Q2 2020 Choice Hotels International Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to choice hotels International second quarter 2020 earnings call.
This time, all lines or any listen only mode. I will now turn the conference over to Alley Summers Investor Relations director for choice hotels.
Good morning, and thank you for joining us today before we begin we'd love to remind you that during this conference call certain predictive are forward looking statements will be used to assist you in understanding the company and that's resolved.
Actual results may differ materially from those indicated in forward looking statements and you should consult the companys forms 10-Q, 10-K, and other STC filings for information about imports into risk factors affecting the company that you should consider.
Moreover, we would like to acknowledge that continues to be significant uncertainty as to situation and severity of the impact of that covers 18 and make an hour occupancy levels and future results.
These forward looking statements speak as of todays date, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances.
You can find ever conciliation of our non-GAAP financial measures referred to in our remarks.
Part of the second quarter Twentytwenty earnings press release, which is posted on our website a choice hotels dot com under the Investor Relations section.
This morning participation, our president and Chief Executive Officer, and Dragovich, Our Chief Financial Officer will speak to our second quarter and year to date operating results and financial performance.
So we joined by Scott Oak Smith, Senior Vice President real estate and find that.
Following pod and almost remarks, we'll be glad to take your questions.
And with that I'll turn the call over to pot.
Like Sally and good morning, everyone. We appreciate you taking the time to join US and hope that you and your families are well unhealthy.
I'd like to begin by acknowledging the truly remarkable efforts throughout the first half of the year, our franchisee small business owners and their hotel staff.
As well as choice associates around the globe.
Thank you for all you've done for gas and the communities you touched.
This quarter has been marked by unprecedented events and the velocity of change has never been greater.
As you'll hear today, we outperformed the competition in the second quarter on several fronts.
The year over year change in our domestic system wide revpar of negative 49.6%.
Outperformed the overall industry by over 20 percentage points.
And exceeded the primary chain scale segments in which we compete as reported by half T. R.
Hi, seven percentage points.
And as you can see an exhibit seven of our press release, our domestic system wide occupancy rates surpass the industry by an average 570 basis points per week since the onset of the pandemic in mid March through July 25.
We're pleased that these trends continued through July.
For the past 20 weeks through July 25th we continued to observe material revpar share gains against the competition.
In the second quarter, all of our economy extended stay and select service brands achieved material Revpar index gains versus their local competitors.
With the comfort family.
Ascend Hotel collection.
And extended stay portfolio, each experiencing share gains over 10 percentage points.
Domestic system wide daily occupancy levels surpassed 60% last Saturday.
And over half of our domestic hotels experienced occupancy levels north of 50% during the last week of July.
At the same time, our development results provide even further cause for optimism.
In the first half of the year, we awarded over 150, new domestic franchise agreements.
Over 80% of the agreements were signed since the middle of March.
And two thirds of the agree been sold in the first half of the year work for conversion hotels.
Each are expected to open more quickly than our new construction projects.
In addition, we maintained our development momentum with 33, new agreements signed in the month of July alone.
This morning, I'd like to highlight three areas.
First the factors that are driving our performance against competitors and position us well for the second half of the year.
Second the close and unique partnership we have with our franchisees.
And finally, our thoughts on the road ahead.
There are several factors contributing to our outperformance of the industry averages in the second quarter.
First is our strength in leisure travel.
Which has climbed in recent months and currently represent over 80% of consumed room nights systemwide.
In fact, the proportion of arrivals from our leisure guests increased by more than a third in June as compared to the level seen in late March.
We're proud of our reputation as the hotel company families turned to for vacations and road trips.
Our ability to appeal to these gas has proven to be a competitive advantage since the onset of the pandemic as leisure travel continues to lead the recovery.
This summer the more than 2000 domestic hotels in our system near beach locations and National Parks offered attractive destinations for travelers looking to practice outdoor social distancing.
Contributing to our ability to appeal to leisure travelers is our geographic footprint.
Our hotels are located in the right markets to capture growing demand from travelers, who increasingly are choosing to drive to their destinations instead of flying.
Well well position given that we have more than 4000 hotels across the country located within one mile of an interstate exit.
In June one fourth of our revenue came from customers, who travelled less than 25 miles to a hotel.
A sign that more gas just want to get out of the house, while staying closer to home.
We expect that our strong presence and drive two locations will lead to continued outsize performance as gas prices remained low and travelers feel think best in their own cars.
That's provided the basis for our new multimedia AD campaign on the road again.
The first to launch from a major hotel company since the pandemic began.
Throughout the second quarter, we observed significant monthly increases in our proprietary contribution.
Which we believe was supported by the campaign.
More specifically from May to June.
Our website contribution increased by 370 basis points and our loyalty contribution increased by 460 basis points.
Well, our hotels attract a higher proportion of leisure travelers and are not rely on group business for meetings and conventions.
We've seen both a gain in market share and steady week over week increase in the volume of business traveler room nights since a low in early April.
Yes, its thanks to the profile of our core business travelers who've been on the road these past months, including first responders.
Medical another a central workers government trucking.
Adjusted and construction workers.
We're also capturing a larger share up consumer demand, which is the second factor contributing to our outperformance in the second quarter.
Not only I'll be gaining new customers, who are attracted by are well known brands and the ability to drive to our hotels.
But the average number of days per guest has also increased during the second quarter relative to 2019.
We're also benefiting from our key customers.
Always privileges Diamond ALLETE members spent more at our hotels in July as compared to July of last year.
Our award winning loyalty program is now 46 million members strong and enrollments continue to grow.
Our long term strategy is not just to grow brands in the like markets, but also to grow the right brands in the right segments.
The focus of our strategic investments has been concentrated on the more revenue intense mid scale extended stay and upscale segments.
And it's paying off.
In the second quarter, we achieved a 2.3% aggregate increase in units and a 3.7% increase in rooms across these three target segments. Despite the challenging environment.
I'd like to briefly highlight the brands driving success in huge.
First is mid scale.
Segment, where our company was founded and where we are leader.
One in four Midscale hotels in the U.S. is a choice hotels brand.
Our upper mid scale and Midscale brands represent two thirds of our total domestic portfolio.
Comfort 2.5 billion dollar system wide renovation has positioned to our flagship brand extremely well to weather the storm.
Attracting both travelers and hotel developers looking for a trusted brand to deliver proven value.
This is already bearing out.
In addition to the Revpar index gains against their local competitors up 13 percentage points in the second quarter. The comfort brand family experienced a rev. Par change that was over nine percentage points higher than the upper mid scale chain scale.
Copper hotels that completed their renovations by the end of 29 team experienced even stronger revpar and saw a significant advantage in Revpar index gains of nearly 16 percentage points versus their local competitors.
Comfort now represents over a quarter of our total domestic pipeline, which will fuel revenue intense growth for years to calm.
The next segment in which we targeted our strategic investments is extended stay.
Where our well positioned brands afforded us a competitive advantage with industry leading performance.
Between the onset of the pandemic in mid March through the end of the second quarter. Our portfolio of 414 extended stay hotels grew 8% year over year and achieved average occupancy rate of 66% nearly double the industry average.
Leading the way was our wouldn't spring suites brand with an average occupancy rate of 69% in the second quarter, beating the overall industry by nearly 36 percentage points.
What spring suites occupancy levels have remained above 70% since mid may.
And in the last week of July returned to occupancy rate consistent with 2019 levels.
Stabbing developers looking to drive returns in practically any economic environment, no that demand for extended stay lodging outpaces industry supply like two to one.
Which contributed to the 8% year over year increase in our extended stay pipeline in the second quarter.
We're very optimistic about the growth potential of our extended stay portfolio, including our door bran sleep mainstay concept at our new ever home suite scrap.
That's for the upscale segment, our portfolio achieved impressive year over year growth in the second quarter.
Including a 37% increase in room count.
Outperformance in Revpar change of over seven percentage points versus the upscale segment.
And at Revpar share gains against local competitors.
Contributing to our success is our proven conversion engine, which allows us to drive unit growth through down cycles.
For example, the ascend hotel collection was launched in 2008 during the great recession.
And is now the Industrys largest soft brand with over 370 hotels around the globe.
We see significant opportunity for the ascend hotel collection as we recover from the crisis.
To the brands at low capital requirements for entry and strong value proposition for owners driven by reduced customer acquisition cost.
Our upscale Cambria hotels brand benefits from strong leisure travel demand, thanks to being affiliated with our system.
The brands developer interest remains high and in fact, the number of contracts we awarded in the first half of the year is inline with last year's results.
True that the brands value proposition is resonating.
Ultimately what sets choice apart is not that were the only lodging company with a primarily franchise only business model, it's who are owners are.
90% of our hotels qualify as small businesses.
I meet regularly with these entrepreneurs many of whom have overcome a lot to build a legacy for their families.
For them their choice brand hotel is more than an investment.
It's their livelihood.
A softer year can make or break their ability to afford their child's college tuition.
Therefore, they're wholehearted commitment to the success of their business is unparalleled and differentiates choice hotels partnership with our franchisees.
Our typical franchisee as an owner operator with one hotel financed with low overall debt levels and a flexible operating model that allows owners to scale back staffing and service levels to reduce expenses.
Critical elements during down cycles.
Even in April amid the worst weaker the crisis in the industry.
Over 90% of our domestic hotels remained open.
Demonstrating the tenacity and resilience of our ownership base.
Today, we're proud to say nearly 100% of our domestic hotels are open.
In addition, we've continued to see increased openings in our international portfolio, where 96% of our hotels are open and operating as all the end of July.
We're proud to have earned the trust of so many small business owners by demonstrating consistently over more than eight decades in business.
That we treat our franchisees investment just as seriously as we do our own capital.
And more recently by providing the necessary support to help them whether this crisis.
For example, we've redeployed associates from across the company to help franchisee facing teens contact owners from every hotel in the system.
Resulting in nearly 25000 individual consultations.
We've also remained active in our advocacy efforts at the federal level to secure a relief for franchise businesses as the economy reopens.
We hope that the Congress will be able to vote soon on an agreement on critical economic relief and stimulus.
I've met recently with the leaders in the administration and the Congress and just yesterday with Speaker Nancy Pelosi to ensure that relief for small business is front and center in their discussions.
We continue to leverage our award winning choice University online learning platform to educate our owners on the various federal programs as they come online.
And share best practices around reducing their operating expenses.
A few weeks ago choice hotels was ranked the number one organization for excellence in learning development by the learning 100 Awards.
We're honored to have been the only lodging company on the list and surpassed companies like Fedex and the Khan Academy.
In addition to a targeted and strategic feed deferral program.
We've talked to help further improve our owners profitability by optimizing the operating efficiency of their hotels.
While this has been one of our core focuses for years.
Demick has further accelerated some of our efforts.
For example, we've rolled out offerings like grab and go breakfast.
Housekeeping on demand.
And contact list check in.
That not only keep pace with rapidly changing guest expectations and enhance the safety of travelers and on property associates.
But also lower franchisees total cost of ownership.
Two key metrics tell us that we're living up to our promise as a franchise or do help small business owners being business for themselves, but not by themselves.
First over half of the new franchise contracts awarded in the second quarter, well with existing or returning owners, which means we're providing an attractive value proposition to those who know us well and those new to choice hotels.
And second we maintain an industry, leading voluntary franchisee retention rate of 98% of which we are extremely proud.
I'd now like to share a few words about our people and our corporate culture.
A choice hotels, we are committed to our values reflected in our brand promise of making every associate partner and guest.
You're welcome.
I wanted.
And respected.
Part of how we deliver on this commitment is by weaving deliberate diversity and inclusion initiatives throughout all levels of the enterprise.
For over 15 years, our board of Directors has had a diversity committee specifically aimed at advancing a culture that values diversity and inclusion.
We also have a long history of enhancing the diversity of our ownership base.
I supporting minority and veteran entrepreneurs and providing best in class resources that hotel owners need to drive these values throughout their organizations.
As the National conversation about race has unfolded, we've initiated a series of actions that brought us together as a community to have courageous conversations listen.
Learn.
And support one another.
These efforts will be outlined in our updated E.S.G. report this coming fall.
I'm proud to say that our culture of diversity equity and inclusion is being recognized.
We recently had been named one of the best employers for diversity by Forbes.
The best place to work for LGBTQ equality by the human rights campaign for the eighth consecutive year.
And one of the best places to work for people with disabilities.
Earning a perfect score on the disability equality index.
I'm also deeply honored to have been named one of the best Ceos for women employees by comparable.
Before handing it off the Dom I'd like to share a few words about the road ahead, both for our company Andy industry.
That's probably economic and industry outlook, we are planning for the recovery to continue to be sporadic and regional.
Even if an increase wave of the pandemic word to return in the fall. There are several factors, we believe would mitigate the impact on our business and that we're closely monitoring.
First is the duration and scope of any travel restrictions.
Seem to be getting geographically narrower and localized has the pandemic, whereas on.
Importantly, 96% of our portfolio is comprised of select service hotels that do not have bars or restaurants, which had been a particular focus of restrictions across the country.
The degree to which the virus spreads will depend in part on our collective adoption of best practices around hand, hygiene, social distancing and personal protective equipment.
This brings me to the second factor, we're monitoring consumer behavior.
As for consumers, having a means to travel we're optimistic that additional government assistance and stimulus funding currently under debate will once path help get Americans back on the road again.
Our commitment to clean initiative is aimed at boosting consumer confidence to travel by building on our existing dedication to cleanliness.
As part of commitment to clean we made the decision to required gets to where face coverings in hotel common areas as an important and simple step everyone can take to help protect the safety of gas and franchised hotel employees like slowing the transmission of KOVA dying team.
As a member of the American Hotel lodging associations say stay Advisory Council choice hotels stands United with the industry in adopting the guidelines outlined in the say stay guest check list, including the required use a face coverings in common areas.
In closing the strength of our company outlined today are all underpinned by our disciplined management team many of whom have experience leading the company through previous down cycles.
Something I've been thinking a lot about as I'm, Mark My 15 year at choice.
Our long term view proven brands and compelling franchisee value proposition will help us not only emerged from the crisis in a position of strength, but we expect to continue to capture an outsize share of demand while building on our partnership with our small business hotel owner.
Yes.
With that I'll hand, it over to our Chief Financial Officer.
Huh.
Thanks, Pat and Hello, everyone.
Choice continues to benefit from our resilient primarily asset light franchise focused business model, which has historically delivered stable returns through our economic cycles and provides a degree of cushion from market risk.
Good day, I will provide some additional color around our second quarter results and share updates regarding our cost management efforts balance sheet and liquidity as well as our approach to capital allocation.
I'll close with our thoughts on the outlook for the road ahead.
For the second quarter 2020, total revenues, excluding marketing and reservation system fees were $72.1 billion adjusted EBITDA totaled $41.1 million.
The adjusted earnings per share worth 13 cents.
Due to the coven 19 pandemic and it subsequent impact on the travel industry, our domestic revpar for the second quarter declined 49.6% for the full system and 48.6% for comparable properties over the same period of the prior year.
As shown an exhibit seven of our press release the trough in our domestic system wide occupancy rate occurred in early April at 28% compared to the overall industry rate of 21%.
Occupancy rates have been steadily climbing since that time, reaching 50% at the end of June and exceeding 60% this past weekend.
In addition, our year over year outperformance versus the competition continued through July.
Since the beginning of March nearly two thirds of our Revpar decline was attributed to occupancy and only about a third to rate.
Ralph the pandemic, our revenue management experts had been advising our franchisees on the best use of the tools, we provide to maximize their pricing strategies.
As a result of these efforts our 80, our index was up 3.6 percentage points against local competitors in the second quarter.
Despite the challenging environment, we increased the number of our domestic hotels by <unk>, 0.6% and rooms by 2% year over year.
Across our more real revenue intense brands and the upscale midscale and extended stay segments. We grew the number of hotels by 2.3% and rooms by 3.7% year over year.
We're particularly pleased to report that our flagship comfort brand family continue to experience positive unit and room growth following its recent transformation.
We're also happy with the company's performance related to our effective royalty rate, which reaffirms that developers continue to choose our brands as they seek to boost the value of their hotels and recognized our unwavering commitment to maximize the return on investment.
Thanks to our investments in technology and proprietary franchisee facing tools. During this crisis, we were able to deliver new guests to our franchise hotels to drive occupancy levels.
Helping our owners improved operating efficiency of their hotels and lower their total cost of ownership.
Our domestic effective royalty rate increased 10 basis points in the second quarter versus the same period of the prior year to 4.94%.
This is driven by the attractive value proposition, we provide to franchisees their continued desire to be affiliated with our strong brands and our current pipeline.
As the current period of low travel demand in occupancy wears on we anticipate that new owners will seek the shelter of a large proven franchise or that deliver strong topline revenues to their hotel.
Therefore, despite the softer revenue environment, we expect to observe continued growth of this lever for the remainder of the year.
Choice entered the crisis with a strong balance sheet due to our prudent capital allocation strategy.
We also took a strategic approach in adopting mitigation efforts to alleviate the impact of the pandemic on our business.
Every action the company has taken since the beginning of the crisis was aimed at improving our cash position all strong liquidity, reducing discretionary costs.
And exercising discipline around capital allocation.
Our financial position and liquidity allowed us to take a strategic measured approach to cost management by adjusting to a lower consumer demand environment.
Previously, we announced mitigation efforts in response to covert 19 that were expected to result in S. DNA cost savings of nearly 25% and 2020.
Today, we're on track to achieve this target and also expect to maintain a run rate, especially in a cost savings of at least 15% in 2021 and beyond.
We have also lowered our maintenance capital expenditures, which have historically been below $35 million by 20%.
We expect these actions will better align our cost structure in the post pandemic environment.
While our cash and liquidity profile remains exceptionally strong we have continued to take action to further bolster that strength, which we believe will allow us to not only whether the impact to the pandemic button prove our long term financial and competitive position.
In July we issued $450 million in new senior unsecured notes, which allowed us to both refinance a portion of our existing senior notes offering due in 2022 and repay our previously previously announced 364 day 250 million dollar term.
This new 10 year senior note offering allowed us to extend our near term debt maturities to 2031 and capitalize on favorable credit market to significantly reduce the effective cost of our borrowings.
The offering was oversubscribed by nine times, a powerful endorsement of our business model and its performance as well as the stewardship of the company's resources amid turbulent times.
As of the end of June 2020, the company had over $725 billion in cash and available borrowing capacity through its revolving credit facility and has maintained consistent liquidity position over the last three months.
In fact, despite the worst impacted the pandemic being incurred during the second quarter. The company's net debt only increased approximately $31 million much lower than we initially expected.
We continue to believe that our current liquidity position is more than adequate to whether the current environment and today, our gross debt to EBITDA leverage levels remain well within our target range of three to four times.
Our historic prudent and disciplined approach to capital allocation has been instrumental in our ability to successfully navigate the current crisis.
We will continue to follow the same approach and ensure our level of investment activity is aligned with the current and buyer.
Most importantly, we will always look for organic growth opportunities to invest strategically in our business.
Based on our strong organic growth track record. We believe these internal investments will continue to drive attractive returns for years to comp.
We will be evaluating other investments in capital return opportunities in the context, the developing market conditions and our overall capital allocation strategy.
Now I will close with some thoughts on what lies ahead.
The ultimate and precise impact of the pandemic on our business for the remainder of 2020 and beyond remains largely unknown.
This the exact trajectory of our industry's recovery.
While we are not issuing formal guidance today. We currently expect that coven 19 will have a less significant impact on our third quarter performance results based on the continued weekly trend of travel growth predominantly stemming from leisure transient guests driving to their destinations.
We will continue to evaluate the impact of cobot night team across the business and will provide further updates in November during our next earnings call.
I would like to close by saying that we're optimistic about choices prospects and while we're not immune to the pressures faced by the industry. We believed that our long term focus prudent and disciplined capital allocation strategy and the targeted actions we have undertaken since the onset of the crisis will allow us to.
Continue to capitalize on opportunities during the recovery at this time and I would be happy to answer any questions operator.
Well now begin the question answer session test. Good question you May Press Star then one on your Touchtone phone for use any speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily.
[music] assembler roster.
Our first question comes from Robin Farley from Yes. Please go ahead.
On the great I didn't know if you addressed this in the opening remarks, because I am just a couple of minutes I wasn't sure just follow up on the royalty rate I never really talked about a 10 basis point increase [laughter] and you know in the quarter can you talk about royalty rates on the new agreements you're signing I'm just wondering if the current environment.
And go after you know last downturn, there were some kind of rate.
Productions in the introductory years things like that so just wondering how the graduate trip on that the newly signed agreements. Thanks.
Thanks Robin so.
To the point that you made yet royalty rate was up about 10 basis points and previous Ah Ah in previous conference calls, we had talked about the fact that that was really driven by the increase in rack rates. Obviously, we had a very strong transaction environment over the course, the last couple of years, which allow that royalty rate to be reset I'm, just really a testament to the strong value proposition.
What I would say isn't that future probably continued growth. We said, we said we would see continued growth throughout 2020 and that future growth would probably be more in line with our historical active royalty rate growth of call. It mid single digits, what we're seeing right now maybe some slight or discounting at least in the shorter term.
That would burn off probably over the course about 12 to 18 months anyway, but again highly dependent on whether that transaction environment does return in 2021, 2022 et cetera, obviously, driven by the Revpar environment and somebody other factors as well, but we still do expect continued growth in that rate at least for the remainder of this year and probably.
In line with historical is beyond that.
Yeah, right I was just Robby Robin I would just add a significant amount of the new.
New agreements, where we're selling in the second quarter, where it brands, where we haven't historically had to discount.
And so those are brands like what spraying and comfort as well as a is also been very strong from that perspective. So saddam's point. If there is a discounting similar to the great recession is likely to be significantly less than what we had to do 10 years ago.
Okay. No that's helpful to the so there's some some limited reductions in rate from new agreements. That's that's more that will affect the graduate next you're being mid single digit as opposed to the rate of increases you're seeing this year is that kind of when that comes into play.
Yes. Thank you I'll take a look Oh, yeah, we were already had it in that direction and given that the outsize impact to the existing contracts versus the new ones coming in.
Tom's point earlier it it is expected to return to historical levels.
Okay, great. Thank you very much.
Thank you.
The next question comes from Shaun Kelley from Bank of America. Please go ahead.
Hi, good good afternoon everybody.
Patter John kick could you just give us a quick update on sort of the the franchisee collection and health piece here just what percentage of franchisees were a you know good luck for any sort of fee deferrals on how is the collection process proceeding as we move yeah kinda from you know the Don.
Because period here into you know kind of a a more stable period on if you could just give us some stats or updates there I think I'd be really helpful.
Sure I think the when we spoke on the last call.
Yeah, we were pretty much in the middle or close to what ended up being the end of a lot of those early conversations with regard to franchise fee deferrals. So that the numbers. We gave in the first quarter around the number of up of hotels that a that that took us up on that offer a really hasn't changed what's really been.
Promising has been the significant performance we've had a on the topline revenue to our franchisees in the months of May and June in particular for the quarter and that's continued into July so we're not having anywhere near those level of conversations that we were having back in a in the April timeframe.
You want to follow up sure yeah. The only few things that I would add their shot as well when you take a look at how we did the feed referral program. Yeah pass opening remarks really covered this but we were very strategic and surgical but we're also very long term focused in nature. We don't want there you know obviously the virus data somebody other elements you don't know theres going to be another.
Crunch in terms of where the franchisees are so what we did as we deferred some portion of the entire yearly fee that would be recovered than in years, two and three rather than they're being discussed clip so to speak up when it when you look at the quantitative intact, Sean It's about you know what we've talked about maybe attend the 20 million.
Dollar networking capital drag that would then be recovered obviously in years, two and three it's looking like it's going to be I'm on the lower end to that probably more like 10 to 15 million in terms of those for you deferrals and that's really to pass point driven by the strong occupancy that we're seeing certainly higher than the previous expectations and overall cut.
Elections, I think what you're seeing is in the first quarter as well we had talked about you know a call. It a two to three year runway that was really based on 20 million dollar cash burn our cash burn for the second quarter of this year was actually about half of that was about $10 million, where we are today is much better positioned than where we work throughout.
The second quarter as well so we're really returning to a cash breakeven cash positive position as you continue to see a these collections continue to these collection rates continue to increase coupled with the stronger occupancy performance that you're seeing week over week.
That's great and Super helpful. Thank you, both and then sort of the follow up is sticking with the same theme would just be on you can you help us just translate as we think about just kind of yeah, you're now above 50% occupancy on you know across the portfolio, which is which is like you said a huge bright spot as we kind of look at that relative to the industry.
What does that translate into four let's call. It unit level economics for the franchisee. He also talked a little bit out your rate mix, Oh, we had a level where you think.
Most of your franchisees are also a cash flow positive and then are we at a place where you know and then how does how do you kind of think about that before and after debt service I know I know, it's a really broad question, but just maybe a an indicative you know example, or set of examples would be helpful.
Sure. So we I think we talked about this and in the past. We we've you know with debt service for most of our hotels you know if you're at that 30% occupancy level, you're able to you're able to breakeven today I'm, probably about 15% of the portfolio was probably operating at that.
30% level or below I'm. So good 85% is in that is in that positive territory. You know the debt service on our hotels is kind of interesting because you know the loan to cost on on on most of our hotels. There do you know, it's about 50% equity and 50% debt.
And so you know from the standpoint of the debt service and a mid scale weren't economy hotel is a is lower than it might be in other parts of the industry. So those those are two key factors that I think have us feeling pretty good about the financial health of our of our franchisees.
You know saddam's point, the outperformance in the second quarter relative to where we thought we were going to perform on the topline revenue has significantly helped our owners and as you know the summer months or that by the big months per person. That's the number of our hotels, so being able to get into that or above breakeven.
Placed in late April early May and then having a good three months of Ah of running at that level has got to our franchisees in a in a much healthier position I will say and this is you know what we've been spending a lot of time focusing on is with the.
You know cares act and the PPP program and all of those things that have been really a nice bridge for the industry and for our hotels to Ah to provide additional liquidity, we're doing our best advocate for continuation of those programs because as we're all seeing and we mentioned this before the vice.
This is sporadically popping up in places, which is leading to no regional Gibson valleys, and so having a additional government relief programs that our franchisees can take advantage of if we have no further hot spots in the back half of the years gonna be critically important for for our owners, but by and law.
Charge, a you know Sean I think the the health of the franchisees or is in a really strong position today relative to where we were back in the early part of April.
Thank you Beth.
Thank you.
Next coal is from Michael Bender surreal from Baird. Please go ahead.
Good afternoon, everyone.
Okay no.
Uh Huh, Patrick just a follow up on that last question and also on your conversation yesterday with the speaker can you maybe just provide some specifics about what the franchisees are asking for I guess, maybe why they need it specifically.
Sure Theres two things they want one is liquidity and the other is liability protection.
And so a lot of the liquidity issues or obviously related to the used to PPP funds and the recapitalization of that program.
Secondly, there's things that are in the tax code that could be really helpful for our industry around either capex or operating expenses relative to cleaning supplies and things that a that owners are gonna have to do to adapt to the new environment and there's a significant amount of things on the tax code.
To be done to actually encourage particularly business travel to love to get a consumers back on the road again.
On the liability side of the house. This is something that is not just in the hotel space, but across businesses large and small size to provide that safe Harbor protection.
So you don't have yeah lawsuits that are literally putting you know the businesses that we've struggled so hard as a as a country to keep alive, putting them out of business over over liability related to the pandemic business interruption insurance does not include Pandemics and so you know.
Yeah, the a small business owners and hotel owners around around the country not able to rely on that and so there is this this open liability.
Yeah, I spoke to the speaker about it we had a great call with the industry last night with Senator Rubio, Who's leading a lot of small business efforts I'm on the Senate side for the for the future of Alif still here and those are those are the two key issues its liquidity and liability.
That are that are the things that are owners are concerned about as we you know have figured out how to how to run a hotel business in the age of coated.
And our owners have been very successful doing that despite the I'm the travel restrictions.
You know I think in the industry itself has proven to be an essential part of the Oh, yeah. The functioning of the country with a central travelers and the like so we're actually looking at the back half of the year. If we do see more spikes I think local jurisdictions state governments and business owners have all figured out how to work.
Together to keep the hotels open operating at a good level of occupancy so long as everybody does that the right things you know where your mask socially distance and wash your hands and the hotel industry itself has stepped up significantly in our cleanliness standards. So all of those things I think are positive.
But I was just go back to you know that lie at liability protection and liquidity or the two key things that we're looking for out of the I'm not at the upcoming a government legislation.
Got it but that's very helpful. And then just one more I know you mentioned investment opportunities again, you have on prior calls, but maybe you provide an update on on your latest thinking there and are you starting to sharpen the pencil and or at least think about affect any more today versus 90 days ago.
Relative to M&A or or investment back in our business I mean, just yeah. It within all within our business I mean, I think we talked about the the continued performance at an interest in our Cambria brand that a that has continued to a two to two drive interest while we haven't.
Done a lot on the ever home side, the conversations that we're having with owners. There are very very very positive and our when spring brand continues to to grow as well without any any capital involvement yeah. I think as we've talked about on the M&A front and are you know it's extremely.
Hard for either a buyer or seller today to underwrite an asset just given you know expectations on what the future holds so we are while there's there's opportunities that may come down the Pike right now I think a lot of sellers are kind of a waiting to see what happens with their assets.
The next question comes from Jared Shuja yen from Wolfe Research. Please go ahead.
Hi, everybody. Thanks for taking my question, Andrew can you talk about which brands specifically are driving the Revpar index gains for you is that primarily extended stay brands or are you seeing that really across the entire portfolio and then do you think those gains are coming from independent specifically or other brands.
So it's across the portfolio Jared its all of our limited service hotels, it's all of our upscale and our extended stay hotels and our economy hotels I'm. The only the only brand is our Clarion brand, which is a meetings based brand I think there's about a 175.
Those but all of the other brands every single one of them has had significant revpar index share gains and it's coming from competitors, it's coming from independent alike. So it's it's are one when we say a local competitive said these are not set by choice hotels. These are said by heart consultation with our owners.
As to who they're truly competing within our market for those price points. So it's a real strong signal to us that our owners are seeing share gains relative to other hotels on the same street corners.
Got it. Thank you and I believe you mentioned, the 98% voluntary owner retention, but can you tell us how the total owner exits have been trending year to date and how that compares to last year in prior years.
Yeah. So when you take a look at it Jared you know the overall churn rate when you put in voluntary and involuntary together you know the voluntary side of the house historically is about 1% to 2% involuntary about 3% to 4% and we're trending in line with that but I think what you have to really look look out as it is not all of.
As terminations and not all unit growth is created equal. So when you take a look at where the unit growth is coming from I know in the past we've always talked to about you know Cambria being three to four times more revenue and has done an average comfort, but really all of the Oh all of the terminations are really coming from that economy segment, which is why you saw that the net.
Growth in the economy segment in particular decline, but then when you look at three of the really key brands to help us as part of the recovery you know comfort obviously the transformed a brand overall, it's about three times a the royalty revenue as a as one of our economy brands ascend being a very big conversion engine for US also about three times.
The royalty revenue and then what spring suites. When you think about the multi pack in the momentum that we have with that unit growth as well, it's about two times the a the royalty ads as one of those are economy brands and so it's really you know overall churn I'm still very much in line with historical but where it's coming from were board.
Very optimistic about how that's going to know the sport as part of the recovery.
Okay. Thanks, Don in just one more if I make sure I I think you said in the June quarter of your revenue came from customers, who traveled less than 25 miles away I thought there was an interesting stat is that just mix effect was extended stay outperforming everything right now and extend as they tend to have more local.
Oh visitation then so the other chain scales or is there something else fundamentally different about consumer behavior right now where you are seeing more vacations and that sort of thing that are finding their way into your brands.
Yeah, I think there what we're seeing it is a is a shift in consumer behavior, it's not really a its not really a brand specific driver you know the 25% say significantly higher number than what we normally have which is more in that sort of high single digits, but it's it's proved to us that that you know it could be at several things one.
Yeah. The state is is open to its own travelers, but it's not open to travelers from other states people still want to get out and travel and if it just means going over the next town over or if you're in Phoenix and going up to Flagstaff or you know staying within your own state, we're seeing a lot more interstate I'm traveling.
Opposed to intrastate travel and I think that's a yeah seeking higher this summer than we've we've been used to seeing in prior years.
Okay. Thank you very much.
Next question comes from Patrick shows from Truest. Please go ahead.
Hi, good morning, everyone.
Hi, good morning wondering about <unk>.
As your net income continues to ramp up and recover here I'm wondering your about your thoughts regarding reinstating.
The dividend or part of it and along with that I'd remind me are you restricted by any a covenant.
Or other money restrictions in that regard thank you.
Yeah, Patrick So we've we've basically said we're going to suspend the dividend through the end of the year and then sort of re evaluate depending on.
What a what happens in 20 or 21 or as we begin together fresher look into a into that a into that here. You had said, it's I'm glad you brought that up because if you're looking at our you know sort of outlays. During the second quarter. You know, we really took a long term view.
Yeah. The first thing we focused on was helping our franchisees through this.
A significant amount of the impact of that feed deferral and fee help was in the second quarter and is not going to be a similar level in quarters, three and four secondly, we had our workforce re sizing that was up the done in the second quarter and that was done to set us up for a lower demand environment that we expect to see.
The.
In 2021 and beyond the third was the dividend, which had been approved prior to the onset of coded and that's about that $12 million. So I'm, just a as you're thinking about our cash position.
Positioning you're thinking about the outlays and our cash burn as Don mentioned.
Being you know basically about $10 million a month I'm, putting the dividend back into place or something that we'll we'll consider next year, but at this point. We've we've essentially said we're gonna suspended for the remainder of 2020.
The only think of it out as their art and there are no restrictions on paying those dividends. Patrick you know just given the covenant package that we had in place.
Okay. Thank you Tom.
Great. Thank you.
Next question comes from Alton Stump from Longbow Research. Please go ahead.
Great. Thank you good afternoon, or you're just wanted to ask how about the conversion rate I mean, much impact that you know it obviously uptick you know excuse me over the course of your you know have to Q. I was curious you know kind what percentage or it's you can't from conversions versus new build say persist this time last year.
Tom why don't you.
Go for the give me a year over year, you can but I'll just just all I mean, it's yeah. The difference I think this time around relative to past downturns is just our portfolio mix is a little bit a different where we have stronger brands going into this downturn, we talk about them on the.
In the prepared remarks, if you look at comfort and the ascend collection in particular, we're able to do really strong hotel assets that converted into those brands and those are brands that drive higher royalty to the to the system that then then the average brand so that that mix of conversion.
At this time I think is gonna be very.
Helpful with our strategy to be as I keep saying you know in those more revenue intensive segments and write that revenue intensive locations.
And when you take a look all Tennessee, the historicals about 60% of our openings have come from conversions and to pass point on a more recessionary environment or a downturn environment and the great recession, we actually saw that 80% to 90% of our openings actually came from conversions. So what you saw this year it was slightly above historical.
Actually over the course of the last two months in particular.
As you know a its covance has become more widespread you've actually seen that number of conversions begin to pick up a little bit more than even that two thirds rate that you've seen historically speaking and again you know when you know going back to the ascend properties can comfort being bigger conversion engines for us now that that transformation. It is complete we see more.
Revenue in tens conversions happening as well so we're very very optimistic about that.
[noise] kind of excess spread helpful. Thank you Pat down.
Thank you.
Next question comes from Robert Mullins from Gordon Haskett. Please go ahead.
Hi, Good afternoon. So choice has clearly been a beneficiary of track to leisure demand over the past couple of months, but how should we think about demand heading into the fall and winter months and any commentary around where you're doing to drive demand in the back half a year very helpful.
Sure I think you know Robert the it's going to depend on three things going to depend on the stimulus it's going to depend on schools, that's going to depend on sports.
So you know all three of those.
Our unknowns at this point I think you know months from now we'll have a clear idea on I'm you know what what what comes out of the Congress and gets approved by the administration from the standpoint of additional help to to help the industry recover from a travel perspective, yeah, I would say on the schools opening.
It's interesting because at some of these schools have gone virtual they're actually pushing their start date later, which means you could have more of an extension of summer travel into September the or it could go the other way where where schools are are becoming you know starting earlier, it's gonna be interesting to kind of see how that impacts.
Overall travel and then sports is a key driver as well you know what happens both the youth sports and the college sports level as well as you get into the later months of the year and all of those at this point I think.
Our unknowns, but they do have a a potential if they go into right direction to take our occupancy in revpar numbers and continue to move them in that direction that what outperformed our expectations or or they could have a deleterious effect on other than the opposite.
That's helpful. Then Doug just sneak in one more so with all three.
<unk> competitive activity around conversions, you doing anything different than in the past or I track. These types of deals.
So as I said in my remarks, we have a management team largely that was here during the last recession. Then so there's a playbook around what we do with regard to shifting our bar or sales and development pipeline to more towards conversions. So.
So we are prepared to do some of those things yeah, yeah. It would probably be a similar what we've done during prior downturns.
Okay, great. Thank you very much and Robert the only thing I'd add is just in terms of leisure trends and whatnot. We did post a an investor presentation on our website that really highlights a lot of what you're seeing in terms of the drive two locations the mix of the portfolio proximity to highways et cetera. So you can see that on our Investor Relations website that we posted a ready to be.
This call as well.
Thank you.
Thank you.
There are no more questions in the queue and this concludes our question and answer session I'd like to turn the conference back over to pet patients President and CEO for any closing remarks.
Thank you operator, and thanks again, everyone for your time, we're pleased with our ability to navigate the challenging first half of this year and to outperform the overall industry and the competition in the second quarter. So I hope you all will stay safe and healthy and we'll talk to you all again in the fall have a great afternoon.
Okay.
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The conference has now concluded thanks for attending today's presentation you may now disconnect.
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