambling -- Goldman Sachs -- Analyst

Great, thank you.

Bruce N. Haase -- President, Chief Executive 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 over to Bruce Haase for closing remarks.

Bruce N. Haase -- President, Chief Executive Officer

Great. Well, thanks everyone for your questions. We really appreciate your interest in the company. We're obviously really pleased with our performance during the pandemic, but I hope you can tell, we're really excited about the future of this company. We're really excited about the strategies we've unveiled today, we're excited about our positioning in the segment. We really feel like all these strategies really work together well for the long-term.

We're building a multi-brand platform in the extended stay segment. I think our asset and disposition strategies, our renovation strategies fit well together with that and we continue to see a lot of upside in our commercial engine to drive better business to our properties at higher rates. All the while we think we can continue as we said, pay a market well above market dividends and have other opportunities to return capital to shareholders as we pursue dispositions. So again, thanks for your interest. David, Rob and I are always at your disposal and we look forward to follow-up conversations over the coming days. Thank you.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Rob Ballew -- Vice President, Finance and Investor Relations

Bruce N. Haase -- President, Chief Executive Officer

David Clarkson -- Chief Financial Officer

Chris Woronka -- Deutsche Bank -- Analyst

Joe Greff -- J.P. Morgan -- Analyst

Smedes Rose -- Citigroup -- Analyst

Brian Dobson -- Jefferies -- Analyst

Michael Bellisario -- Baird -- Analyst

Dany Asad -- Bank of America -- Analyst

Stephen Grambling -- Goldman Sachs -- Analyst

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