Q2 2021 Choice Hotels International Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to choice hotels International second quarter, 'twenty, 'twenty, 1 and earnings call.
At this time all lines are in a listen only mode.
I'll now turn the conference average Alistair and my 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 or forward looking statements will be used to assist you in understanding the company and its results.
Actual results may differ materially from those indicated and forward looking statements and you should consult the company's form 10-Q, and K and other SEC filings for information about important risk factors affecting the company that you should consider.
Moreover, we'd like to acknowledge that there continues to be uncertainty as to the impact of the COVID-19, pandemic and 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.
You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our second quarter 'twenty 'twenty..1 earnings press release, which is posted on our website of choice hotels Dot com under the Investor Relations section.
This morning paths patient, our president and Chief Executive Officer, and Dragovich, Our Chief Financial Officer will speak to our second quarter operating results and financial performance.
I'll be joined by Scott Oak Smith, Senior Vice President of real estate and finance.
Following Pat and dumps remarks, we'll be glad to take your questions and with that I'll turn the call over to Pat.
Thanks, Sally and good morning, everyone. We appreciate you taking your time to join us.
I'm pleased to report that choice hotels has continued to deliver strong results that once again significantly outperformed the industry and.
And gained share across all segments, and which we compete.
Our June and July Revpar results exceeded 2019 levels by approximately 5% and 15% respectively.
A truly remarkable achievement.
For almost a year and a half we've maintained significant revpar index share gains against the competition as compared to 2019.
In fact, this quarter, we increased Revpar index versus our local competitors by nearly 5 percentage points as compared to 2019 through.
And through notable lift in both weekday and weekend Revpar index as reported by STR.
Retaining these elevated competitive share gains and even as the broader industry recovers illustrates that our strategic investments are working and gives us further optimism about our future revenue trajectory.
Our goal is not simply to return to our 2019 performance levels.
But rather to capitalize on current and future investments to fuel our long term growth and drive our performance to new levels.
As previously discussed we were very intentional and our approach to investing prior to the pandemic to drive growth across the more revenue intense hotel segments.
While we've reduced our overall spend in 2020 due to the pandemic, we continued to invest and key strategic areas.
More importantly, and today's stronger demand environment, we see an outsized opportunity to continue or even accelerate strategic investments to capture a greater share of travel demand.
What gives us optimism is that the bold investments we've continued to make are paying off.
These include.
Launching and enhancing brands in each of our strategic segments, namely expanding our upscale positioning star.
Strengthening our Midscale leadership role.
And rapidly growing our extended stay portfolio.
We're also improving our guests' delivery at the hotel level, while strengthening our marketing and reservation systems and franchisee tools that have contributed to the outperformance our brands are demonstrating.
We are also bolstering our platform capabilities through the strategic partnerships that drive incremental revenue to our existing portfolio.
Allowing us to play and non traditional segments, such as gaming and all inclusive resorts among others.
I will now outline more specifically why we are confident that we can continue to increase our share of travel demand and the years to come.
First we strengthened our existing brands and launch new brands to appeal to the customer of tomorrow and key segments that provide a compelling return on investment.
Our strategic investments and the extended stay segment allowed us to quadruple the size of the portfolio over the past 5 years to reach 460 domestic units.
With a domestic pipeline of over 300 hotels.
Last year, we launched our newest midscale extended stay brand ever homes suites.
To provide franchisees and opportunity to capitalize on the best performing segment of the hotel industry.
The interest level from multi unit developers backed by institutional capital for this new product is high.
Similar to what we are seeing with our wood spring suites brand.
And our mid scale segment, we have reinvested in the future of our brand portfolio with comfort move to modern transformation.
The comfort portfolio grew its domestic unit count by 2.5% in the second quarter year over year and recently celebrated the highest number of openings since 2014.
While achieving revpar index gains versus its local competitors and the second quarter.
Clarion Pointe has already experienced a 5 fold increase of its portfolio since the end of 2019, ending the first half of the year with over 30 hotels open in the U S and more than 20 additional hotels awaiting conversion this year.
At the same time, we rapidly grew our upscale segment.
Specifically, we've increased the number of domestic upscale rooms by nearly 25% since the end of 2019, driven by impressive growth of both Cambria and.
And the ascend hotel collection.
We also continue to invest and capabilities to further enhance our owners value proposition and drive the bottom line results through value added programs and resources to achieve higher levels of profitability.
Notably, we enhanced our pricing and merchandising tools to further enable our franchise owners to reach their target customers and effectively drive top line revenue.
Thanks to these tools, we were successful and swiftly executing our pricing strategy and optimizing right delivery, which resulted in significant average daily rate gains.
The company is currently outpacing the rate recovery seen following prior recessions.
And finally, we continued to propel our future forward by expanding our platform capabilities through signing strategic agreements with new travel partners and adjacent business segments.
These platform expansion strategies enabled us to attract new franchisees and guests to the core brand portfolio and.
And supplement investments and strategic brand growth with increases to high margin affiliation fee streams.
As discussed on our prior calls.
And we've been anticipating long term consumer and demographic trends to drive a significant uptick and travel demand.
And we've been making investments to capitalize on them.
Specifically, we are benefiting from trends such as Americans and rediscovering domestic destinations and the continued rise of road trips.
And increase in workers retiring early.
And the trend of work from anywhere, which affords Americans flexibility and where and when they travel for leisure.
We now know that the pandemic has only accelerated these trends and we believe that our business will therefore benefit and an outsized way from additional travel demand coming to our key segments.
The investments we've made allowed us to capitalize on demand that has historically propelled our core business and also enabled us to attract and capture a larger share of leisure demand.
With customers, who are new to our brands driving more revenue this year than in 2019.
At the same time, we're benefiting from our most loyal customers choice privileges Diamond elite members, who are experiencing our new and refreshed brands and who contributed and even higher percentage of overall revenue for the quarter as compared to 2019.
Not only are our customers planning their travel further in advance as witnessed by the continued lengthening of average booking windows, but we continue to see a slightly greater share of revenue coming from longer lengths of stay.
While our expectation to capture a larger share of consumer's wallet among leisure travelers is already coming to fruition. We also see continuing momentum and our business travel trends with additional runway for growth.
We have seen sequential quarter over quarter and month over month increases and our business travel booking trends in the second quarter 2021.
Likewise with our recent refresh of the comfort brand family and further upscale penetration, we are well positioned not only to recover our existing business customers, but to expand our guest space as business travel rebounds.
As a matter of fact, our group travel bookings reached 90% of our 2019 levels in the first half of the year.
And with key segments strongly rebounding and lead volume steadily rising close to 2019 levels.
The results, we achieved confirm our focus to grow and our strategic segments, which will further fuel the long term revenue intensity of our system.
I'll now provide a brief update on our key segments, where all of our select service brands achieved Revpar index gains versus their local competitors in the second quarter as compared to 2019.
Our extended stay segment, a significant growth engine for the company expanded by over 45 hotels in the second quarter year over year and now represents over 10% of our total domestic rooms.
For the second quarter as compared to 2019 would spring suites reported 16% Revpar growth.
And the brand's pipeline continues to expand reaching 155 domestic hotels.
Our suburban extended stay portfolio expanded to nearly 70 domestic hotels open representing 15% unit growth year over year.
Additionally franchise agreements awarded for the brand and the first half of the year exceeded levels reported in the same period of 2019.
At the same time, our mainstay suites mid scale extended stay brand continued to capture nearly 14 percentage points and Revpar index gains versus its local competitors as compared to 2019.
And the brands portfolio of over 90 domestic hotels open experienced 27% year over year unit growth.
We are especially pleased with a significant increase and developers' interest and new construction and extended state projects year over year as hotel financing begins to rebound.
And the high developer activity and interest reaffirmed that our strategic commitment and continued investments and this highly cycle resilient segment are driving a competitive advantage.
Our mid scale transient brands represent over 2 thirds of our total domestic room portfolio and over half of the total domestic pipeline spill.
Specifically the comfort family achieved a revpar change that was 9 percentage points more favorable than the upper mid scale chain scale and the second quarter as compared to 2019.
And the first half of the year the comfort portfolio opened the highest number of the brands conversion hotels in the past decade, while increasing domestic new construction agreements by 20% year over year.
With newly updated properties from coast to coast, our recently refreshed brand identity.
And the new Ryzen Shine prototype revealed this spring the future is certainly bright for comfort.
Our upscale portfolio achieved impressive year over year growth and the second quarter, where we increased our domestic room count by 24%, marking a record for domestic openings in the first half of the year for the company, including 22 Penn National Gaming properties.
The ascend hotel collection leads the industry as the first and largest soft brand.
The brand grew its domestic room count by 28% year over year and expanded to nearly 390 hotels open around the globe.
In addition, ascend hotels outperformed the upscale segment Revpar change by 26 percentage points for the quarter as compared to 2019.
Our upscale Cambria hotels brand continues its positive momentum growing its portfolio size by 14% to 58 units with 17 projects under active construction at the end of June and approximately 10 additional hotels planned to open this year.
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These results are proof of choices value proposition and the upscale segment for our current and prospective owners.
The recovery is not just about travelers returning it's also about continuing to drive forward our efforts to improve the unit economics of our franchises.
I've been traveling a lot since late March across the country and every time I speak with our franchise owners. They are optimistic about the progress of their business recovery and the outlook for the remainder of the year.
The close relationship we have with our franchisees has always been strong but.
But the pandemic was an opportunity for us to strengthen this bond spa.
Specifically our owners are very pleased with the new pricing tool. We recently introduced that has helped drive their top line outperformance versus competitors.
And with several initiatives, we launched that reduce their total cost of ownership.
Our franchisees are also benefiting from our strong business delivery. Thanks.
And thanks to our enhancements and our distribution capabilities. We recorded 9 of our top 10, all time highest booking days per choice hotels dot com and other proprietary digital channels in the last 2 months.
With such a powerful value proposition, it's no surprise why choice has and industry, leading voluntary franchisee retention rate and our franchise owners continue to seek and develop our brands.
Aided by our strong value proposition for our current and future owners. We also experienced significant demand for new franchise contracts.
And the first half of the year, we awarded 200, new domestic franchise agreements a 32% increase over the same period of 2020.
Likewise demand for our conversion brands throughout the first half of the year has increased by over 40% year over year.
In addition, our development and franchise service team that is fully dedicated to driving diverse ownership of choice franchised hotels among under represented and minority owners has awarded nearly a dozen franchise contracts and the first half of the year, while growing and cultivating the number of women.
Owners.
We also continued to strengthen our platform business portfolio, which represents a highly revenue intense extension for choice.
Our guests are increasingly engaging with our travel partners and continuing to benefit with additional travel options.
While our more than 49 million choice privileges members have the opportunity to earn and redeem points and our travel partners properties by booking their stays directly on choice hotels Dot com.
In fact, we are seeing an increase and our domestic loyalty program sign ups in the second quarter 2021 as compared to 2019.
We are committed to enhancing our value proposition by further strengthening the platform portfolio and continuing to establish new strategic partnerships.
In closing I am proud to say that our culture centered around diversity equity and belonging is being recognized.
This year, we've been named 1 of the best employers for diversity by Forbes.
The best place to work for LGBTQ equality by the human rights campaign for the ninth consecutive year.
And 1 of the best places to work for people with disabilities, earning a perfect score on the disability equality index for the second year in a row.
I am confident that thanks to the strategic investments, we're making are impressive performance and this award winning culture, we are now and a stronger position than ever as a company to further capitalize on outsized growth opportunities over the long term that will continue to pay off for our.
Owners and shareholders alike.
With that I will hand, it over to our CFO.
Tom.
Thanks, Pat and good morning, everyone I Hope you and your families are all well today I'd like to provide additional insights around our second quarter results update you on our liquidity profile and capital allocation and share our thoughts on the outlook for the road ahead.
Throughout my remarks today, I'll provide financial performance and Revpar comparisons to 2019, which we believe are more meaningful and analyzing trends as the prior year's quarter results were significantly impacted by the pandemic.
For comparisons to 2020, please refer to our press release.
For second quarter 2021, as compared to the same period of 2019 total revenues, excluding marketing and reservation system fees were $142.4 million.
Adjusted EBITDA increased 9% to $111.8 million driven by improving Revpar performance and continued cost discipline.
Our adjusted EBITDA margin expanded to 79% and 8% increase and as a result, our adjusted earnings per share were $1.22 for.
For the second quarter, a 3% increase versus the same period of 2019.
Let's now take a closer look at our 3 key revenue levers beginning with royalty rate.
The continued increases and our effective royalty rate remains a significant source of our revenue growth, which is driven by the attractive value proposition, we provide to our franchisees and their continued desire to be affiliated with our proven brands and our pipeline.
The company's domestic effective royalty rate once again exceeded 5% for the second consecutive quarter growing 7 basis points for the second quarter 2021, compared to the same period of 2020, a reflection of the continued strengthening of the value proposition, we provide to our franchise owners.
We expect to maintain the historical growth trajectory of this lever for full year 2021 as owners seek choice hotels proven capabilities and delivering strong top line revenues to their hotels, while helping them reduce their total cost of ownership and maximize return on investment.
Our domestic system wide revpar outperformed the overall industry by 20 percentage points for the second quarter declining only 1% from 2019, while occupancy increased by 20 basis points as compared to the same quarter of 2019.
At the same time, our second quarter results continued to exceed the primary chain scale segments, and which we compete as reported by STR by nearly 7 percentage points versus 2019.
We are proud to report that our June Revpar results exceeded 2019 levels by approximately 5% driven by a nearly 3% increase and average daily rate and a 2 percentage point increase in occupancy.
The trends are improving Revpar performance have continued into the third quarter. Our July performance was significantly stronger with revpar growth of approximately 15% driven by occupancy levels at 70% and and average daily rate increase of 10% versus 2019 levels.
In fact July revpar for our upscale extended stay upper Midscale Midscale and economy segments, all surpassed 2019 pre pandemic levels and we saw a month over month acceleration and performance across all of our segments.
These trends give us continued optimism for the remainder of the year.
As discussed in the past, we've long focused our brand strategy on driving growth across the higher value and more revenue intense upscale extended stay and mid scale segments and.
And the investments we've made are paying off.
These strategic segments continue to help us achieve material revpar change outperformance against our respective industry chain scales and drove gains versus our local competitors.
Specifically when compared to second quarter 2019, our upscale portfolio increased its revpar index relative to its local competitive set and outperformed the industry's revpar change by nearly 13 percentage points.
Our extended stay portfolio grew revpar by 10% and the second quarter year over year, driven by occupancy levels of 82% and a 2% increase and average daily rate.
This segment outperformed the industry's revpar change by more than 31 percentage points.
And finally, the Revpar change for our Midscale and upper Midscale portfolio exceeded these segments by 8 percentage points.
Let me also highlight just a few impressive performance achievements for our brands and the second quarter as compared to the same period of 2019.
Our wood spring brand reported 16% Revpar growth, reaching an average occupancy rate of nearly 86% and experiencing a nearly 6% increase and average daily rate.
Ascend hotels grew June revpar by nearly 5% driven by and over 12% average daily rate increase and achieved Revpar index gains of 11 percentage points against their local competitors.
While our Cambria hotels drove the brand's revpar share gains versus their local competitors to 14 percentage points.
Quality, our largest brand and the portfolio recorded nearly 2% revpar growth driven mainly by a 1.2% increase and average daily rate.
And finally suburban extended stay grew its occupancy by over 4 percentage points.
Across the choice system, we were able to increase our overall revpar index against local competitors by nearly 5 percentage points driven by both our franchisees' ability to grow rate and occupancy gains.
More specifically our average daily rate improved from the prior quarter and our average daily rate index continued to increase as compared to 2019, thanks to our investments and pricing optimization capabilities for our franchisees.
Finally, we continue to grow the overall size of our domestic franchise system and exceeded 2019 levels for conversion openings through the first half of the year.
Across our more revenue and <unk> brands and the upscale extended stay and mid scale segments, we observe stronger unit growth, increasing the number of hotels and rooms by 2.5% and 3.1% year over year, respectively, and increasing the growth rate from the first quarter of 2021.
For full year 2021, we expect our overall unit growth trend to continue.
Furthermore, we continue to expect a unit growth of the more revenue and <unk> segments to accelerate versus 2020 and range between 2% and 3%.
Aided by our strong value proposition and outperformance demand for our brands continue to gain momentum since the beginning of the year with more than a third of the total domestic agreements executed in the month of June.
In fact development activity for our extended stay and upscale domestic franchise contracts throughout the first half of the year exceeded 2019 levels by nearly 60% and 14% respectively.
At the same time, our developers are increasingly optimistic about the long term fundamentals of the lodging industry.
Nearly 40% of total domestic franchise agreements awarded and the second quarter were for new construction contracts, which increased by over 20% and the second quarter year over year.
In fact demand for our new construction brands continued to accelerate throughout the first half of the year with more than half of the total new construction contracts executed in June alone.
I would now like to say a few words about our liquidity profile and provide a capital allocation update.
Our strong results have led to an even stronger liquidity position for the company at.
At the end of second quarter of 2021, the company had approximately $908 million and cash and available borrowing capacity through its revolving credit facility.
We are also pleased to report cash flow from operations of $102.3 million.
For the second quarter 2021 of 28% increase versus second quarter 2019.
Today, our gross debt to EBITDA leverage levels remain well within our target range of 3 times to 4 times.
Our impressive results combined with our confidence and continuing to generate strong levels of cash and our optimism for the future, let us to reinstate the quarterly dividend at the pre pandemic level and resume our share repurchase program.
In June and July 2021, we returned over $14 million back to our shareholders and the form of cash dividends and repurchases of our common stock.
These actions reflect our continued commitment to driving long term shareholder value and returning excess capital to our shareholders.
We will continue to monitor the environment for other investment opportunities and evaluate capital returns and the context of our leverage levels market conditions, and our overall capital allocation strategy.
Before closing I'd like to offer some thoughts on what lies ahead.
While we are not providing detailed guidance today. We currently expect the third quarter revpar to grow and the mid to high single digits as compared to 2019.
Assuming elevated consumer sentiment remains and the broader revpar and economic recovery trends continue.
We expect to see our 2021, adjusted EBITDA approaching 2019 levels, even with potential incremental investments and the back half of the year.
Our view is reinforced by our strong year to date financial performance.
Broader macro and consumer trends and our recent domestic June and July Revpar results and our continued investments to support growth for the remainder of 2021 and beyond.
We will continue to evaluate the impact of COVID-19 across the business and we'll provide further updates and November during our next earnings call.
In closing, we remain confident that our strategic approach and resilient business model, coupled with our disciplined capital allocation strategy and strong balance sheet will help us further capitalize on growth opportunities and drive outsized returns for years to come.
The investments that we have made and will continue to make will allow us to execute on our ambitious long term growth plan at this time patent I would be happy to answer any questions operator.
Thank you we will now begin the question and answer session.
So ask the question and you May Press Star then 1 on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
So with <unk>. Your question. Please press Star and then too.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Dan and Bob with Bank of America. Please go ahead.
Hey, good morning patent.
Okay.
So I just wanted to start off by just asking a question on first you were talking about how effectively the choice portfolio has been gaining so much share.
And it's pretty significant.
Can you just help us China and see.
See like the.
And the bigger those big gains are they and certain chain scales are they driven by certain markets.
And how sustainable do you think that is.
Yes.
Coming from EMEA.
It's a very broad based pick up across all of our brands across all of our regions. When we look at the consumer base. Our guests that are 65 and older.
And that that travelers already back to 2019 levels.
We're also seeing a younger travelers a traveler that skews more female as well and.
So it's really there isn't a single brand or a single region that sort of driving this it's really broad based.
And we look at this early and in a variety of ways as to why that's happening as I mentioned are.
Our merchandising and promotion tools, and our and our pricing.
Tools that we've really invested in over the last several years.
Significant driver of that is really helping us find those customers that are out there and we did this all last year as well when demand was low so.
And those those are the things that we see that are driving it and secondly, the investments we made and our brands.
Comfort in particular, we're seeing a lot of pickup in the quality and the comfort brand in particular and the investments we've made on refreshing that brand again are helping finally, if you look at it pre pandemic, we were cleaning up comfort. So there were a lot more rooms out of commission is that brand was going through.
Sure.
The renovations, so again thats, giving us additional optimism for a bigger size of the of the share that we're going to take as we move forward.
And then and just quantitatively speaking that 5 percentage points of RPI game that we achieved and the second quarter, we actually report that on a local basis. So it's like for like products within like for like markets and so when you take a look and then the prepared remarks, we talked about every 1 of our select service brands had material RPI.
Gains so we are seeing it across the entire portfolio and again that it averages out to about that 5 percentage points.
Got it and just.
You ended your prepared comments with <unk>.
Talking about EBITDA approaching 2019 levels with even with incremental investments and the back half of this year. So just can you unpack that a little bit first in terms of the cadence of that these investments and is it first of all is it going to be and corporate expense and then and then what are these types of investment is it like.
On new brand is it on technology are you, adding more people on your development teams or kind of what's driving that.
And so when you take a look and it obviously.
EBITDA outperformance was driven by both significant strength on the top line, obviously, we're continuing to see those outsized revpar results. So when you take a look at Q3, we had guided in Q3 is that Revpar will continue to grow and Paul at the mid to high single digits versus 2019. So when you take a look at year to date Youre starting to get within.
2019, revpar levels. So we expect to see that strength and Revpar to continue obviously, we expect to see it moderate potentially a little bit and the back half of the year as you get into Q4 et cetera, we're not expecting to see these 15 percentage points of revpar gains versus per Revpar outperformance versus 2019, as we enter Q4 and some of that leisure travel.
Begins to moderate somewhat so obviously, we do expect to see continued strength on the top line from an SG&A perspective, we had guided previously that the SG&A savings were going to be somewhere in the ballpark normalized at about 10% to 15%. When you take a look at where we were in Q2 was right around 10% down apples to apples that includes obviously thing.
Like a merit increase and whatnot, so youre certainly on an apples to apples basis within that guidance that we had previously that we've previously reported as well. So the reality is we're in a much stronger demand environment now and so when we're looking at the back half of the year much like we did even during the pandemic, we're going to continue to invest and we're certainly willing to sacrifice a little bit of <unk>.
And if it ultimately leads to outsized growth and those outside share gains and so when you think about those investments.
Continuing to invest and brand growth opportunities continuing to improve the value proposition as it pertains to revenue management tools and those types of things and then continuing to make the corporate functions more efficient and.
And if it means some capital investments that are required to do that we would certainly.
Certainly be willing to make those investments, but ultimately when you think about just the corporate margin you would still continue to see it in those pre pandemic levels.
Company has always operated about 70% margin or so we were 79% margin this year or this quarter and the reason for that is the higher demand period, coupled with some of those SG&A investments.
Sure.
Thank you very much thank.
Thank you.
Yes.
Our next question comes from Robin Farley with UBS. Please go ahead.
Thanks, Great I, just wanted to make sure I understand the dynamics of your EBITDA and.
Such a strong 9% versus Q2 thousand 19, and then the EPS of 3% and the difference had to do with marketing and system.
Revenues for something I Wonder if you could just clarify whether that is that just a timing issue or what made this sort of the.
The lower EPS growth relative to the to the great EBITDA growth first and when we report the adjusted EBITDA and the adjusted EPS.
Net other it's excluding that marketing and reservation and obviously, we can run surpluses and deficits. So just for comparable purposes much like several of our competitors do we adjust that out of the numbers. So it is a corporate EBIT to be when we're quoting the significant outperformance and again Robyn.
I would tell you is the significant EBIT to be when you have.
Our revpar that's coming in in line with those 2019 levels down 1% for the quarter, coupled with the 10% to 15% SG&A reduction that we had committed to we're operating at a higher margin and we're a more efficient business today than we were back in 2019 and so.
So again as we continue to look at.
And to the Q3 and you see those outsized revpar.
And versus 2019, we're continuing to see that margin flow through now obviously on the EPS side that flow through to the bottom line taxes may have been slightly up versus where we had expected and the reason for that is our taxable income was significantly up as well for the quarter.
But in general your book.
Kind of flow through or do you expect from from EBITDA to EPS line in other words.
Is there you mentioned taxes slightly up is there anything else about the quarter that was unusual that that wouldn't create that same dynamic and.
Forward periods.
No I mean, the reality is as there was a pretty normalized and pretty clean quarter, and we would expect to see the same flow through from EBITDA to EPS and the future.
Alright, Thank you and.
Yes.
Our next question comes from Dori Kesten with Wells Fargo. Please go ahead.
Thanks, Good morning.
You think about your trend and new signings and openings removals. When would you expect your pipeline to return to year over year growth versus its current contraction.
And there are and when you look at our pipeline I mean, obviously right now with the increase and the conversion contracts were doing the velocity of those conversions moving through our pipeline.
Increases so the average conversion stays and our pipeline anywhere from 3 to 6 months.
Look at Q2, we had about 8% or 14% rather of our openings in Q2 were actually sold and opened within the quarter. So they never even show up even in a quarter over quarter view.
The other thing that we do on a normal basis is to look at the pipeline and remove those contracts where the developers are not planning to move forward.
And we do that so that our sales team can have the opportunity to go out and.
Fill those markets to fuel our long term growth.
As you look at what we have been doing.
As the pandemic started.
A year and a half ago and what we've been doing since then we have been taking out contracts that when we talk to the developers. They are no longer planning and move forward I would expect that's probably going to reverse itself by Q4.
As owners sort of begin to.
Reengage with with their with their lenders and.
And get their projects finance and start moving forward again, so that's a little bit of the assumption that we were looking at a lot of it depends on hotel financing coming back, which we are seeing particularly and our extended stay segment.
And just broadly speaking when you look at our pipeline about 50% of that pipe is a conversion hotel by hotel under construction or 1 that is and advanced planning.
The stages of planning so we feel really good about what we have and our pipe and that additional 50% we can.
Closely monitor it and make sure that it's a contract that's going to move forward.
At the end of the day, we're not changing our outlook on net unit growth.
And we are excited by the uptick that we're seeing and application volumes from new contracts as well. So that's kind of how we think about the pipeline and how we're looking at it as a contributor to our net unit growth and the long term.
Oh, Thanks, and historically I think terminations and it's been about a 3% to 4% headwind to net unit growth or net rooms growth and your reason to believe that this level should be lower going forward.
When you consider how many hotels have been refreshed and you're you have I guess relatively higher and property is coming into the system versus historically.
Well certainly we're finished with the comfort clean up so if you look back over the last 4 or 5 years that was that was a key.
Driver of terminations.
But we're back to our historical levels and feel really comfortable moving forward.
And we're not going to see increased terminations the health of our franchisees right now.
With the PPP loans, the interest forbearance, they were able to get and that is total cost of ownership savings that we're helping them with and which is which is lowering other areas of cost on their P&L.
We see our franchisee base and a very healthy financial.
Situations and we would not anticipate terminations anything above historical levels, we had already I mean, when you take a look at where the terminations are trending today, they're trending right around that 4% Mark and the reality is as and when you take a closer look at the exhibit you see that the vast majority of those terminations are actually coming from our transient economy brands and so obviously.
Economy extended stay.
Very very much red hot and in terms of that unit growth, but its really rough.
<unk> in particular, and so again this goes back to that revenue intensity stories, so youre seeing and on the termination side that were continuing to add more and more revenue intense units and you're when you're losing some of the less revenue and hence units and then even on the pipeline side. The vast majority of our pipeline is made up of those and those revenue and <unk> segments. So again I would say.
Close to 95% or so of the pipeline.
And those revenue and some segments that we are really focused on.
Okay. Thanks.
Thank you.
Our next question comes from Michael Bellisario with Baird. Please go ahead.
Thanks, Good morning, everyone.
Good morning.
And just along those same lines, maybe can you provide some more details on the sequential decline and the system size what came in during the quarter.
What went out and then any updated thoughts on and when net net unit growth inflection might occur.
Yes, so when you take a look at the domestic unit growth Michael certainly very optimistic about those trends were continuing to see growth portfolio wide. Excluding the economy transient segment. Your rooms growth is above 3%. So certainly in line with what are those historical trends were and frankly accelerating versus <unk>.
And we were last year.
Broader the broader net unit growth decline was really driven and international and a lot of that has to do with the disproportionate impact that COVID-19 had specifically in Europe, obviously hotel closures work and more common and Europe, especially in the portfolio that we're dealing with we also looked at this as an opportunity to terminate some marginal.
Or lower performing.
Products from the European portfolio that we felt and the long term, we're not necessarily going to be profitable. So a couple of multi packs with lower profitability and so we expect to continue to see some of that trend continue into Q3 and Q4. This year internationally speaking, but then anticipate significant pick up and 2022 and.
Beyond.
Yeah.
Got it that's helpful and then bigger picture, maybe when you look at your franchisee base scenarios and maybe the incremental franchisee are you seeing new firsthand and hotel owners joined the choice platform or are you seeing the existing franchisee base getting a little bit more concentrated but what's the makeup there of the new signings and the new franchisees coming onto the platform.
Yes, its been interesting.
Historically, we sell about 2 thirds of our contracts to existing owners.
I would say if we look at the last I know and Q2, and it's probably true and Q1 as well.
We're seeing really 2 thirds of new owners and and that's some of Thats being driven by.
And the investors, we're seeing now and our extended stay segment as.
As I mentioned these are.
More institutional capital backed multi unit owners so.
So we are seeing a higher percentage of AUM.
Owners, who we hadn't seen before who are developing and are particularly and our extended stay segment, which has which is a great.
And opportunity for us it means we're continuing to have our existing customers come back and build new hotels, which were also attracting a new category of franchisees, which again I think is going to be a real.
Tailwind for us in the future.
Got it and there are those.
So as new franchisees are they are they asking for anything differently or are the contracts structured.
Any differently than they would have been if it were and existing franchisee joining the platform.
No I mean, I think that's all.
Our franchise contracts are fairly market.
So what what we are offering our existing owners and what we're offering the new owners are fairly consistent with regard to franchise terms.
And new owner that is.
New to the industry completely.
Choice has always been a great place for people, who are new to the industry to start.
Our choice University online training platform, our area directors and their opening fees out and the field are used to dealing with owners new to the industry. So.
That's a that's a muscle that we've had for many years and so it's always helped new people get into the industry and as I mentioned and the last couple of quarters, we are actually seeing that which is a real positive.
Helpful. Thank you.
Okay.
Thank you.
Yes.
Okay.
Our next question comes from Patrick shows went to sales.
Go ahead.
Hi, good morning, everyone moving.
And Patrick.
Thank you.
First of all thank you for part D and are at the start about changing customer habits and trends certainly as we try to figure out how what is changing and the world of hotels, having thoughts and information like that.
Is very helpful.
On to my questions here.
Certainly you know your balance sheet is and at least a year and will be and pre.
Pre COVID-19.
Covid shape or how do you think about the priority of <unk>.
Either share repurchase or dividend and.
In light of.
The stock pretty much being at or near an all time high here.
Well I think as we had mentioned and many times before the allocation of our capital really goes to its highest and best use and so that we always start with our internal investments.
Tom and I have been talking about we've been investing prior to the pandemic and we invested through it and we will continue to invest.
We really as I said see some exciting opportunities and these revenue intense segments to continue to grow our product portfolio.
We're going to continue to invest and our value proposition.
There is a significant amount of.
Opportunity for us to lower the cost of running 1 of our hotels and help our owners set pricing and market their product more effectively.
The cost of customer acquisition continues to go up as well. So those investments are going to are going to continue.
Secondly, we will look for M&A opportunities if they are out there and if they fit with our criteria around our ability to improve the unit economics for the franchisee and our ability to grow the brand for our shareholders.
And it gets to dividends and share repurchases, it's really.
A factor of on share repurchases, when we see a dislocation from.
Our view of intrinsic value, we're going to be and the market, we're not and the market and a programmatic way, where and the market and a much more opportunistic way.
And so that really is a function of how the capital markets perform and our internal view on the long term.
Growth of our of our of our equity.
And then our dividend policy, we've returned it to our pre COVID-19 levels and we feel comfortable at the <unk>.
Current.
Dividend yield and so that's kind of as you work down those 4 steps, how we think about our capital and how we think about returning it to shareholders as well as investing it back and the business.
Yes, Patrick the only thing I would add is we feel very good about where those leverage levels are as well obviously on a gross basis, we're well within that 3 to 4 times. When you look at it on a net basis just given the fact that we are sitting on a little bit of cash still youre at 2.5 times and so the reality is when you look at each of those priorities, it's not an either or.
And my opinion, and I do think that youre going to have the ability to pull every 1 of the levers obviously, we're going to continue to pay the dividend.
Those pre pandemic levels and so again I think the past point and the ability to play offense, especially and this recovery period is critical but make no mistake I think that returning capital back to shareholders will still continue to be a priority going forward.
Okay.
And certainly a high class problem with having to pick.
Pick and choose what to use there.
And Ive 2 more questions. The first 1 is.
In the press release, you talked about.
Third quarter Revpar growing mid to high single digits versus 2019.
<unk>.
Can you tell us what that comparable Revpar number was.
Look back in the press release from 2 years ago. It was $59, but I don't think that is in fact, a comparable number to grow off of or do you have a ballpark number we could use.
Okay.
Well, let me, let me just broadly speak and talk about the third quarter.
And as we mentioned the July was off to a very.
Very strong start in the quarter and.
Plus 15% we have to be careful July had an extra Saturday and it.
And we also had a favorable.
Location of the fourth of July is as regards to how it fell within the week. So those 2.
Elevated and already strong month.
And as we look into August and September.
We are going to and we're seeing continued strength.
And the business and it's a.
As you think about August and.
September the calendar impacts of that are going to have a slightly lesser impact and we saw in the first month of the quarter I think Dom and is trying to check on your numbers and the numbers are $55.10, Patrick and so again.
Methodology in terms of full room availability and ensuring that we were actually reporting on a full room availability perspective, just given the fact that the COVID-19 did have an impact on temporary and rooms out of service. We wanted to make sure that we change that methodology to be apples to apples. So the number is 55% okay.
Okay, Great great helpful and then lastly.
And the owned hotel revenue line and the quarter.
Up quite significantly and when I think about the drivers of that.
Was that because you had less.
So a year ago.
And the quarter.
Quite a few of the Cambria is.
Out of service I, just want to make sure we're thinking about the right way to model that going forward or was that that growth due to any new hotels subsequently coming in over the past year. Thank you.
No it's really the location of the 5 hotels.
La <unk> and airport hotel. So obviously when there was nobody flying that 1 was.
And significantly impacted and New Orleans and Nashville.
And now Houston are doing quite well with.
With the type of traveler, who was out there and and what's going on and those markets. So it's really location driven as to why things were lower last year and why they are really strong this year.
Okay.
Makes sense. Thanks. Thank you that's it.
Thank you.
And again, if you'd like to ask a question. Please press Star then 1 our next question comes from David Katz with Jefferies. Please go ahead.
Hi, Good morning, everyone. Thanks for taking my question I Wonder if you go back 1 day or Florida.
I wanted to go back to the conversions number which I think.
And you've discussed somewhat is strikingly large.
Can you just talk about the value proposition out there and I suppose that's a nice way of asking.
Just how competitive it is and how much capital people are putting into the marketplace, because we certainly hear peers talking about <unk>.
Inversion pursuits as.
And as well.
Any color there would be helpful. Thanks.
Yeah, I think David it's and conversions are nothing new to us and it may be new to some competitors and certain brands. So if youre going to take a newbuild brand and I'll start with conversions.
There is a significant amount of internal hurdles I would say you have to get over that's not the case with with the majority of our brands comfort Inn.
And is about 2 thirds, new construction and about 1 third.
And conversions.
And that's essentially what we saw in the in the quarter from the standpoint of non.
Tracks being added and.
And then when you look at other brands that we have quality clarity and economize roadway Clarian Pointe.
These are all 100% conversion brands and.
And so that that we have and engine here that runs through those performance improvement plans that are aligned with those individual brand standards.
And so we know what we're looking for and the marketplace, we know how to.
Engage with owners, particularly and a time like this when supply chains are constrained.
And and understand what the guest values and what needs to be and our property improvement plans and so theres a lot of.
Complexity and driving conversion into your brands, if youre not doing it on a regular basis and so I think that's 1 aspect of this is <unk>.
During good times, we do conversions during bad times, we do even more conversion. So it's not something we have to turn the switch on and it's and it's an always on process and I think that that's part of it.
The second thing is if you go back to the last downturn.
Ascend wasn't where it is today Clarion Pointe isn't where it is today.
Mainstay and suburban is Domino discussed are really accelerating from the standpoint of.
New contracts, so we have additional brands that.
10 years ago, we're not.
Really in the conversion.
And part of our portfolio.
And so it's really providing us that strength and when we engage with owners.
I'd say, it's a negotiation over what they need to do with their existing hotels to bring it into 1 of our brands and bring it up to standards and the second piece of it is we have a better value proposition.
And certainly then and independent hotel that is trying to pay.
A high cost of customer acquisition and high labor costs higher.
High insurance costs.
All of those are things that we because we are a platform and 7000 hotels.
Can help lower the cost for an independent owner and for and owner of that might be and a weaker brand.
And that is looking for.
A more robust business delivery engine.
And also a.
Franchisee success system everything from training to to cost reduction that can help them improve their profitability. So I think as a company. We've always had a great conversion story and.
Capability, and Thats really showing up now that owners, having been through the downturn and the last 18 months are really looking not just for our safe Harbor, but for a company that can continue to drive that profitability higher and day.
But it's really showing up and the numbers as well when you look and the first half of this year Youre conversion agreements are up 43% year over year and I know the 2020, probably not the best comps. So even when you take a look at 2019 your conversion contracts are approaching 90% of 2019 levels as well even in the environment that we're in today.
Okay Super helpful. Thank you.
Sure.
This concludes our question and answer session and I'd like to turn the conference back over to Pat patients for any closing remarks.
Thank you operator, and thanks to everyone again for your time. This morning, I Hope you all stay safe stay healthy and we'll talk to you again in the fall have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.