Q4 2020 Choice Hotels International Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to choice hotels International fourth quarter and full year 2020 earnings call.
At this time all lines are in a listen only mode.
I'd like to turn the conference call over to Allie Summers Investor Relations director for choice hotels.
Good morning, and thank you for joining us today before we begin we'd like to remind you that during this conference call certain predictive on forward looking statements will be used to assist you in on.
Understanding the company and that's yourselves.
Actual results may differ materially from those indicated in forward looking statements and you should consult the company's forms 10-Q, 10-K, and other SEC filings for information about important risk factors affecting the company's debt you should consider.
Moreover, we would like to acknowledge that there continues to be significant uncertainty as to the impact of the COVID-19 pandemic on our future performance.
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.
Can find a reconciliation of all non-GAAP financial measures referred to in our remarks as part of our fourth quarter and full year 'twenty 'twenty earnings press release, which is posted on our website at choice hotels Dot com under the Investor Relations section.
This morning put patients, our president and Chief Executive Officer, and Dragovich, Our Chief Financial Officer will speak to our fourth quarter and full year operating results and financial performance.
They will be joined by Scott The Oak Smith, Senior Vice President real estate and finance.
Following pods and dumps remarks, we'll be glad to take your questions on this that I will turn the call over to Pat.
Thanks Ali and good morning, everyone.
We appreciate your taking the time to join US and hope you are all well.
This week, we lost a leader who had a major impact on our industry and on the lives of many who call the travel industry there.
On behalf of all of US at choice hotels, I'd like to express our deepest condolences to Arnie Sorenson family and to the many people across our industry, who are inspired by his personal and professional leadership.
We will all miss him.
As we look back 2020 was a year. Unlike any other year that challenged leaders on companies of ground in the globe.
And choice hotels was no exception.
But it was the collective response dedication and resilience of our franchise owners their hotel staff and choice associates that made all the difference for our company and franchise system.
I would like to thank them again for everything they've done for our guests and the communities they are impacted.
During a year of significant challenges brought upon the industry by the pandemic choice hotels achieved a number of key milestones that demonstrate our long term strategy of growing our presence in more revenue intense segments and locations is working.
2020 was the year that our flagship comfort brand return to unit growth.
After a successful transformation incur.
Increasing its domestic system size by 2%.
As we celebrate comfort 40th anniversary this year.
Access of the brand is proof positive that we invest for the long term.
And as you can see by both unit growth and impressive Revpar performance those investments are paying off and position the brand for growth into the future.
2020 was also the year our extended stay segment rapidly expanded by 44 units to nearly 450 domestic hotels.
And the domestic pipeline for that segment alone reached over 315 hotels.
The segment now represents nearly 8% of our total domestic portfolio.
And strong developer interest reaffirms that our strategic commitment and continued investments in this highly cycle resilient segment.
Our driving a competitive advantage.
And finally 2020 was a year of continued growth for our upscale portfolio.
Highlighted by an 8% growth of Cambria hotels.
The brand now has a pipeline of nearly 80 hotels and is expected to accelerate its unit growth in 2021.
Consumer confidence in our upscale products drove the brand's outperformance vs. Their local competitors and is a proof point to current and prospective owners of choice hotels value proposition in the upscale segment.
The results, we achieved confirm our strategic focus to grow in these segments, which will further fuel the long term revenue intensity of our system.
I'm also pleased to report that we have continued to drive revpar results that significantly outperform the industry in the fourth quarter and 2020 as a whole.
Our domestic system wide year over year Revpar change surpassed the industry by nearly 17 percentage points for the full year.
Declining 37% from 2019.
Since the onset of the pandemic in mid March our performance has achieved sequential quarter over quarter improvement with our fourth quarter domestic system wide revpar declining 25, 1% from the same quarter of 2019.
Our results continue to outpace the overall industry and our chain scale segments.
In fact, our outperformance expanded in the fourth quarter.
In 2020 choice hotels grew revpar faster than our local competitors, increasing revpar index by over five percentage points. Two notable lifts in weekday and weekend Revpar index.
Our Revpar index growth strengthened in the fourth quarter of 2020 and continued to improve through year end.
Throughout 2020, we also continue to grow our effective royalty rate.
A reflection of the improving value proposition, we deliver to our franchise owners.
Our success is highlighted by choice hotels key differentiators, including the strength of our proven and well distributed brands.
Our customer profile and the continued resilience on leisure travel demand.
Our powerful reservations delivery system and loyalty program.
And our franchise focused business model.
These four attributes along with our relative outperformance versus the industry.
Reaffirmed our confidence in our strategy.
Therefore in the fourth quarter, we decided to accelerate certain strategic investments in our product portfolio and value proposition capabilities to position. The company for continued success in the future.
Consumer and developer demand for our products encouraged us to invest in new prototype development and brand initiatives in our key strategic segments.
We also advanced our pricing optimization and merchandising capabilities to further enable our owners to reach their target customers and effectively drive topline revenue to their hotels.
Turning to 2021, we expect our momentum to continue into the first quarter, allowing choice hotels to further outperform the industry in the current environment.
We recognize that a high degree of uncertainty remains and our company like the hotel industry overall continues to be significantly affected by the pandemic.
Nevertheless, we are observing positive signs that give us confidence for 'twenty 'twenty, one and beyond.
First given the vaccine rollout, we believe consumers are beginning to feel more optimistic about future travel prospects.
In fact, we've observed that our customers are beginning to plan their travel further in advance as noted by improvements in our 31 day plus bookings since November.
Furthermore, we expect the trend of Americans vacationing domestically and taking road trips will continue.
With 95% of our domestic hotels located outside of dense urban centers and over 80% of our portfolio in the U S. Our hotels are uniquely positioned to welcome travelers as they hit the open road.
Second stimulus checks from the December federal relief package.
Prospect of additional government aid this year and high household savings point to a continued recovery for our small business owners and middle class consumers our core customers.
Finally, and as discussed on our last call. We believe that long term consumer trends such as remote work and virtual learning will likely continue to provide Americans flexibility in where and when they travel for leisure.
We feel confident that our core strength combined with the tactics. We deployed in response to the pandemic have positioned us well to continue to capture and increase our share of travel demand over the long term.
Our long term strategy of growing the right brands in the right segments in the right locations, while enhancing our distribution capabilities continues to pay off.
In the fourth quarter, we generated significant quarter over quarter growth in our proprietary revenue contribution mix, which drove our full year results to match our prior year's strong performance.
More specifically our website contribution increased by 150 basis points ending the year with the three strongest months in 2020.
While our loyalty program increased its contribution by 280 basis points quarter over quarter.
In addition, we continued to benefit from our most loyal customers choice privileges Diamond elite members, who contributed an even higher percentage of overall revenue for full year 2020 as compared to the prior year.
These results have helped drive Revpar index share gains of over 600 basis points in the fourth quarter versus our local competitors.
Significantly across all location types as reported by STR.
For the past 46 consecutive weeks through mid February we've observed significant revpar share gains against the competition.
Giving us further optimism about our future revenue trajectory.
I'll now provide a brief update on our key brand segments.
Our mid scale brands represent two thirds of our domestic portfolio nearly half of the franchise agreements executed last year.
And over half of the total domestic pipeline.
All of our select service Midscale brands achieved year over year, Revpar index gains driven by occupancy and average daily rate index gains versus their local competitors through the fourth quarter and full year.
We're especially pleased with the performance of our comfort portfolio, where our efforts to transform the brand have led to Revpar index gains versus local competitors of nearly nine percentage points and our revpar change that was over 10 percentage points more favorable than the upper mid scale.
Chain scale in the fourth quarter.
At the same time, we continue to add new construction hotels to the comfort pipeline and attract high quality franchise conversion agreements to the brands that will fuel revenue intense growth in the near term.
And finally, Clarion Pointe are relatively new conversion brand extension to our Clariant portfolio ended the year by opening the doors of its 25th hotel in the U S. A four fold increase of its portfolio since the prior year.
The brand now has over 50 domestic hotels open or in the pipeline.
Moving on to our extended stay segment, where we nearly quadrupled the size of the portfolio during the last five years.
Once again, our purpose built brands tailored for long term guest outperformed the competition in this cycle resilient segment.
Our wood spring suites brand achieved an average occupancy rate of 72% for full year 2020.
And experienced year over year Revpar growth of 2% in the month of December a truly remarkable achievement given the current environment.
The brand's pipeline continues to expand and reached 150 domestic hotels at the end of 2020.
At the same time, our suburban extended stay brand experienced year over year occupancy gains in the fourth quarter, and then over 40% increase in franchise agreements activity for the full year.
Our mainstay suites mid scale extended stay brand captured more than 20 percentage points in Revpar index gains versus its local competitors, both in the fourth quarter and full year.
And developer interest is growing.
Most recently, we signed and on boarded the largest multiunit transaction and mainstays history.
10 units, which significantly increase the brand's presence in the segment.
Last year alone the brand's portfolio expanded to 90 domestic hotels open.
And over 20% increase year over year.
And its pipeline has swelled to more than 140 domestic properties.
For full year 2020 choice hotels awarded nearly 110 extended stay franchise agreements.
Validating our strategic focus on this segment from both new construction and conversion opportunities.
Given these results we remain optimistic about the growth potential of our extended stay portfolio.
I'd now like to turn to our upscale portfolio, whose choice hotels dot com contribution increased by nearly 500 basis points year over year in the fourth quarter.
And Mark the strongest quarterly revenue share in 2020.
Our upscale Cambria hotels brand continues its ongoing momentum growing its portfolio size by 8% and its pipeline to nearly 80 domestic hotels.
19 of which were already under construction at year end.
Developer interest in the brand remains high with 16 franchise agreements executed for the full year, including one third of those awarded in the fourth quarter.
Thanks to being affiliated with our system. The Cambria brand continued to benefit from leisure travel demand.
<unk> revpar share gains versus local competitors of nearly 22 percentage points in the fourth quarter.
The ascend hotel collection continues to lead the industry as the first and largest soft brand.
With nearly 300 hotels open around the globe.
Non hotels outperformed the upscale segment and year over year fourth quarter Revpar change by over 20 percentage points.
The brand also achieved Revpar index gains of nearly 13 percentage points against its local competitors for the full year further enhancing the brand's attractiveness to developers looking for a smart conversion opportunity.
Choice hotels brands remain in demand despite the challenging environment.
Added by our strong value proposition and continued outperformance.
Developers continue to choose our brands as they seek to improve their operations and boost the long term value of their hotels.
For full year 2020, we awarded 427, new domestic franchise agreements of which over 70% were for conversion hotels.
Demand continued to accelerate throughout the year.
With over one quarter of the total agreements executed in the month of December.
In the fourth quarter alone, we executed 195 domestic agreements of which over 70% were for conversions.
Additionally, our developers remain optimistic about the long term fundamentals in the lodging industry and.
In fact, nearly 30% of total domestic franchise agreements we awarded in 2020 were for new construction contracts.
Our emerging markets development team, which is dedicated to driving diverse ownership of choice franchise hotels, among underrepresented minority owners awarded two dozen franchise contracts in 2020, including the largest minority owned multi unit franchise agreement in the programs history.
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We also recently announced the creation of the choice hotels owners African American Alliance further underscoring our commitment to strengthen representation support and advocacy for Black and African American hoteliers.
This builds on our long commitment to diversity in the hospitality industry generally, including among others. The strong representation of South Asian, and Indian American Hoteliers in our system.
These results and critical initiatives are major drivers for our optimism in the years ahead.
We're also committed to enhancing our value proposition by growing our platform business we.
We recently announced the further expansion of our attractive upscale platform with the addition of 22 Penn National Gaming Casino resort properties, representing nearly 7000 rooms, joining our ascend hotel collection.
This strategic agreement will offer more than 47 million choice privileges members the opportunity to earn and redeem points at these Penn properties I booking their stay directly on choice hotels Dot com.
Our focus remains centered on franchisee profitability through reducing the cost of ownership at the hotel level and driving top line outperformance versus competitors.
Our franchisees are at the core of everything we do and we are committed to helping them along the royalty economic recovery.
Throughout 2020, we conducted 49000 individual constant consultations with hotel owners and operators that helped our franchisees who remain open and continue serving guests.
We've also rolled out offerings like grab and go breakfast housekeeping on demand and contactless check in that further lowered franchisees total cost of ownership.
Ensuring appropriate safety precautions for our owners hotel staff and guests.
We are particularly pleased that legislation we advocated for became law in December providing additional relief and stimulus to small businesses like our franchisees.
Specifically, we supported the establishment of a second draw loan program for existing Paycheck protection program borrowers that were hit hard by the pandemic.
The extension and improvement of the program itself and increase flexibility for lenders.
We will continue to advocate with the new Congress and administration for additional relief measures aimed at assisting small businesses and providing targeted health for the travel industry.
In closing I'm confident that these trying times have made us even more resilient and agile as a company.
Looking beyond the crisis I'm convinced we will emerge even stronger over the long term.
Our long term view resilient business model proven brands and strong balance sheet will help us to further capitalize on growth opportunities in 'twenty, 'twenty, one and beyond with that I'll hand, it over to our CFO.
Dom.
Thanks, Pat and Hello, everyone I hope that you and your families are all well and healthy.
Today I'd like to provide additional color around our fourth quarter and full year results and share updates regarding our balance sheet liquidity and approach to capital allocation.
I'll close with our thoughts on the outlook for the road ahead.
Taking a closer look at our results for full year 2020, total revenues, excluding marketing and reservation system fees were $371 $5.088 billion of which was generated in the fourth quarter and adjusted EBITDA totaled 240.
The $1 $1 million fee.
$54 $7 million of which was generated in the fourth quarter.
And our adjusted EBITDA margin for full year 2020 with 65%.
As a result, our adjusted earnings per share were $2 22, and 51 cents for full year 2020, and the fourth quarter respectively.
Let me now dive into our three key revenue levers beginning with Revpar.
Our domestic system wide revpar outperformed the overall industry by nearly 17 percentage points for the full year declining 37% from the prior year.
Our fourth quarter 2020 domestic system wide revpar surpassed the industry by nearly 26 percentage points declined 25, 1% from the same period of the prior year and improved by 370 basis points from the third quarter.
In addition, our results exceeded the primary chain scale segments in which we compete as reported by STR by over five percentage points for full year 2020, and nearly eight percentage points for the fourth quarter.
We've long focused our strategy on driving growth across the higher value and more revenue and tests upscale extended stay and mid scale segments and the investments. We've made are paying off in the fourth quarter. These strategic segments helped us achieve material year over year.
Year, Revpar outperformance against our respective industry chain scales and drove games versus our local competitors.
Specifically, our upscale portfolio increase relative to its local competitive set by over 12 percentage points, our extended stay portfolio outperformed the industry's revpar change by an impressive 49 percentage points and grew versus its local competitive sets by 14 percentage.
Points.
Finally, the Revpar change for our Midscale and upper Midscale portfolio exceeded these segments by 10 percentage points.
For full year 2020, all of our select service brands achieved significant Revpar index gains versus their local competitors with each of our upscale and extended stay brands experiencing share gains of more than 10 percentage points.
In fact, we were able to increase our overall revpar index against local competitors by over 600 basis points in the fourth quarter through notable lift in both continued occupancy gains and our franchisees' ability to maintain rate integrity.
More specifically our average daily rate index increased two four percentage points. Thanks to our experienced revenue managers, who had been counseling our franchisees on the best use of tools to maximize their pricing strategies and providing sophisticated market intelligence and strategic channel management.
We expect that our recent investments in these capabilities will further enhance revenue management for our franchisees.
Despite the unprecedented circumstances, we experienced positive unit and room growth year over year.
Across our more revenue intense brands in the upscale extended stay and mid scale segments, we observe stronger unit growth increasing the number of hotels by one 8% year over year.
We expect our unit growth rate of these key segments to accelerate beyond 2000 twenty's growth rate.
We're especially pleased to report that following the completion of its brand transformation. The comfort brand family returned to growth in 2020, increasing the number of domestic units by 2% year over year.
The brand reached over 260 hotels and its domestic pipeline.
On quarter of which our hotels awaiting conversion, which we believe will fuel the brand's growth in the near term.
Demand for our conversion brands has only increased aided by our strong value proposition and recent outperformance in fact, the number of our conversion agreements executed and opened in 2020 was more favorable than we previously projected when accounting for the impact of the pandemic and additionally.
We awarded a higher number of conversion agreements in the month of December than previously expected.
These trends give us further optimism for continued growth in 2021 and beyond.
Our royalty rate remains a significant source of our revenue growth, which is driven by the attractive value proposition, we provide to our franchisees their continued desire to be affiliated with our proven brands and our pipeline.
The company's domestic effective royalty rate increased seven basis points year over year to $4 nine 8% in the fourth quarter and grew eight basis points for full year 2020 compared to the prior year.
We expect to maintain the historical growth trajectory of this lever in 'twenty 'twenty, one as owners seek choice hotels proven capabilities of delivering strong topline revenues to their hotels, while helping them maximize return on investment.
I would now like to turn to our balance sheet and our capital allocation strategy.
Throughout 2020, we transformed our cost structure exercise prudent disciplined around capital allocation and effectively allocated resources to drive topline outperformance all of which allowed us to improve our cash position and further bolster our liquidity.
We successfully navigated the impact of the pandemic without having to renegotiate debt covenants, we refinanced a portion of debt to extend our debt maturity profile and capitalized on favorable credit markets to significantly reduce the effective cost of our borrowings.
In fact, we reduced our net debt by approximately $50 million during the fourth quarter and are pleased to report cash flow from operations of over $115 million for 2020 over $45 million of which was generated in the fourth quarter alone.
Spike the historically lower seasonal demand environment.
Our cash and liquidity profile continued to be strong at the end of last year. The company had approximately $835 million in cash and available borrowing capacity through its revolving credit facility.
Our strong results relative to the industry and the chain scales in which we compete since the onset of the pandemic as well as our adjusted SG&A cost savings of 21% realized throughout 2020 gave us confidence to make certain investments in the fourth quarter to position the company for success in 2020.
One and beyond.
We will maintain our disciplined approach to managing operating expenses, while investing for the long term and capitalizing on opportunities as travel demand recovers.
Our capital allocation philosophy remains unchanged, meaning we will continue to be disciplined stewards of capital and take steps that we believe maximize value for our shareholders choice.
Voice is primary objective has always been to increase organic growth by strategically investing back into the business in particular, our capacity and strong cash flows will allow us to strategically invest in capabilities to further strengthen our presence in more revenue intense segments in <unk>.
Hence our franchisee value proposition and drive topline revenue through value added programs and services, we offer to our franchisees guests and other travel partners.
We put a premium on balance sheet flexibility and we expect to continue to utilize our strong leverage position to invest in these growth opportunities.
Just on our demonstrated track record of success and our organic growth. We believe these internal investments will drive attractive returns for years to come.
We will continue to monitor the environment and evaluate capital returns to shareholders in the context of other investment opportunities our leverage levels market conditions, and our overall capital allocation strategy.
Before opening up for questions I'd like to offer some thoughts on what lies ahead.
Ultimate and precise impact of the pandemic on our business for 'twenty 'twenty, one and beyond remains largely unknown as is the exact trajectory of our industry's recovery.
While we are not issuing formal guidance today, we currently expect to see a sequential quarter over quarter improvement in Revpar change in the first quarter 'twenty 'twenty, one versus both 'twenty and 'twenty and 2019.
Our view is based on the following.
First we are observing continued resilience of leisure demand, especially in drive to locations and the company continues to experience stronger year over year, Revpar change performance versus the industry and the chain scales in which we compete.
Second despite entering our historically lower demand season, we are pleased that our first quarter domestic revpar change has continued the pattern of sequential quarterly improvement through mid February.
In fact, our year to date 'twenty 'twenty, one revpar has declined by approximately 18% from the same period of 2020.
Finally to date, we have seen little correlation between the rising COVID-19 cases in the fourth quarter and Revpar change trajectory for our company.
This along with optimism and consumer sentiment reflected by our 31 day plus booking trends even before vaccines are widely distributed signals that consumers desire to travel is climbing.
We will continue to evaluate the impact of COVID-19 across the business and we'll provide further updates in may during our next earnings call.
In closing we remain optimistic that choice hotels is well positioned to succeed in 2021 and beyond and are confident in how we're managing the company for the long term.
We continued to benefit from a resilient primarily asset light franchise focused business model, which has historically delivered stable returns throughout economic cycles and provided a degree of cushion from market risks.
While we are not immune to the pressures faced by the industry. We believe that our long term view disciplined capital allocation strategy and strong balance sheet will allow us to continue to capitalize on opportunities during the recovery and drive outsized returns for years to come at this time, Pat and I would be happy to answer.
Questions operator.
Ladies and gentlemen at this time, we'll begin the question and answer session.
Ask a question you May press Star and then one using a touch tone telephone.
To withdraw your question you May press Star two.
If you are using a speaker phone, we do ask that you. Please pick up the handset before pressing the numbers to ensure the best sound quality.
Once again that is star and then one to ask a question.
And our first question today comes from Michael Bellisario from Baird. Please go ahead with your question.
Hello, everyone.
I'm Michael <unk> Michael.
First question from me can you maybe expand on the accelerated investments that you made during the fourth quarter, but what were those exactly how.
How much you spent and then maybe how much more spend is left there.
Sure. So let me just put it into a couple of categories and put it into some context as well.
Yeah, I think as we look back on 2020 or first half of the year was really spent kind of readjusting, our cost structure for a lower demand environment.
A lot of those decisions. We made you know really by the July timeframe and as we got further into the year and got closer to the fourth quarter, we began to see sort of how the recovery was likely to take shape.
And we also began to get a lot more confident around the resiliency of our business model the performance of our brands, particularly what we're seeing on on new conversions.
And so we decided to accelerate a number of things I would put them on and maybe four categories.
The first is new brand prototypes, so again reinvesting back in to the future of our product portfolio set.
On his around our pricing and merchandising capabilities, so our revenue optimization tools.
We'll be discussing here.
Probably in the next month or so during our roll out of that that capability.
Third would be continued investments in our key segments that have outsized growth in front of them I would point to especially to the extended stay segment and the upscale segment.
And then fourth is we on boarded a new travel partner and and Penn National.
Which is an exciting opportunity for us so really investing in all four of those key areas as where those where those investments came in the fourth quarter.
Yeah, Michael on when you quantify those impacts I mean, the reality is when you take a look at quarter four adjusted SG&A costs, we were down about 17% for full year, we were down about 21% versus the prior guide of around 25%. So that's really the puts and takes for full year 2020, as well as Q4 I think when you look ahead.
The follow up question is going to be what do we expect in terms of run rate savings from an SG&A perspective on the reality as we said.
We were looking at about 15% or so last quarter, we talked about that we would evaluate that in the context of the demand environment. So I would say somewhere in that 10% to 15% range is certainly still within reach and we would be able to flex up or flex back based on where we are on the revpar environment. So.
<unk> is as we still do we still will maintain that margin that you're seeing this year on we expect to see that margin continue to grow for years to come.
Got it that's very helpful and then just.
One more.
New agreements that you're signing.
What are franchisees asking for or what terms are you being more flexible on as you're signing up new deals today.
Well I think it depends on you know what what brand category, you're talking about you.
You know for our brands that are in significant demand comfort.
Spring some of our other extended stay products.
Where we're attracting developers who are interested in joining those clubs. If you will so there's not a lot of change with regard to.
Any any discounting or the like.
I think in the.
And the more what we call our foundation brand category quality Con large roadway.
Those are those are brands that have continued to to also have continued sort of pricing power.
With regard to effective royalty rate and I think it's all of it's reflected in that.
Seven point increase in the effective royalty rate overall, so we're not we're not having to do a lot of.
Concessions, if you will on the on a year over year basis.
With regard to what's in the agreements to to win new contracts.
Got it thank you.
Thank you.
Our next question comes from David Katz from Jefferies. Please go ahead with your question.
Hi, good morning, everyone.
Good good to hear everyone's voices.
I wanted to talk about sort of the overall franchisee landscape.
Just get your thoughts on sort of what their overall financial health health is I know that it's a large population.
But you know what changes you may have sort of structurally made.
You know to help them, how much of that endures and just.
An update around all of that would be really helpful.
Sure. So I think if you are the long term trend on.
We've been focused on for our franchisees is lowering their total cost of ownership.
It's something we've been engaged in for a long period of time prior to the pandemic.
We accelerated a number of things.
That help them reduce the total cost of running their hotel.
Cost of breakfast, we have a much more flexible grabbing grow breakfast option.
Housekeeping on demand has created an opportunity for guests to opt out of daily housekeeping.
Contactless check in is allowing them to do lower the labor they have at the front desk.
So there's a variety of programs that we're doing that apply to all of the brands within each brand category.
David There's also things that we have underway to continue to drive down the total cost of ownership.
For those owners second I would say you know the relief that was available we believe about 85% of our portfolio took a PPP or heat IDL loans back in the first draw.
In the in the second and third quarter.
We think with the second draw that's been released into late December legislation.
On that that's likely to be somewhere around 40% to 50% at this point have either indicated they're going to apply them. So they are getting the needed relief that they need to bridge to where we need to get to on a recovery perspective, and then finally I would point to the fact that our brands are outperforming.
Performing if.
If we look at how many of our hotels are operating at sort of that 30% occupancy level, it's very similar to a year ago.
No it's not.
On a situation and that means that they're used to operating in those low demand environment. So.
I would say by and large our franchisee health is in a very positive place relative to what's going on around them.
Certainly with the optimism around vaccine rollout the optimism around what we're seeing with.
30 day, plus bookings and.
In our consumer sentiment that we would expect to see once the pandemic begins to get behind us.
Our franchise, you see that as well and so there is for them a <unk>.
Light at the end of the tunnel, where six months ago that wasn't the case. So I think there's there's just a sense of optimism around that as well, but as we said on the on the in the.
Call you know we're.
We're not out of the woods yet.
There are a lot of owners who are.
Still planning through the of these these these difficult times and so it's something we're very focused on and that's again why in that long term focus on driving down the cost of ownership for our brand that's something that's going to continue to be a strategic focus of ours.
In the post pandemic area era as well.
David and I would just on the only thing I would add is it's really showing up in the metrics as well when you take a look at our collections rates in particular feeling.
Feeling very strong feeling very optimistic about where that's trending we have about 96% of our franchisees were actually paying today and so that number continues to increase month over month, 100% of our system is open and operating today and so everything that Pat just mentioned and some of the flexibility that we were able to provide to our franchisees through pips on other.
Items really showing up in the in the results themselves.
Perfect. Thank you very much thank.
Thank you.
Our next question comes from Danny Assad from Bank of America. Please go ahead with your question.
Hi, good morning, everybody.
I'm wondering day.
Your so your signings in Q4, how does that brand mix look like relative to your existing base I'm, just trying to get a sense for like the incremental developer interest in your branch.
Yeah.
Well, it's skewed more.
Conversion, obviously, so it trends more towards our more higher.
Conversion brands, so quality of college roadway.
Comfort in as well we do.
What we call more higher end conversions for that brand.
But as we also stated you know.
If you look at the performance of the extended stay segment.
The wood spring brand as well as the Cambria, which are all both new construction brands.
Those did well as well on a relative basis. So.
But to me, we do look at that to see if there's any trends there.
But we feel really good about both the new construction contracts that we did as well as the conversion contracts, we did across the portfolio.
And just to add a little bit of a just in terms of the percentage Breakouts you Pat mentioned extended stay on that was really a shining star for US you know more than 25% of the new signings for the year actually came in the form of that extended stay product comfort as you know we talked about the resurgence of comfort following the transformation frankly, we feel very good about.
What our comfort contracts came out as well obviously in those focused brands mid scale extended stay on upscale is where we're feeling the strongest in terms of those new signings.
Great Great and then just from my follow up can you maybe just help us understand.
Or just get a little bit smarter about what drives brand solutions as a business segment. So I guess is it possible that brand solutions. Looking ahead is going to just underperformed revpar, if franchisees are pulling back or limiting services and offerings.
So I think you are referring to our procurement services the procurement services correct Yep sure. Yeah. That's a that is a volume driven business. So as the hotels fill up owners need sheets, and towels in soaps and shampoos and alike.
So it's significant.
A piece of that is volume driven if there's fewer people eating breakfast.
There's a there's a lower amount of.
Product that that flows through that so that that's a key.
Driver for us.
There's some other revenue items that.
Net flow into that as well around brand programs. So if you think about comfort in where we have been doing a signage program for the new logo.
Another.
Category of items debt as a result of the pandemic probably slowed.
Relative to our expectations. So theres some some brand programs that also drive.
Some of the some of the.
Revenue opportunity in that and then as you think about the pandemic impact on.
If your guidance kind of you've seen the aerial shots of the port of long Beach.
The supply chain disruption that came as a result of Covid is.
It is having an impact on on getting product into the country.
That's <unk> that's.
Breakfast items and shampoos as well so.
Those are the items that we look at debt that had a key impact on our procurement services business back in 2020.
Yes.
Financially speaking when we were pre pandemic, we had talked about the outperformance of that procurement services revenue than we expected to see that but in the long term probably closer to approximating your revpar growth just given the fact that it is it's very much occupancy related the good news is this year those revenues were only down about 26.
Versus.
Versus the enterprise wide revenue, which is a little closer to the Revpar stat for the full year, just over 30% or so so from that perspective, we were able to fill in some of the gaps in terms of that that revenue stream and we expect to see this bounce back in 2021 as well.
Got it thank you very much.
Thank you.
Our next question comes from Robin Farley from UBS. Please go ahead with your question.
Great. Thanks, just thinking about your unit growth from this year I I didn't hear I don't think you've guided to that specifically, but should we think about the reduction in <unk>.
Signed agreements as potentially meaning.
Lower unit growth since here it was kind of flat in 2020 and agreements are down or do you think that.
Conversions will sort of pick up in the year I guess, you know how how do you expect growth to come in thanks.
Yeah, I think Rob and that's the key is the shift to more conversion.
The mix as far as the number of contracts.
And then the success rate of opening those and the speed to open means they flow through our pipeline much more rapidly so.
So we feel really good about the you.
You know the we.
We exceeded what we thought we would do.
In the fourth quarter with regard to new agreements and I feel good about the conversion mix of that and the opportunity it has to.
To drive unit growth I also if you look at our extended stay segment, particularly would spring.
That is a brand that when you when you look at the amount of time, those new construction contracts take too to get signed and then open.
One of our shortest timeframes.
So seeing the growth in that brand in particular as well as the other brands on our extended stay segment.
I think also we'll be adding to our unit growth.
In 2021 on a go forward basis.
Yeah Robert.
Oh go ahead sorry.
Okay. I was just so meaning that you do expect positive growth in 'twenty, one I just it sounded like you were kind of concluding right.
I cut you off go ahead, I'm, sorry, no it's related to that Robin. So you know we aren't giving formal guidance overall, but I think one of the things that I would reiterate is when you take a look at the growth of those key revenue segments, what I talked about in the prepared remarks is something that we are comfortable guiding to which is the fact that that growth we expect to accelerate.
Into 2021, so those those revenue intense segments grew at about one 8%, we expect to see a pickup in that in 2021. Overall you know the economy segment Youre seeing very similar trends across the industry. That's been the segment that has just a little bit more pressure from a termination perspective that just the nature of those contracts being less sticky than you expect.
To see those trends continue as well, but again, just where we're focused as a company and just where our the vast majority of our revenue sits in that mid scale extended stay on upscale segment, we feel very comfortable about the fact that that unit growth is expected to accelerate in 'twenty and 'twenty one.
Okay, great. Thanks, and just one quick follow up just similarly on the royalty rate.
Sounded like during your prepared remarks that there was a comment about sort of expecting that is that that seven basis point increase like expecting that to increase in 'twenty. One did you mean increase.
More than seven basis points or just increase something over 2020 levels I, just I don't know if I quite understood.
Your comment meant on the prepared remarks, thanks sure happy to happy to clarify that Robyn So eight basis points for full year 2027 basis points. In Q4, we expect in 2021 and beyond for that to be slightly more in line with historical growth, which is the mid single digits. We do frankly, we did outperform what are.
Original expectation was for 'twenty 'twenty. So we're optimistic that we can continue to drive price of these contracts and get closer to those rack rates. So again I think the best modeling assumption is your mid single digit growth, which is in line with historical.
Thanks very much thanks. Thank you.
Our next question comes from Dori Kesten from Wells Fargo. Please go ahead with your question.
Thanks, and good afternoon.
Good afternoon.
You said that 96% of your franchisees are paying their full fees today, what was it at the trough.
So.
What I can tell you as last quarter.
Or excuse me about two months ago, it was closer to $93, 94% of our franchisees, we're paying even in the trough we were collecting anywhere between 75 and 80% of our collections overall and so we are seeing that.
That continued to increase month over month, so again I want to be very clear, they're not necessarily paying their full fees, but our our collections are trending very much in the right direction and well over that 80% Mark 96% of which are paying some form of their franchise fees.
Okay.
And I guess, what would you need to fee and the business that would lead you to return to paying a dividend or.
Share purchases.
Sure. So you know as we.
We've been very clear our strategy really starts with investing back in our owned business.
And as we mentioned we've been we've been we've been making investments, particularly in the fourth quarter around our brand prototypes in our.
Merchandising and pricing capabilities and the like.
Second we you know we want to seek potential acquisition opportunities and when you go through a period of disruption as we're going through that may create some opportunity so that would be our second use of capital.
And then as we've done in the past if there is excess capital we would return that to.
To shareholders and so we'll be monitoring sort of the pace of the recovery.
To make those.
On the decisions around what we might do with regard to our return on capital, but that's that's kind of the hierarchy of decision, making that we do.
And as I mentioned, we're already.
Doing the first one which is investing back in the business.
And how would you describe external growth opportunities that you've seen to date.
Well I think as we've said in the past when you go through something like this nobody can underwrite on asset or a company.
Until they get clarity around what the future holds.
So I do think it will take a little bit of time for.
Sellers to to go through that process and arrive at sort of what they think the post pandemic world will look like and I think that will provide more clarity around opportunities that may be out there. If you look at our portfolio.
Certainly.
<unk> to be white space in our portfolio that could make sense for either a tuck in acquisition.
Or a new brand opportunity. So we do have a lot of growth potential off of this franchising platform that I think.
This opportunities and as we kind of get beyond the <unk>.
I guess further into what the post pandemic recovery is going to look like that'll help owners beside if.
Selling at the right price makes sense for them and then we can evaluate those opportunities as they come along.
Okay. Thank you.
Our next question comes from Omer Sander from J P. Morgan. Please go ahead with your question.
Hey patent I appreciate you taking the question just one for you.
Just one question on the conversion where are most of these conversions are coming from is it predominantly independent for competitor brands and I guess just for context, how did that trend over the course of the pandemic and maybe before then.
Yeah. The majority of our conversion has actually come from competitor brands and so obviously the further up in the chain scale you get the more likely you are to convert from independent to brand. So our ascend hotel collection for example.
Primarily independent boutique hotels that want to affiliate with a strong distribution channel. So the vast majority of our centers are coming from independent but those are conversions now the further down you get in the chain scale. The more likely you are to actually convert from a slightly weaker brand who wants to be affiliated with a stronger system that can drive more traffic.
You can reduce that debt.
Total cost of ownership at the hotel level, So let's call. It the majority of which kind of let that quality of cartilage and rodeway are converting from <unk> from from brands.
Overall regionally speaking a lot of a lot of our conversions are also coming from the South you know given the fact that the south was able to you know.
So really what stands from the impacts of the pandemic as well. So again just based on some of the things that we talked about before was 72% of our.
Development agreements in quarter four coming from conversions, we feel very optimistic about the fact that we can continue to maintain that trend heading into 2021.
And it's why we highlighted the Revpar index share gains.
Which are really outstanding and then those are things that owners, who are looking to convert via from another brand into what choice brand or from an independent hotel into one of our brands.
They really want I mean, theyre expecting something from a brand and that's something should be outperformance.
And so we're really encouraged by it.
The Revpar index share gains that are that all of our select service brands made in 2020 on what was the worst environment that our debt hoteliers have seen so again that is another proof point of our value proposition to owners.
And again I think that's something that we believe is gonna be a real optimistic driver of future development for our brands.
Thanks, so much.
Okay.
And once again, if you would like to ask a question. Please press star and one to withdraw yourself from the question queue. You May press Star two.
Our next question is a follow up from Danny Assad from Bank of America. Please go ahead with your follow up.
Hey, guys, sorry, just a quick clarification question. When you mentioned the company is expecting sequential quarter over quarter Revpar improvement in Q1, 2021 versus 2019, 2020 and 2019 just to be clear is the expectation here is that Q1, 'twenty 'twenty, one revpar is going to be higher than the first quarter of 2019, Inc.
No the change in Revpar, we expect to continue to improve in quarter, one versus the 25, one that you saw in quarter four and so I just want to be very clear on that we don't expect to see actually growth versus 2000 22019, we do expect to see the improvements and frankly when you take a look at January and February.
We're down 18% year to date.
Through the call it mid February.
I would say is march tends to be a higher demand month for us and so when you take a look at a tough comp in 2019, specifically in March.
That's going to be a little bit tougher, but we still expect for the overall quarter debt, we would still be better than that down 25 one.
Understood. Thank you.
Thank you.
Yes.
And ladies and gentlemen at this time in showing no additional questions I'd like to turn the floor back over to management for any closing remarks.
Thank you operator, and thanks, everyone for your time as you heard today choice hotels achieved from key milestones in 2020 and drove results that significantly outperform the industry and our recent investments. We've made I believe we're going to position us well to capitalize on growth opportunities in 2021 and beyond so I hope you all stay safe.
And healthy and we'll talk to you all again in May.
Have a great afternoon.
Yeah.
Okay.
Ladies and gentlemen that does conclude today's conference call. We do thank you for attending you may now disconnect your lines.
Yeah.
Yeah.
Yes.
Yeah.
Yes.