Q3 2020 Choice Hotels International Inc Earnings Call
[music].
Please standby we are about to begin.
Good day, ladies and gentlemen, and welcome to your Q3 2020 choice hotels International Inc. earnings Conference call.
All lines have been placed in a listen only mode and the floor will be open for questions. Following the presentation. If you should require assistance throughout the conference. Please press star zero to reach a live operator.
At this time it is my pleasure to turn the floor over to your host Ali Summer Ma'am the floor is yours.
Good morning, and thank you for joining us today.
Before we begin I would like to remind you that during this conference call certain predictive or forward looking statements will be used to assist you in understanding the company and its yourself.
Actual results may differ materially from those indicated in forward looking statements and.
You should consult the Companys forms 10-Q, 10-K and out there she falling short.
Information about important risk factors affecting to companies that you should consider.
Moreover, I would like to acknowledge that there continues to be significant uncertainty that's the situation and severity of the inside of the call the 19th and Dan <unk> and our occupancy levels in future. So.
These forward looking statements speak as of today's date, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances.
You can find it was supposed to mediation of our non-GAAP financial measures referred to in our remarks fired up the first quarter's Twentytwenty earnings press release, which is posted on our website at choice hotels Dot com under the Investor Relations section.
This morning, Pops patients, Oh, President and Chief Executive Officer, and drive usage, our Chief Financial Officer.
Speaks to our first quarter and the year to date operating results and financial performance.
They will be joined that's called Oak Smith, Senior Vice President real estate and find it.
Following the path and downstream marks well be glad to take your questions.
With that I will turn the call although taposh.
Thanks, Sally good morning, everyone. We're glad you could join us and hope Youre all well.
Our company like the hotel industry overall continues to be significantly impacted by the COVID-19, pandemic, which is far from over.
The response of our franchisees their hotel staff and choice associates has been remarkable to.
To them I say, thank you for your incredible dedication to serving our guests during these trying times.
Despite the pandemic I'm pleased to report that choice hotels has continued to drive results that significantly outperformed the industry in the third quarter.
An investment in remote access technology by businesses schools and consumers.
Is creating more options in where and when traditional activities take place.
And a post pandemic world. This may afford Americans, even more flexibility in their schedules to travel for leisure.
For the last several years, we've seen a trend in leisure travel demand spreading more evenly throughout the months of the year.
Which we attribute in part to school schedules shifting over the years as well as the increase in baby boomers, retiring and having more time and disposable income to travel.
More employees can now work from anywhere with an internet connection while their children attend virtual schooling.
For the past two months, we saw continued leisure demand extending into weekdays.
A second trend is the increase in road trips, which we're benefiting from with our high concentration of hotels and drive to markets.
Road trips have been on the rise for the past five years.
And part to low gas prices, which have been trending down for several years.
Consumers appetite for road trips has only accelerated since the onset of the pandemic as Americans are showing a clear preference for trips that are closer to home.
Destinations that may have been overlooked before the onset of COVID-19 are getting fresh consideration.
With over 4000 domestic hotels located within a mile of an interstate exit our hotels are well positioned to serve travelers as they hit the open road.
And with over 2000 domestic hotels near beaches and National Parks are hotels are also located in the right market to capture growing demand from travelers, who increasingly are looking to rediscover the great American outdoors.
Another emerging trend is the economic disruption brought on by the pandemic and its effect on consumers as the recovery takes place.
We believe that in uncertain times as in previous down cycles.
Consumers will be looking for more moderately priced limited service hotel offerings.
Presenting an opportunity for our portfolio to capture this demand.
Another anticipated economic effect of the pandemic is higher relocation rates.
As people shift jobs and industries demand for longer term hotel stays rises.
A trend we believe will benefit our brands, particularly those in the moderately priced extended stay segment.
And finally, there are signs that consumers at risk tolerance is climbing even before a vaccine is available.
According to a recent survey the perception of travel safety is up and Americans likelihood to take a domestic leisure trip and stay in a hotel during the next six months is the highest since mid March.
As a result of these trends we've seen a rise in our week day occupancy quarter over quarter on top of the existing base of weak and leisure demand. We've historically enjoyed.
In fact, our weekday Revpar index is up eight percentage points year over year in the third quarter.
Or a year over year Revpar change continue to improve month over month in the third quarter.
At this time, we remain optimistic that we will see sequential month over month improvements related to our year over year Revpar change.
Our loyalty program has remained a key driver of our business throughout the pandemic enhancing our ability to drive franchisees top line revenue.
Particularly benefitted from choice privileges Diamond elite members.
Our best customers, who contributed an even higher percentage of overall revenue year to date versus last year.
We expect this bedrock of loyalty business to deliver even higher value going forward as more Americans return to travel and enrollments in our award winning choice privileges loyalty program continues to climb.
Our long term strategy the growing the right brands in the right segments in the right markets allow choice brand hotels to continue to outperform the competition.
Throughout the third quarter, we generated significant month over month increases in our proprietary revenue contribution to our hotels.
19 percentage points.
And average daily right index games of approximately nine percentage points.
In fact for the past six months Ah send has significantly outperformed the upscale soft brands.
As well as the segment as a whole in terms of year over year Revpar change.
Our upscale Cambria hotels brand continues to benefit from leisure travel demand, thanks to being affiliated with our system.
Achieving revpar share gains versus local competitors of nearly 15 percentage points in the third quarter.
Our extended stay hotels are purpose built for long term guests.
These hotels brands in this cycle resilient segment continue to outperform in this unprecedented environment and.
And our portfolio of over 420 extended stay hotels grew 6% year over year in the third quarter.
Or would spring sweets brand achieved an average occupancy rate of 77% in the third quarter and.
And the brands monthly occupancy levels have remained north of 75% since the last week of June.
Our suburban extended stay brand experienced year over year occupancy games in the third quarter.
Further enhancing the brands attractiveness to developers looking for a smart extended stay conversion opportunity.
At the same time are mainstays suites Midscale extended stay brand gained more than 16 percentage points and Revpar index versus it's local competitors in the third quarter.
We remain optimistic about the growth potential of our extended stay portfolio who's pipeline increased by 9% year over year in the third quarter.
Year to date through September choices awarded over 40 extended stay franchise agreements demonstrating sustained interest in both new construction and conversion opportunities during a challenging time for the industry.
And now like to turn to our Midscale segment, whose brands represent two thirds of our total domestic portfolio and over half of the franchise agreements executed here today.
All of our select service Midscale brands achieved year over year Revpar Index, an average daily right index gains versus their local competitors through the third quarter.
The comfort brand captured revpar share gains of over seven percentage points versus local competitors in the third quarter.
And Clarion point that conversion brand extension of Clarian that launched less than two years ago. [noise] recently opened its 20th hotel in the U S. And now has over 50 hotels open or in the pipeline demonstrating its strong growth as the brand continues it's coast to coast expansion.
Demand for choices brands continues despite the challenging environment.
Aided by our strong value proposition and recent outperformance.
Developers choose our brands as they seek to boost the value of their hotels.
We have a conversion brand to fit most developers price points, which is driven or development growth through past downturns.
Year to date through the end of September we have awarded over 230, new domestic franchise agreements nearly 70% of which were for conversion hotels.
In the third quarter alone, we executed over 80 domestic agreements of which nearly three quarters, where for conversions and over 40% of which were executed in the month of September.
We have a long history of enhancing the diversity of our ownership base.
Or one of a kind emerging markets development team, which.
Which helps under represented individuals such as minority and veteran entrepreneurs enter the rewarding business of hotel franchising.
Nearly 70% of our hotels have minority ownership.
Despite the pandemic, we have awarded and financially supported 17 franchise contracts with black and Hispanic entrepreneurs year today.
Most recently, we entered into the largest minority owned Multiunit franchise agreement.
In the program's history.
Our long standing commitment to diversity and further details regarding our efforts to improve the communities. We serve will be outlined in our forthcoming E. S. G report.
While this year's challenges have been unique the cyclical nature of our industry is known.
It's something our experienced and disciplined management team many of whom have led the company through previous down cycles plan for.
Are resilient franchisee base also has deep experience, leading they're small businesses through down cycles and they are at the centre of everything we do.
Over the course of the pandemic, we have supported our franchisees in a number of ways.
First by reducing costs through extending brand program deadlines into implementing cost saving.
Operational initiatives.
Reducing certain fixed fees.
Implementing a tailored fee deferral program and modifying brand standards.
Second by capturing business through our global sales efforts aimed at first responders and other essential travel.
A multichannel multi brand marketing campaign.
And tailored promotional programs.
Finally by leveraging hygiene, an infection prevention experts like eco lab in launching our commitment to clean initiative, helping to make sure their hotels are clean and safe.
We also have been advocating and we will continue to advocate with policymakers for additional relief measures aimed at assisting small businesses to provide targeted help for the travel industry.
Specifically, we've been urging enactment of a second draw a loan program for existing Paycheck protection program borrowers.
Greater accommodation and more streamlining for borrowers to obtain forgiveness.
And liability protections for hotel owners, who comply with health and safety protocols during the pandemic.
We've also call for additional stimulus to support Americans discretionary spending including in areas such as travel.
In closing choice hotels is positioned to emerge from these trying times stronger just as we have before in our 80 year history.
Are proven portfolio of well segmented brands geographic footprint.
An asset light business model physician as well to benefit from current consumer trends as they continue to evolve.
I will now invite our CFO to provide his update.
Dom.
Thanks, Pat and good morning, everyone.
I hope that you and your families are well and healthy.
Today, I would like to provide additional insights around our third quarter performance.
Update you on our balance sheet and liquidity as well as our approach to capital allocation and finally share our thoughts on the outlook for the road ahead.
Let's now I'll take a closer look at our results.
For the third quarter of 2020, total revenues, excluding marketing and reservation system fees or $103.6 million.
The justice EBITA totaled $74.9 million.
Setting and adjusted EBITDA margin of over 72% and adjusted earnings per share or 66 cents.
Our domestic system wide revpar for the third quarter outperform the overall industry by nearly 20 percentage points declining only 28, 8% from the same quarter of 2019.
In addition, our results exceeded the primary chain scale segments in which we compete as reported by STR by six percentage points.
We have long focused our brand strategy on driving growth across the higher value and more revenue intense upscale extended stay and midscale segments and it's paying off.
And the third quarter, all three segments achieved year over year, revpar outperformance against their respective industry chain scales and games versus their local competitors.
Specifically, the Revpar change of our upscale portfolio exceeded that of the overall segment by 14 percentage points and our upscale portfolio outperformed it's local competitive set.
Over nine percentage points.
With average domestic system wide occupancy rates of 74% are extended stay portfolio outperformed the industry's revpar change by an impressive 40 percentage points feeding it's local competitive set by 14 percentage points.
And finally Revpar change for our Midscale portfolio exceeded this segment by nearly eight percentage points.
This revpar outperformance is the result of both continued occupancy games and our franchisees ability to maintain right.
Our domestic system occupancy rate has seen improvements since the trough of 28% that occurred back in early April.
Since the week of June 21st through late October or average weekly occupancy rates have consistently exceeded 50%.
In addition, we continue to see games and our average daily right Index, which was up 1.7 percentage points against local competitors in the third quarter.
Are owners have succeeded in maintaining right integrity. Thanks to the support of our experienced revenue management consultants. These experts have been advising our franchisees on the best use of tools to maximize their pricing strategies and provide sophisticated market intelligence and channel management.
Despite the challenging environment, we expanded our system size growing the number of domestic hotels by 7% and rooms by 1.9% year over here.
Across are more revenue intense brands on the upscale extended stay in Midscale segments, we experienced even greater growth increasing the number of hotels by 2.1% and rooms by three 4% year over a year.
We are especially pleased that comfort our flagship brand continue to experience positive unit and rooms growth in the third quarter. Following it's brand transformation.
Comforts development success amid unprecedented circumstances is perhaps the clearest endorsement of the brand value proposition come.
Comfort now represents nearly one third of our total domestic pipeline, which will fuel revenue intense growth for years to come.
In addition, the brands conversion pipeline increased by nearly 50% in the third quarter you're over a year.
We are particularly pleased with the company's performance related to our effective royalty rate, which is driven by the attractive value proposition, we provide to our franchisees. There continued desire to be affiliated with our strong brands and our current pipeline.
Our royalty rate remains a significant driver of our revenue growth.
The companies domestic effective royalty rate increased seven basis points you're over here.
<unk> nine 1% in the third quarter and has increased nine basis points, a year to date compared to the prior year.
We expect to observe continued growth of this lever for the remainder of the year as owner seek the shelter of a large proven franchise are that deliver strong topline results to their hotels and helps them maximize the return on investment.
I'd now like to say, a few words about our balance sheet and capital allocation strategy.
Throughout the third quarter, we continued to focus on reducing discretionary costs exercising discipline around capital allocation and effectively allocating resources to drive topline outperformance all of which allowed us to improve our cash position and further bolster our liquidity.
In fact, we reduced our net debt by approximately $50 million during the third quarter and are proud to report cash flow from operations of $70 million for the nine months ended September 30th over 68 million of which was generated in the third quarter alone.
Our cash and liquidity profile remains exceptionally strong at the end of the third quarter. The company had over $790 million in cash and available borrowing capacity through a revolving credit facility.
We remain on track to achieve our previously announced SG&A cost savings of nearly 25% and 2020 and expect to maintain a run rate of SG&A cost savings of approximately 15% and 2021 and beyond.
The decisions, we have made to better align our cost structure in the post pandemic environment physician as well to capitalize on opportunities as travel demand recovers, while allowing us to continue to invest for the long term.
R capital allocation approach defined by Prudence and discipline remains key to our success.
Choices first priority in this area has always been to increase organic growth by strategically investing back into the business and that won't change we.
We are confident that our capacity and cash flows will allow us to not only weather the storm, but also increase the organic growth of our business by strategically investing in rolling bar brands and system size executing our technology roadmap and delivering proprietary franchisees facing tools that help drive top wide revenues.
Based on a demonstrated track record of success and organic growth. We believe these internal investments will drive attractive returns for years to come.
We will continue to evaluate other investments in capital returned opportunities in the context of developing market conditions and our overall capital allocation strategy on a go forward basis.
Before closing I'd like to offer 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 as the as the exact trajectory of our industries recovery.
While we are not issuing formal guidance today. We currently expect that the impact of COVID-19 on the companies year over year Revpar change will be less significant for the fourth quarter versus the third quarter of this year.
Our sentiment is based on the following.
First we are observing continued resilience of leisure demand and continue to drive relative outperformance versus the industry.
Second despite entering fall when demand is historically lower we are pleased that our fourth quarter domestic revpar change has continued the pattern of sequential quarterly improvement through the week of October 24. In fact, we expect our October 2020, Revpar to declined by approximately 25%.
From the same period of 2019.
The final reason, we are optimistic is the nature of the current environment.
Unlike the great recession, which was caused by underlying fundamental economic problems. The current economic downturn is tied to the course of the COVID-19, pandemic, which we believe could contribute to a faster recovery.
We will continue to evaluate the impact of COVID-19 across the business and we will provide further updates in February during our next earnings call.
In closing, we are optimistic that choice hotels, as well positioned to succeed for the remainder of 2020 and beyond.
We continue to benefit from a resilient primarily asset light franchise focused business model, which is historically delivered stable returns throughout economic cycles and provided a degree of cushions from market risks.
While we are not immune to the pressures faced by the industry. We believe that our long term focus and prudent disciplined capital allocation strategy will allow us to continue to capitalize on opportunities during the recovery.
At this time pattern I would be happy to answer any questions operator.
Thank you that's all it is now open for questions. If you do have a question. Please press star one one on your telephone keypad picture of next year, and if you're using a speaker phone. Please pick up your handset to provide the both sound quality.
Our first question comes from Dory cast one with Wells Fargo. Please go ahead.
Thanks, and good morning, guys can you telling dirty percentage development pipeline currently has financing in place and then separately what percentage of the papers may be open within the next two years.
Yeah.
When you got that maybe somebody start with that just from up if you look at our pipeline by 25% of it is conversion hotels.
So those are you know that that's not a situation where you're looking at and financing.
I think when you look at how long those hotels conversion ones in particular would take to open.
It's usually at three to six month timeframe.
And we've seen you know pretty normal.
Normal I would say progression on on the conversion side of the house. The financing market is I think everybody's normally around is is is very challenge.
There are projects getting financement strong sponsors in the right market with the right brand.
And the the challenge for you know most developers right now is understanding how to underwrite. The same is true for lenders as well I don't know if you want to talk about the the percentage of finance that it's not something that.
We're we're familiar with as far as the total pipeline. If some of these are projects that that come in and and then once the agreement assign then the developer goes out and looks for financing. So it is there is a time lag there involved.
Yeah. When you take a look at the historical story, you know to pass point about a quarter of our pipeline is conversions and those are gonna open really quickly one of the reasons why you see your pipeline holding city because as conversions come in the door you have about 70% to 75% of your development agreement today coming in as conversions. So by the time the next quarter comes around and many.
[noise] cases, those hotels will actually open so you're gonna see probably more stagnant pipeline growth just due to the nature of conversions historically speaking.
We've had about you know anywhere from 20% to 25% of our pipeline. That's also under construction or you know have some of that financing you know.
Secured and so there is certainly a path basically imply almost anywhere from 40 to 50 per cent of our pipeline is either under construction or one of those conversions or has that financing secure.
Okay and.
Sure, it's a little bit sensitive, but where can you generalize where your conversion activity is coming from.
Yeah. It's a specific brands that are that are high on on the conversion side, so and the upscale segment. It's the ascend collection, which is nearly 100% conversion.
[noise] comfort is historically has been sort of you know 50 50, new construction and conversion.
And then quality in Clarion point collage roadway clarian those are those are primarily.
Conversion brands. So the mixing our portfolio isn't is a nice mix of conversion brands versus new construction brands, which allows us during times like this to.
Really lean on that part of the portfolio for unit growth.
Right right I guess, what I meant was are you seeing it from from independent properties or is it from from other brands that are converting yours.
It's both yeah. We have we do look at that historically, we're not seeing any difference a year over year, whether it's coming from more more other flags versus independence.
Normally in this occurred 10 years ago, we did see more independence seek out a brand and so I would expect during this downturn.
To see that to start to pick up we're not seen yet and the numbers that it looks pretty familiar to us a year over year as far as that change goes.
And the only thing I would ask stories when you take a look at the the upscale segment in particular Assentor, obviously, a lot of those conversions come from independent boutique hotels, just given the nature of the soft brand collection. The further down market. You go you typically do see yeah sure sure shift from from one competitor to the other as well as some level of those into.
Pendants convert again.
Okay. Thank.
Thank you.
Since our next question comes from Danny Ass off with Bank of America. Please go ahead.
Hi, good morning, guys.
And it looks like you were free cash flow positive in the quarter. So I guess my first question is how much of that is collection from franchisees on you know just any any of the you know any like relief that you've been giving them.
Sure. So so you're absolutely right, yeah over $68 million of cash flow from operations. So we feel very good about where we are we also feel very good about the trends in in collections. You know obviously, we had a very you know stronger summer than we had previously expected and when you take a look at.
Those franchisees, who are essentially non payers, you're you're pretty much in the ballpark of 95 per cent of your franchisers today are actually paying their bills. So we're actually seeing that trend sequentially increase month over month and quarter over quarter as well in terms of your the feed hurdle question. We had talked about early in the pandemic that we were looking at anywhere from 10 to 20.
Last quarter, we got into something closer to $10 million to $15 million, we're actually looking like we're gonna come in at the low end of that range as well so call at about $10 million of deferrals again back to that program. It was very very surgical certainly targeted those those customers who are you know who was struggling at occupancy levels below breakeven to et cetera.
'cause peanut butter spread so we feel very good about the approach that we took him there as well and so obviously you know the court. That's two four tends to be a slightly lower demand quarter. So we'll continue to monitor we still feel very good about the fact that again, it's not a waiver to deferral that would essentially be payback over over a three year period, so you'd differ on the first.
Yeah, and then pay it back over the next two and so again lower end of that guidance as well around $10 million.
That's totally fine.
Good point on the the thrown out a waiver but.
I guess it just didn't natural follow up I have to ask is you know when you think of all the puts and takes so sequential improvement revpar. It sounds like you know the working capital is kind of in a good place here.
How sustainable is this free cash flow generation. When you think of maybe two or three quarters out and then how does that play into.
Your capital allocation strategy.
HM Bye blacks and so on yeah.
Sure. So so obviously, we're not issuing 2021 guidance very dependent on you know the the buyers trends in several other factors so pretty tough to tell what 2021 is gonna look like in the past what we've talked about was you know our our free cash flow would really approximate your net income with a couple of that puts and takes obviously with kimani Amor.
Asian et cetera, and so again feeling very good about where we set today and just as an approximation going forward you know obviously depends on the algorithm. It is you know you can take your EBITA lesser interests less your your your taxes as well and so that's we feel very good about the stabilize aldose you know holding steady now in terms of.
You know capital allocation I would say again, feeling very good about our balance sheet and the cash generation for the quarter, but.
Going to invest first and foremost in the business and we talked about that in the prepared remarks, obviously with downturn do you have an opportunity to invest organically that's gonna hopefully lead to those outsized returns that we've seen in the past there could be market dislocations as well so can't comment on M&A in particular, but given the fact that we're gonna emerge from this thing stronger where.
Going to look first and foremost 10 best organically, obviously take a look at inorganic opportunities out there and then at that point in time, depending on where the balance sheets sits and and obviously the nature of the virus itself will revisit you know the the show buybacks Angela dividends, but again, we have suspended the dividend to at least this year will provide more input you know during the February.
A call.
Great. Thank you very much.
Thank you.
Okay. Your next question comes from my <unk> third. Please go ahead.
Good morning, everyone.
Morning, Good morning.
Just first question back to the development pipeline Pops of Dorries question, but it's supposed to go back to the prior downturn the number of your new construction hotels in the pipeline.
Declined pretty significantly.
Maybe could you provide some insight into why you think that will or won't happen again, this time and maybe some context around what did happen 2000 18009 versus what you're sitting on the ground today would be helpful.
There are Michael I mean, I think if you look at the last downturn that was a you know financial crisis, where the banking industry was.
Frozen for a period of time and then it took a real long time for that to recover which financings a key driver of new construction.
I think the other big change is our portfolio today, we have several additional new construction brands today compared to.
10 years ago, particularly in the extended stay segment as well, which is doing very well operationally is very sought after as a as a development opportunity for hotel developers in general we're seeing a lot of I would call developers, who just focused on transient hotels, showing a lot of interest in those brands right now.
Now and so that's an area today of strength for hours that we didn't have 10 years ago. So I I look at those two differences.
As reasons, why we think our new construction pipeline in our pipeline in general will probably be better.
Condition during this downturn than than that 110 years ago.
Helpful. And then a separate topic as you think about the path of recovery for your non royalty revenue line items and how how are you thinking about the rebound there with and the other revenues line in the procurement services and would you expect those revenues to get back.
To prior peak levels, maybe faster or slower than than the royalty C outlook today.
Sure. So a key driver of that is occupancy you know if you don't if you're running at 50% occupancy you're not using as many sheets and towels and soaps and and the like there is some uptick with the commitment to clean then the need for additional cleaning products.
But but it's not a meaningful number relative to what occupancy would drive so as occupancy billed.
And we have seen it continued to build month over month.
That's a key driver of what we do on the procurement services side a lot of our partnerships are also dependent on travel so from the standpoint of more traveling being out there.
We we had into 2021 and beyond we do expect those to recovery, but those are the those are the drivers of the procurement services rather than I would look too yeah.
Yeah, and then and then Michael I'd I'd I'd just on the other revenue line item. Obviously, you see that particular line item down pretty significantly obviously immaterial in the Grand scheme of things in terms of total about volume, but those are things like your QA Your brand Noncompliant. Some other initial fee, but obviously during the pandemic. We've continued to work with our franchisees on on either.
Doing some of those programs are pushing obviously pushing out some of the some of the timing associated with them I should say and so we do expect you know post pandemic or as as as the occupancy rates continue to rise in our franchisees become healthier you would actually see those returned back to historical levels as well.
Thank you.
Thank you.
And our next question comes from here at Showtime with well researched. Please go ahead.
Hi, Good morning, everyone. Thanks for taking my question.
So you can tell you that you continue to have impressive share gains can you tell us where the absolute Revpar index level now stands above 100 below 100, and maybe broken out by segment.
So I don't know that we have that.
Handy I would say it's increased.
Up it by segment you agree it would have to look at it and maybe while well.
Cover and that's at a high level Dom can fill it in but it's it's essentially increased by you know 10%.
And it we used to run sort of in that high eighties low nineties, so whether it's actually at 100 or above is really segment dependent I can tell you on the extended state, saying that I know that is north of 100% from from that standpoint, I'm pretty sure that the mid scale. The upper mid scale in the mid scale are hurting that ball.
Park as well so I don't know if you've got the specific called out there.
Yeah, I mean, it's obviously dependent bye bye segment I'm feeling very good to pass quite we've continued to take those share games. When you take a look at your your Midscale properties dared, you're you're pretty darn close to that 100% in terms of in terms of the local Revpar index. Both of our upscale brands are well over 100 in terms of local Revpar index, you've got <unk>.
Hamburger. That's you know you know close to 110 or so it sounds pretty close to that as well and so again, where you see the the lower Revpar index. It's the only brand Israeli are full service Clarion brand in the mid scale space and obviously, that's more dependent on groups banquets et cetera, and so again feeling very good about where we are getting close to that hundred or.
Frankly, you know even above 100 for most of those brands are extended stay properties also above 100 in terms of breath part next.
Thank you that that's really helpful. So I I know, you're seeing ninth year over year games, but is that generally higher than where you where several years ago, maybe even 10 years ago I as as I start to think about really from an owner's perspective, I think the benefit of a lot of the lower chain scale properties is on the cost side, but if you can start to get some of the.
And the revenue premium benefits I I would think that could have a little bit of a positive impact on development as well. So curious how that sort of compares today versus where you where several years ago.
Well, it's definitely improved and I think part of this is there are fewer business travelers out there. So you know that's a that's a smaller percentage of our business on a on a on a normal basis. So so we are benefiting relative to competitors by having that strong leisure.
Base that we have but as I mentioned in the in the in the script, we're seeing a pickup in weekday which we do think maybe there may be some of his that is sustainable once we get onto the other side of this pandemic is people have more flexibility in their scheduled.
They will take trips that extend into the weekday and they're taking trips leisure trips in months that.
Historically, we're not as strong on to lose your front. So I do think there's opportunity there and you're right you're right on the on the cost side of the house, particularly for a mid scale in our extended stay brands.
There is an ability there there's just lower fixed costs, so the variable costs and when when occupancy flexes. The owner has a lot more opportunity to maintain their operating margins as demand moves up and down.
The only thing.
I was just gonna say Jared as you look at you know the proprietary channel contribution you're continuing to see a game. There. Obviously that has been really nice you know catalyst for somebody's route probably next games, and then where you're seeing additional games you know and we think it's going to be longterm as as those brands that have been refresh like comfort in particular I mentioned comes.
<unk> was above that hundred in terms of our part index you combine some of those refresh you know the the the refresh room some of the the transformation activities that we did for that brand and then later on new tools, such as revenue management loyalty program enhancements et cetera, we think that given where that brand sits today and obviously a big chunk of our revenue right now that will be eight.
To say sustained some of those Revpar index games that we've seen.
Great. Thank you very much.
Thank you.
And our next question comes from Robyn Finally, with you B S. Please go ahead.
Alright, great. Thank you I mean, the the business model is so resilient in this environment I guess I'm just thinking about it.
And the decrease in franchise agreements here today cause I know you know anyone quarter that can always be lumpy like kind of looking at that ear to date down 38%, even with conversions, you know, making up a slightly higher percent. It seems like the absolute number of conversions is it's down as well first of all.
Last year and I guess, that's just how should we think about that cause it it seems like conversions would be up in this environment.
And and so just wondering you know why we may not be saying that even though there you know I can't or higher as a per cent of the pipeline, but at the.
New franchise agreements decline is more than that game. So just how should we think about that thanks.
But I think we're we're in the the middle of this inflection point. So it's very early on if you look at the second quarter, what owners were doing was preserving capital and preserving cash and we'd be you're going to convert your hotel. It does cost money to to do that and so while owners maybe thinking about it they were probably at a point, where they're saying well let me get.
Through the summer months, let me see how Q3 looks.
As you know most of our development.
Development opportunity occurs in the fourth quarter and so that is you know those are those are months to come I will see that in the next two months here.
And so I think that's that's part of it and we do believe as you get into this longer term, we get into 2021 and owners have sort of figured out how to whether the worst of the storm and back in a place where.
They have the money to convert their hotels.
That that will be a a driver of this in the medium term.
Yeah, Rob and the only thing I would add there you know it's a passport it sometimes takes a few quarters even in a in a in.
In a business as usual environment for could I'd owner to make the decision to switch.
The other point that I would make is when you take a look at the 2019 stats even on the conversion side of the house in a in a business as usual environment is a really tough cop.
2019 was near record year for us in our development team and so when you take a look at that especially where we're sitting just competitively speaking.
Feeling very good about the fact that we've seen the development result that we have today and you know obviously the queue for tends to be the highest development quarter for us and we still feel pretty confident that that'll be the case this year.
No obviously going to continue to work with our franchisees in terms of in terms of where they are but then other franchisees in other brands, obviously may need that quarter or two quarters to make that switch over.
And can you give us some color on kind of health system removals are trending and I'm I'm just thinking about.
Between those two factors, whether we should be just kind of prepared for 21, yeah cause you know maybe to be negative or not to be positive just.
Because of this you know maybe like her pocket being created.
Create a kind of earlier this year.
Yeah. So almost all of our brands are are at or below our forecast determinations, where the terminations are really coming from Rob and it's that economy segment.
And so that's that's really the important point to take away from the prepared remarks in particular, when you look at where the net unit growth is coming from that is something that I shared on the last call, but the net unit growth is coming from brands that are typically anywhere from three in some cases greater than six or seven times more revenue intense done the economy's segments of the vast majority.
Of the churn is coming from <unk> roadway, obviously, the nature of the contracts the nature of the economy segment. Certainly you know in terms of our focus brands Midscale extended stay and upscale we still do expect to see that unit gross continue.
And I combined basis, how would you how does 21 looks like it may be given all those factors.
Yeah. Unfortunately, we're not gonna be giving 2021 guidance at this point Robyn, but what I can tell you is you know you're seeing the trends today and you're seeing the trends continue, especially in some of those focus segments.
Okay. Thank you. Thank you very much.
Thank you.
And our next question comes from David Kat with Jeffrey Please go ahead.
Hi, everyone. Thanks for taking my question and congrats on the quarter you know.
As we move around in our travels.
Happen upon data points and whether those you know are within your purview or not around you know you know blown distress, writing and franchisee distress et cetera.
Can you just you know give us some color around what you were saying within you know your population you know there sort of durability.
From from now to 12 months from now or so.
Sure I mean, I think if you if you look at our portfolio on average.
The franchisees do not lever their assets up very highly so you know an average they're probably at about 50% leverage so they're they're they're not over levered, and and where where there are where there that services is a significant piece to this and then secondly, many of the owners, we've talked to and where we're suppose he just did this broadly.
They've been successful or getting interest forbearance.
A lot of our owners have relationships with community banks that go back you know years. So there is a there is a big real helpful relationships on that side of the house. So you know anecdotally I mean, we don't we don't we don't have a a way of actually tracking this but but anecdotally what we're hearing is that are.
Are owners are working with their lenders, but it's not as big of a component as it is when you move into that upper upscale world.
Wherever you don't like today, so that that's a key factor here and the second piece of it is we've been running our portfolio at an occupancy level for the most part that's.
[noise] above.
Breakeven, so owners are making money and therefore, they're not they're not falling into distress. So.
So those are those are the factors that I look at David and I think you know just from when we went with him or I'm talking to owners, we have a sense of sort of where their pain points are it's it's not in that it's not in that lender front at this point obviously the longer this goes on things.
Things may change as we move into the future, but right now we're feeling pretty good about the health of our franchise ebay's.
Got it and.
And Ah apologies if you covered this already but in terms of you know how we should think about openings in the fourth quarter.
Have you said anything about that.
We have not and as you know that that's the quarter when a lot of what's happened. So there's a there's a you know.
A lot of uncertainty around the next two months as far as what will happen and so therefore, we're being very cautious on on I'm trying to project on that.
Got it very helpful. Okay, Thanks, and good luck.
Thank you David.
And our next question comes from Thomas Allen with Morgan swimming pool for him.
Thank you Uhm just wanted to me. So can you dive a little deeper into work gives you confidence for cure poor will be better than three Q I feel like you know a number of your peers are come out just suggest there'll be more similar.
So I just Wanna kind of what what's giving me the confidence thank you.
Yeah sure Thomas So we've as we said on the prepared remarks, the first month came in at 25%.
Down relative to the the third quarter, which was negative 28%.
And you know if you dial that back to Q2 that was negative 49%. So we're seeing quarter over quarter and now a month over month uhm improvements.
So that that's one factor the other factor is you know for us traditionally queue for is.
Is is a month, where there's just lower demand out there in general there is more business travel out there in the fourth quarter historically for US and we are seeing continued volume you're a month over month volume in a business travelers that are out there as you know in our segment that's primarily.
Action retail trade and transportation segments right now that we're seeing increased on the business travel side. So I think those factors.
You know lead us to believe and we look at the month of November and December that they will continue the trend we've seen in Revpar decline improvements a month every month.
Okay, I'm Gonna look when I look at your weekly trend it seemed like they stole out filled out a bit.
And then I guess I guess the bigger question, though is you're covered cases are increasing again in the U S does it feel like that's having any impact on you know on demand level.
Now with regard to the case counts. So we saw a pickup in case counts in the month of July and August.
And we did not see a correlation between that and and bookings going down we actually saw bookings increase.
So the the two don't appear to be correlated and this is in specific areas of the country, where where the cases, where rising we continue to see travelers.
Build travel demand month over month.
It's always hard to know what the next two months for the next year is going to going to entail with regard to the to the virus.
But as I said, we're as we look back at the last eight or nine months has case spikes have gone in a in a higher direction other than that initial shock in in March we haven't seen a correlation between that and traveled a man.
And then and then Thomas suits your point on some of the stalled growth I think you you Gotta look at it on a seasonally adjusted basis.
The demand so a couple of things there when you take a look at some of the weeklies, which were down 27%, obviously, there's some fluctuations they're based off you'll see some pretty dramatic improvements during weekend travel for US obviously, just given the leisure demand et cetera, and so when you when you add the Friday and the Saturday, probably would expect to see some improvement that's why we actually got.
Added to the 25% for October in particular.
What we're seeing in October is much stronger than expected in terms of seasonal trends Pat mentioned corporate side, but also on the leisure side, especially when you look at the south.
In the South it's had the strongest route par growth among all of our regions Q3 and talk tober. Despite the recent elevation and buyers cases, so I I witnessed and we're not sitting here, saying you're you can expect to see the improvements in Revpar looked like they did from Q2 to Q3, we just expect to see some level of sequential revpar improvement from Q3 to cute.
Four and not showing up in the 25% that you see in October.
Oh really helpful color. Thank you.
[laughter].
I'm not so much Athens down with lung <unk> research. Please go ahead.
You get sick and.
I think most of all my questions have been answered guys, who just wanted to ask about you know kind of your mix of you know cause <unk> you know versus business you know how they're trying to three few verses two cute and they're kind of looking forward. You know obviously, it's a hard question because you know who knows what's you know I took a walk in the quake Orange 12, plus months, but you know kind of how you see that mix you know a credit do you know.
Of course of 2021.
Yeah sure. So our traditional mix was sort of 70 30 leisure to business.
What we've seen in the third quarter was leisure at about 82%.
So it is a higher portion of the mix, even though that the total demand it down.
And as I said in in our in our remarks, we are seeing.
The the extended trips where people are taking long weekends, we're seeing actually more in our mix of stays north of 13 Knights.
So we are seeing some some some drivers here that there are a little different than than what we've seen historically and so the real question is gonna be as the virus gets under control as the country returns to more of a normal travel pattern will consumers have more flexibility with there with the offices they work.
In in with the schools that that their children attend and that made of allow more travelers to travel a different points of the year and also different days of the week and.
And if that is in fact, the case then our our locations are really well.
Suited to pick up some of that demand.
That's what the future starts to hold as as people return to to a more normal pattern of travel.
Great makes us and then just you know as a you know but quick follow up to that is kind of picky about your unit bills. You know is there any thought too you know you know come maybe you know I forgot shifting more tours.
You know kind of like the leisure market bills versus business going for giving you know it may be no question time until we see things get back to pre covid normal or is that just you know if I should really you have to kind of make that call and you think about your bills in general.
Yeah, I think if you look at our brands.
For for most of our new construction brands. They they they they work off a driver of both business and leisure travel and that really depends on the market that that that we put them into I think some of the things that we have been doing in the past couple of years. These dual brands, where you have an extended stay in a transient hotel on the same.
Piece of dirt is really owners waking up to that fact could you to tap into an purpose build rooms that are more suited for the different types of demand drivers if you've got extended stay and you've got.
Business travel and leisure travel we are seeing some of that I would say if you look at our extended stay hotels there is a significant.
Contribution in those hotels that is related to business travelers that are in the market for a long period of time.
So so those and those we would expect to continue even if the if the shifts more of a leisure travel demand on the leisure front you know the points, we met around why ascend is done so well.
A lot of those are in their unique hotels there in.
Markets that are you know travel to destinations where the hotel itself may be the destination because of their their boutique or historic nature.
And they're usually located in places where where that type of traveler is is going to be headed so those are the types of brands that I think will see grow in this new environment.
And we're already seeing some of that as we talked about and are prepared remarks.
Great. Thanks, so much for all of the car Patrick.
Sure.
And our final questions come from one that's alright with morning, sorry. Please go ahead.
In the morning, guys. Thanks for squeezing me in so you guys are having good morning, so you're having some strong success, obviously with your focus on revenue intense segments, such as extended stay Midscale upscale just wondering if you comment maybe a little bit more the economy scale and what you think <unk>.
Be needed there too I guess lift the rep. Her index unit growth is it something.
That's more of a kind of a structural issue with that segment or is it something that maybe it's just you know the brands might.
Nida refreshed just kind of wondering if you could provide some color. Thanks.
Well I think you have to look at the segment itself.
Itself, then I mean, if you look at the last really the the the the the 911 recession.
The segment really hasn't grown in the past 20 years and in fact has started to shrink.
So there's just less supply out there.
There's a lot of that product that is exterior corridor, it's old and so it's just a it's a more challenging environment. If you wanted to do a brand refresh in that segment.
Secondly, I would say that you know the if you look at our roadway brand in particular those are shorter term contracts and so owners come in look at the you know.
Try us out if you will and they have the ability to you know if they they feel like they can do better on their own as an independent they have the ability to move out of that Grand.
More easily and so I think those are some of the drivers of the of the turnover in that segment. It's a it's a segment where the the franchise fees because of the the average daily right that they charge or not that significant have a portion of their of their P&L, but those are some of the drivers I think that is those owners move in in <unk>.
They have the ability to.
To to ship contracts at a at an earlier point in time and then our other brands.
Okay I'm in do you think that the segments hasn't seen much grow with over the 20 years 'cause maybe it was over supply it at one point in the supply demand balance is that maybe it and it's kind of.
More normalised or or do you kind of see this segment as you know the next five years kind of continuing as it maybe it has been the last 20 years from kind of a supply demand characteristic.
I would say, it's probably gonna continue.
The trend it's been on for some of the factors that that are going on in the economy and just the age of the product I would say, though that the you know the the would spring brand that we have.
Is actually I think the only new construction bring him in the economy segment and that is growing significantly.
Has owners, who are you looking to build in that [noise] right here for extended stay it makes it a lot of sense, because that's really where that where that model works, but other than the economy extended stay segment, there's not much new construction going on in the economy segment.
Okay, great. Thanks for the color and congrats on a solid corner.
Thanks, Dan.
Isn't that that's concluded our question and answer session for today I'd like that turned off my back over to hip hop people Alright, you know clothing remarks.
Thank you operator, and thanks again, everyone for your time as you heard today choice hotels continued to drive results significantly outperformed the industry.
And we're positioned to emerge stronger from these trying times. So I hope all of you stay safe and healthy and we'll talk to you again in the new year take care.
And that does conclude today's conference call. We appreciate your participation you may disconnect. Your life at this time and have a great day.
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