Q2 2022 Choice Hotels International Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the choice hotels International second quarter 2022 earnings call.
At this time all lines are in a listen only mode.
At this time I'll turn the conference call over to Allie Summers Investor Relations director for choice hotels Ma'am. Please begin.
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 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 that you should consider.
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 2022 earnings press release, which is posted on our website at choice hotels Dot com and there's the Investor Relations section.
This morning that the patients are president and Chief Executive Officer, and Don drug as it our Chief Financial Officer will speak to our second quarter operating results and financial performance.
Following patent dumps remarks, we'll be glad to take your questions.
With that I'll turn the call over to Pat.
Thanks, Allie and good morning, everyone. We appreciate your taking the time to join us.
The second quarter was a truly remarkable one for our company.
We once again outperformed the industry in Revpar growth.
Accelerated our capital recycling progress.
And announce the most significant acquisition in our company's history.
In June we announced the acquisition of Radisson hotels Americas.
Day I'm pleased to share that we remain on track to close the transaction this month.
This transformative acquisition of Radisson Hotel as Americas nine brands is expected to significantly accelerate choices long term asset light strategy of growing our business in a higher revenue travel segments and locations.
We strongly believe that this transaction will enable us to achieve our dual goals of delivering greater return on investment for our franchise owners, while growing the newly acquired brands to drive meaningful value creation for our shareholders.
As we look forward to closing we expect the acquisition to create a number of compelling value drivers.
First the acquisition will add over 67000 rooms that will be revpar accretive to our existing platform.
Due to Radisson hotels America's strength in the upscale and upper mid scale segments.
And their hotels locations in higher Revpar markets.
In 2019, the average Revpar for this portfolio was 38% higher than the average for choices existing system.
We also believe our superior business delivery platform once combined with these brands.
We'll provide additional revenue upside for these franchisees and our shareholders.
Next.
The acquisition will improve the return on investment for our franchise owners, who we expect will benefit from the enhanced business delivery capabilities of the combined companies Inc.
Including our award winning loyalty program.
Proprietary tools and emerging technologies designed to drive owner performance and reduce their cost of hotel ownership.
Choice has a deep familiarity with the Radisson Hotel is Americas franchisee community, many of whom already hold franchise agreements with us.
The transaction will also expand our customer reach to a higher income and younger demographic as well as with business travelers.
The combined loyalty program provides members a new set of attractive loyalty redemption options for guests in upscale and sought after leisure markets.
And finally, it will expand our regional representation in the upper Midwest and West coast of the U S. While growing our presence in Canada, Mexico, the Caribbean and other key Americas markets.
The pending addition of Radisson hotels Americas marks the next chapter in our higher revenue per room growth trajectory.
Our strategic goal has been to open incremental rooms in higher revenue segments, and Revpar markets, which ultimately result in an outsized increase in royalties.
In fact for the past year and a half every new unit entering our portfolio has generated twice the revenue as a unit, leaving it.
Our strategy has not been solely a unit growth strategy.
It is a unit growth strategy in the segments that are accretive to our earnings and provides significant future growth for our business.
That trend continues with this pending acquisition.
Our company has a long track record of establishing mutually beneficial relationships with our franchisees.
And we have a history of smart investments and new segments, where our world class franchising engine can spur future growth.
A recent example is our off market acquisition of the Woods spring suites brand.
The wood Springs suites results reflect our ability to identify high potential acquisition opportunities and then integrate and grow them successfully.
The wood spring acquisition also allowed us to successfully accelerate the growth of our entire extended stay portfolio.
We see the pending Radisson hotels Americas acquisition, expanding choices growth vectors by bringing the company's best in class franchising platform, two adjacent hotel segments and to a new set of hotel owners, while providing opportunities to further strengthen.
Joyce as core upper Midscale presence.
We also expect that this transaction will enable us to further build on our momentum in the upscale segment.
Accelerating growth for our Cambria hotels, and ascend hotel collection brands and.
And at the same time, allowing us to expand the radisson portfolio.
The addition of the Radisson upscale brands in the Americas, We will increase the size of choices global footprint in the upscale segment to approximately 80000 upscale rooms.
The level of enthusiasm around the acquisition from developers franchise owners and the Investor community has been remarkable.
And importantly, the cultural fit between our two companies could not be more ideal.
This unique off market transaction is the result of a year long strategic conversation with the sellers.
And represents a win win opportunity whereby choice will bring our track record of brand growth and brand stewardship in the Americas to these well known global brands.
I'm very excited to add this new business and start the next chapter in our company's rich history of success.
Yeah.
Now turning to our second quarter results.
I'm pleased to report that we generated $129.6 million of adjusted EBITDA in the second quarter.
A 16% year over year increase and a 26% increase when compared to the same quarter in 2019.
These exceptional financial results were fueled by continued revpar growth that accelerated from the first quarter and again outperformed the industry.
Throughout the remainder of our remarks will provide revpar comparisons to 2019.
Our second quarter Revpar growth was impressive with domestic revpar, increasing 13% from the same quarter of 2019.
Led by our hotels ability to drive room rates, we have now exceeded our 2019 revpar levels for 14 consecutive months in.
Including July Revpar growth results, which surpassed 2019 levels by approximately 14%.
And we expect our momentum to continue into the third quarter.
Clearly consumers continue to shift their spend towards travel experiences and we are seeing that across all segments in which we compete.
Not only do we expect these broader leisure trends to continue but we also have seen continued strengthening of our business transient and group segments.
Recent studies indicate that leisure travel remains a high budget priority for American travelers, who are sticking with their travel plans and willing to make trade offs to make the trips possible.
Faced with high airline ticket prices and flight cancellations, a majority of travelers who responded to our recent survey indicated they would rather switch to driving versus canceling their vacation plans.
This trend is particularly beneficial for our portfolio of over 4000 hotels located within a mile of an interstate exit.
In addition to leisure travel we're also observing business travel trends that are favorable for our brands, especially in the context of the pending Radisson hotels Americas acquisition.
In the second quarter, we drove sequential quarter over quarter increases in our business travel bookings.
With demand surpassing 2021 levels.
In addition to continued robust leisure travel the business travel component of our guest mix continues to approach historical levels and accounted for 30% of stays in the second quarter.
We continue to expect business travel in our key industry verticals to increase fueled by the additional onshoring of the U S supply chain and investments from the infrastructure Bill.
Choice remains well positioned to continue to capitalize on long term consumer trends.
And benefits from our resilient business model, which has historically delivered stable returns throughout both expanding and contracting economic cycles.
Our second quarter results demonstrate that the deliberate decisions and strategic investments we have made in our brand portfolio.
Value proposition.
Platform capabilities.
And other franchisee tools are paying off.
I'll now provide a brief update on our key segments and some of the accomplishments for this quarter.
First we continued to strengthen our core portfolio of brands.
The comfort brand has now registered 10 straight quarters of unit growth year over year since its successful refresh.
And consumer confidence in our updated product has continued to drive the brand's revpar index gains versus its local competitors.
Underlying the attractiveness of this iconic brand to hotel developers and guests alike.
Our new comfort prototype and now underdevelopment in several locations and marks the next chapter for our flagship brand.
Our quality Inn brand with over 1600 hotels opened in the United States remains a leader in the Midscale segment the.
The brand continues to generate strong developer demand with a 28% increase in franchise agreements awarded year to date through June compared to the same period of 2021.
And a 10.8% increase in revpar during the second quarter versus the same period of 2019.
And in the four years since its launch are Clarian Pointe brand has reached a key milestone of 50 hotels open as of last month with over 10 additional hotels awaiting conversion still this year.
We also further invested in the extended stay segment, which continues to be a significant driver of our unit and Revpar growth.
Specifically in the second quarter, our extended stay domestic pipeline expanded to over 360 hotels and we awarded 41 extended stay domestic franchise agreements, a 24% increase year over year, and a 78% increase compared.
2019 levels.
Our investments in the woods spring suites brands marketing and distribution capabilities.
Enabled us to achieve revpar growth of over 28% in the second quarter of 2022 compared to the same period of 2019.
Driven by increases in both occupancy and rate.
In the first half of the year, we more than doubled the number of wood spring suites domestic agreements executed year over year.
Not only has the brand's pipeline expanded by over 30% year over year as of the end of June reaching over 200 domestic properties.
But we also expect the brand's openings this year to significantly exceed 2021 levels.
As you may be aware in the first quarter Blackstone real estate partners and Starwood capital acquired a portfolio of 111 with spring suites hotels from the real estate owner, who purchase these hotels at the time that we acquired the Woods spring suites brand and operating company.
Blackstone and Starwood also own an extended stay brand company.
Recently and not surprisingly they notified us that they intend to reflag. The bulk of these properties in September .
This exit scenario would result in a cash benefit amount of approximately five years of future royalty fees to choice.
The majority of these exiting hotels represent the older legacy value place hotels and are in markets that are highly attractive to current would spring owners interested in future development.
We see this transition as an opportunity to further strengthen the brand by replacing first generation hotels with our highly profitable new construction prototype that will provide an improved experience for our guests.
I'm also pleased to report that we recently entered into a development agreement for 45, New Wood spring suites hotels with two of the country's most prominent hotel developers.
This brings our commitments to develop would springs to approximately 250 hotels.
Our newest extended stay brand ever home suites is on the cusp of significant growth with its first hotel on track to open next month.
The appeal for this mid scale, new construction option in the development community continues to grow with over 30 additional projects already in the pipeline and a substantially higher number of domestic contracts expected for 2022 as compared to last year.
In addition, we recently secured a commitment with one of the largest extended stay investors in the nation to develop more than 20, new ever homes suites hotels brings.
Bringing the development commitments to this brand to over 50 hotels.
Overall, we remain very optimistic about our extended stay segment growth and expect the number of our extended stay units to increase at an average annual growth rate of more than 10% over the next five years.
We're also pleased with our upscale portfolio.
Where our brands outperformed the segment's revpar growth by nearly nine percentage points versus the same period of 2019.
At the same time, we more than doubled the number of upscale franchise agreements executed in the second quarter year over year.
The Cambria brand expanded to 60 units open with an additional 65 domestic properties in the pipeline, including 21 projects under active construction at the end of June .
The recently introduced Cambria Hotel prototype designed for secondary and leisure markets has been enthusiastically received by the developer community with 14, New agreement signed as of the end of the second quarter.
In addition, we expect that the pending Radisson hotels Americas acquisition will enable us to further penetrate the upscale market, creating an additional catalyst for Cambria is growth.
We also continue to improve the value proposition that we deliver to our franchise owners.
With our enhanced distribution capabilities, we've been able to drive growth as compared to 2021 and 2019 through increased revenue contribution in the second quarter of 2022 from choice hotels Dot com.
Business delivery through this channel significantly improves our owners' profitability as it brings more guests into their hotels at the lowest cost.
Existing owners recognize the increasing value in our brands and are continuing to renew their agreements to remain in our system.
In fact, the second quarter of 2022 marked the highest quarter for franchise renewal and re licensing contracts over the past six years.
And finally, our franchise owners continue to remain with choice as seen in our industry, leading voluntary franchisee retention rate.
We're proud of everything we've accomplished this quarter, but we certainly could not have done it without the strength of our award winning culture centered around diversity equity and belonging.
I'm, especially pleased to report that we recently have been named one of the best places to work for people with disabilities.
Earning a perfect score on the disability equality index for the third year in a row.
In closing I want to again convey how pleased we are about the prospects ahead for Radisson hotels Americas bright future as a part of choice.
We look forward to integrating these hotels into the choice family and accelerating the growth of these brands by leveraging choices scale network of owner and franchise relationships and our powerful digital platforms.
With that I will hand, it over to our CFO .
<unk>.
Thanks, Pat and good morning, everyone I'm very pleased to be with you today to report our impressive second quarter financial performance.
Specifically I will provide additional insights on our second quarter results share expectations for what lies ahead and update you on our liquidity profile and capital allocation approach.
Throughout my remarks today, I'll be making financial performance comparisons the 2021.
Or for Revpar growth I will continue to benchmark to 2019 for Revpar comparisons to 2021, please refer to our press release.
I also would like to note that our forward looking guidance does not include any positive impact from the pending Radisson hotels Americas acquisition.
For the second quarter 2022, compared to the same period of 2021.
Total revenues, excluding marketing and reservation system fees were $178 $6 million or 25% increase despite a slight increase in our adjusted SG&A expenses, primarily due to the resumption of our annual convention in the second quarter, our adjusted EBITA grew 16.
<unk> percent to $129 $6 million.
This strong adjusted EBITDA growth was driven by impressive Revpar performance continued effective royalty rate growth and disciplined cost management and.
And as a result, our adjusted earnings per share were $1 43 for the second quarter, an increase of 17% versus the same period of 2021.
I'd like to now turn to our three key revenue levers beginning with Revpar.
Our domestic revpar increased 13% for the second quarter with our average daily rate growing by nearly 14% compared to the same quarter of 2019.
This revpar growth also represents an acceleration of the gains achieved in the first quarter of this year.
As you'll remember from our prior calls our brand strategy is focused on driving growth across the higher value and more revenue intense upscale extended stay and mid scale segments.
Our investments in these strategic segments and our value proposition capabilities have enabled us to outperform the industry and revpar growth by nearly four percentage points for the second quarter with average daily rate growth accelerating quarter over quarter as compared to 2019.
Importantly, thanks to the award winning tools and capabilities, we provide as well as expert advice from our revenue management consultants. Our franchise owners are able to quickly execute the right pricing strategy and effectively reach their target customers, which is critical in this inflationary environment.
We believe that the new enhancements. We are currently deploying to our revenue management tool will allow us to further optimize rate growth for the remainder of 2022 and beyond.
Okay.
Given the strong revpar trends, our ongoing strategic initiatives and continued optimism we are raising the bottom end of our revpar growth range and now expect full year 2022, domestic revpar to increase between 11% and 13% as compared to full year 2019.
Our effective royalty rate also continues to be a significant source of our revenue growth.
Our domestic effective royalty rate once again exceeded 5% for the quarter, increasing three basis points for the second quarter and four basis points year to date through June year over year.
This performance further validates our long term investment strategy on behalf of our franchisees. The continued strengthening of our value proposition to our franchise owners and the attractiveness of our proven brands.
With owners seeking choices proven capabilities to consistently deliver strong topline revenues that maximize return on investment while reducing total cost of ownership. We continue to expect our effective royalty rate to grow approximately five basis points for full year 2022 year over year.
The third revenue lever I'd like to discuss is unit growth, where our portfolio is absolute size and the revenue intensity of its hotels are key advantages.
We are excited about the prospects of integrating over 67000, Radisson hotels America's rooms to the choice family, which we expect will increase our global rooms number by approximately 12% and extend our presence in the Canadian Mexican Caribbean and other key Americas markets.
We are optimistic that as Radisson hotels Americans nine brands are connected into our powerful reservation delivery capabilities.
We will not only improve the performance of the existing portfolio, but also create a runway for future growth of the Radisson Hotel is America's brands.
For the second quarter, our existing revenue intense brands grew by 30 basis points year over year, excluding last year's departure of 17 and resorts from our ascend hotel collection and the strategic termination up 41 underperforming assets that we discussed at the beginning of the year.
This growth was led by our extended stay portfolio with units expanding by over 6% in the second quarter year over year.
For full year 2022, we continue to expect unit growth of the more revenue intense segments to range between 1% and 2% not including the impact from the one time exit of the wood spring suites hotels, nor the pending Radisson hotels Americas acquisition.
Furthermore, we expect the broader revenue intensity trends of our overall portfolio seen in 2021 to continue.
Aided by our strong value proposition and Revpar performance developers continue to choose our brands versus the competition as they seek to improve their operations and boost the long term value of their hotels.
In the first half of the year, we awarded 215, new domestic franchise agreements, a 21% increase year over year, excluding last year's Penn National Gaming multi unit transaction.
Our developers are also increasingly optimistic about the long term fundamentals of the lodging industry.
Specifically, we are very pleased to see that demand for our new construction brands increased by nearly 50% throughout the first half of the year year over year.
At the same time nearly two thirds of the agreements sold in the first six months of the year, where for conversion hotels, which are expected to open more quickly than our new construction projects.
At 24% year over year increase in new applications for domestic franchise agreements in the first half of the year further reinforces our confidence in our continued growth prospects throughout 2022 and beyond.
I'd like to now turn to the strength of our balance sheet. One of the major reasons why we believe we are an even stronger company today than we were a pre pandemic.
Our impressive performance and effective allocation of resources to drive top line outperformance has further bolstered the company's liquidity position.
More specifically at the end of the second quarter 2022, the company had $1 $2 billion in cash and available borrowing capacity through its revolving credit facility.
Even after the completion of the Radisson hotels Americas acquisition, our liquidity is expected to remain strong.
In fact, we expect to continue to maintain our best in class balance sheet with a gross debt to EBITDA leverage level below the low end of our target range of three to four times.
Year to date through June we returned approximately $42 million back to our shareholders in the form of cash dividends and repurchases of our common stock.
In the second quarter of 2022 due to a blackout associated with a pending Radisson hotels Americas acquisition announcement, we were unable to transact through our share repurchase program.
Moving forward, we expect to use all pillars of our capital allocation strategy, including returning capital to shareholders in the form of future share repurchases.
We also expect to pay dividends this year of $53 million more than double the level of 2021.
I'm also pleased to report that our capital recycling efforts are stronger than ever in.
In June and July we sold two of our own Cambria asset recycling approximately $135 million and most importantly, we also secured 20 to 30 year franchise agreements with the respective buyers.
Following the closing of these transactions, we will have recycled over $140 million of prior investments and Cambria development projects during 2022.
Even excluding the impact of the pending Radisson hotels Americas acquisition, we expect to drive continued growth in adjusted EBITDA and adjusted EPS for full year 2022 above both 2021 and 2019 levels.
Due to the significant outperformance in domestic pretax earnings which are taxed at a higher rate than our international operations our tax rate in the first half of 2022 was slightly elevated.
We expect this trend to continue for the remainder of the year.
Finally for full year 2022, and excluding the impact of the pending Radisson hotels Americas acquisition, we expect to drive continued growth in our adjusted EBITA margin above 2019 levels.
We're proud of the accomplishments we've achieved to advance our long term strategy and are excited about the value creation, we expect radisson hotels Americas to bring to choice.
Without the integration process, we are committed to drive meaningful results for owners and franchisees and to help enhance the value of their investments.
By leveraging the benefits of scale and the expansion of choices growth vectors, we expect the combined companies to bring operational efficiencies and additional revenue opportunities to drive attractive returns for years to come.
We look forward to providing you with further updates in November during our next earnings call.
In closing we remain confident in our long term strategic approach and resilient business model, which enables us to continue to deliver strong operating results and generate substantial levels of cash through multiple growth levers.
Coupled with our disciplined capital allocation strategy and strong balance sheet. We believe these strengths will allow us to further capitalize on growth opportunities and drive outsized returns in the years ahead.
At this time patent I would be happy to answer any questions operator.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question you May press Star and then one using a touchtone telephone.
So 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 prior suppressing the need the keys to ensure the best sound quality. Once again that is star and then one to join the question queue.
Our first question today comes from Michael Bellisario from Baird. Please go ahead with your question.
Thanks, Good morning, everyone.
Thanks.
The first question on on Radisson.
There's going to be a different ownership group for the international portfolio could you just provide.
Some details kind of on that dual ownership structure, who who's going to own what and then really kind of more importantly, how do you manage that relationship and the brand consistency globally.
Okay.
Sure.
If you look at this acquisition, we talked to in the prepared remarks, obviously about the strategic benefits of it.
We are acquiring the brands and the operating business the intellectual property everything outright in the Americas. So it is a full ownership.
Of choice hotels for the brands in the.
In the Americas region.
Really the result of our year long strategic conversation that we had with the sellers.
They looked at our ability to aggressively grow in the upscale segment and our key strength in upper Midscale and they said choices the right company for us to grow with.
In this part of the World You know, we got the right network of owner as we've got the right business delivery engine and we've got the right balance sheet frankly to spur future growth for the brands, what we're going to do with them as we have established what we call. It a brand council that will.
Sure best practices ensure that the brands remain in the segments and the consistency.
That they had created.
Globally. So there is a.
A working relationship we will have with them to ensure that these nine brands.
Have a standard around around the globe that that makes sense, but it also means we have the flexibility in the Americas markets to grow these brands a few travel across the world and you stay in the same brand.
Expectations in Asia, and the expectations in Europe with regard to room size and amenities differ by brands and a lot of that is driven by what the consumer wants and what makes sense for the developer to build obviously in Europe your real estate constrained.
More so than you are here in the Americas. So.
That's really the relays.
The relationship that we will have with the Radisson Hotel group based over in Brussels, who manages the brands for the rest of the world.
Yes.
Okay.
Got it that's helpful. And then just on the the Woods Spring Deletions, you mentioned can you quantify how many hotels of rooms, and then what will the forgone fees be.
So the.
It's a little bit in flux, the total number of that they own today is 111.
They've indicated to us that the bulk of those will depart in September .
There may be a handful that depart at a later date, but by and large I would expect.
In the medium term that all 111 will will exit the system the way when we acquired the brand. We saw this as a potential exit scenario given you have a single owner with.
With that number of hotels, so the liquidated damages associated with I really representative of five years at fees.
LT fees that is.
That will be paid.
Page two choice upon the exit so once we have clarity in September and October around the actual number that are leaving we will be able to probably report in our November call. The actual.
Payment to choice, assuming everything stays on track with that exit scenario Michael.
Got it. Thank you and then just.
Last one quickly for me just on July trends, plus 14% I think last year July was plus 15% can you just talk about the mix of rate and occupancy in July and kind of what youre seeing across markets and across segments. So far in the third quarter.
Yeah, what you've seen actually in Q2 has continued into July Michael So essentially your occupancy for all intensive purposes is just down a notch almost flat.
Q2, obviously occupancy was down by about 30 basis points with ADR up almost 14% you've seen that trend continue into July probably a little bit heavier on non ADR, maybe down just a slight notch on occupancy, but the reality is is when you we didn't provide formal Q.
Q3, Revpar guidance, but when you take a look at what we're seeing in Q3, we expect that 13% to continue on the 13% that you saw in Q2, continuing on into Q3 as well.
Helpful. Thank you.
Yep.
Our next question comes from Daniel <unk> from Bank of America. Please go ahead with your question.
Hi, good morning.
Patent.
I'm just kind of just going to continue on that last train of thought there. So assuming rates continue can you help us unpack that outlook that revpar outlook for the balance of the year.
What could also like what could make it go better what can make this outlook potentially look conservative.
What can go right.
Yeah.
Yes, I think I mean, what we what we're seeing and as we kind of got a month that are under our belt here in Q3 Revpar is.
Likely to be similar to Q2, so probably around 13%.
What could make it better is really the return of the business transient travel and the strength of group, which we've seen build quarter over quarter.
And this return to office, which I think we're starting to see really start to pick up here.
Particularly as companies I think are beginning to kind of get back to normal and start looking at.
An economy that is maybe a little bit.
No different than what we've been experiencing a year ago. When we saw sort of all of this kind of economic growth I think youre seeing a little bit of economic slowdown so.
Businesses are coming back and they're sending their sales forces out to say, hey, we need to we need to get back on the on.
On the game here. So I do think if we see more of that business travel business transient return, which is the trend we're seeing that could be a nice.
Motivator on the upside from from from a Revpar perspective. So those are probably the things that we're looking at as we get into Q3 and Q4 would be really does that business traveler return.
Or continue the trends that we're seeing with this sort of quarter over quarter increase in our in that demand.
Okay.
And then and then as we you know.
Closer and closer to her.
We're ahead of 19 levels, but we are fully recovered kind of industry are you seeing any evidence of.
That return if seasonality for the leisure traveler or whether it's in the form of weakness in shoulder seasons are spending across any segment or anything like that.
We're not Danny and in fact these longer term trends of remote work I mean, just looking at our Sunday night business.
That is categorized as a weekday historically weekend was Friday Saturday we're.
We're continuing to see occupancy and rate gains on that Sunday night shoulder of the week.
More so than Thursday, but Thursday is also picking up.
So I do think these this remote work trend.
<unk> is here to stay for us it may not be as strong as it was in the early days of the pandemic, but I don't think it's going to go back to everybody working in the office five days a week I think the flexibility of certain parts of the workforce is going to continue to allow people to travel and extend that weekend stay through Sunday.
And check out on Monday morning, So I think that trend is going to continue.
It'll be interesting to see.
Sort of the seasonality of the months.
As we get back to whatever the new normal looks like but but again as I've said on prior calls.
Tyrants are triple what they were pre pandemic. So you just have more people, who are not working and who have the wherewithal to travel.
In the U S in particular and so that.
Aspect of demand. These retired boomers who are.
We have good healthy you know household balance sheets, they are living longer that are in better health.
That's a nice runway of growth for us from a demand perspective, particularly for our brands, particularly for leisure travel and for particularly travel outside of the busy summer season.
Got it got it and one more if I can sneak one more in.
<unk>.
For the wood spring conversions or like reflagged.
Liquidated damages on that size.
I know it might be a little bit early but have you potentially earmarked them for anything in particular, whether it's you know key money or.
Buybacks are kind of are they already been earmarked for anything.
In your in your capital plans.
So I wouldn't I mean, when we look at the.
Wood spurring growth. This is a brand that is in demand.
Don't do discounting.
For this brand.
And so when I look at the opportunity, where essentially being given a five year runway.
To replace these markets and as I said in my prepared remarks. This is a brand that is in demand the operating model, particularly for the new prototype, which we've been building.
Really since 2015 and later.
Drives exceptional returns for these owners so.
We will be obviously spending a lot of time focused on these markets to make sure we get the right hotel and the right location with the right owner.
As far as our use of that capital would probably be better for us to talk about it in Q3, once we have a better sense of.
What the final.
Financials will look like I don't know Tom do you have yes, I mean, the only thing I would say is you know you mentioned, specifically, if we were going to earmark the funds for anything and the reality is with some of the.
Great capital recycling that we've seen in Q2 continued into Q3, obviously with the sale of our Nashville asset.
You also see this five years or actually it's a little bit more than five years of LD is coming in the reality is even post acquisition of Radisson Americas, our leverage level on a gross basis is still going to be at about two and a half times. So even to get to that bottom end of that three to four times target leverage ratio.
Youre going to have to put about $250 million to $300 million of debt on this business and so we're not living in a capital constrained environment right now so there's really no need to air market specifically.
Got it thank you very much.
Thank you.
Yes.
And our next question comes from Robin Farley from UBS. Please go ahead with your question.
Great. Thanks, I Wonder if you can talk a little bit about I know your pipeline is.
More conversions than new construction, but some other companies have commented on the fact that you record signings Havent led to record shovels in the ground in terms of getting those projects underway.
Any color on that thanks.
Yeah. So broadly speaking when you look at the just the composition of the pipeline Robyn the reality is about a little over 25% of that is conversions, obviously conversions moved through the pipeline a lot more quickly you can open a conversion property anywhere from you know a month or two after six months or so and so we're not seeing as many.
Just in terms of the convert.
Opening cycle, we're not seeing those delayed on the conversion side of the house, obviously the environment that we're living in today with cost rising and whatnot you are seeing a little bit more pressure pressure on the new construction side of the house. So yes, you are seeing some of those new construction projects permitting and things like that getting pushed out maybe what was two years.
Extend out two or three year timing on the new construction side, but broadly speaking, we're not expecting a major impact on the on the net unit growth algorithm, just because of how many conversions, we typically open on a year to year basis.
Great. That's helpful. And then just also as a follow up question.
I was curious about the comments about Radisson I think I made the comment that choice has the right balance sheet for that for.
For that acquisition and.
I'm curious does that imply that you would be sort of using your balance sheet to grow those brands, maybe more than kind of what you have done for your existing brands. Thanks.
Yeah, Robert I mean, the exciting thing is we've effectively repositioned the company into these higher earnings growth segments. So you think about our core business extended stay and upscale Dom talked and I talk a lot about you know you look at back in the last 18 months.
Every unit we brought in this system is producing twice the revenue or do you think thats, leaving the system. So we're really repositioning ourselves up into these higher revenue intense segments. The nice thing about our balance sheet. It gives us the flexibility if we want to push beyond where the Radisson core is so if we want to do upper upscale.
And use our balance sheet in a way that helps us grow brands were doing that today successfully with Cambria, we're doing that today successfully.
With ever home.
When you do these brand launches, putting your balance sheet to work in and putting some skin in the game, particularly in an asset light model is.
As a very effective way of convincing owners that you are in this for the long term.
Which we are.
So that balance sheet capacity that we have gives us the opportunity to.
Two to Incent growth in some of these brands that are emerging.
That's really the the referenced I'm, making there plus the capacity that we had to do this acquisition without having to go out and get financing speaks to the power of the cash flow generating engine.
That we have in our current business the effective stewardship of our balance sheet over the years and with regard to.
Leverage levels, and our share repurchases and dividends and the like so I think that's sort of a discipline to keep your powder dry.
Our strategy that we've had really paid off in this situation to be able to do an acquisition of this size and then literally be back below our target levels with regard to debt to EBITDA. So that's really the nice thing about our business and as I said it gives us the flexibility if as we.
Close this transaction think about growth in new segments, having the ability to use our capital to do that.
We will give us again one more.
Growth engine lever to pull if we need it.
Okay, great. Thanks very much.
Joe.
Our next question comes from Patrick Schultz from Truest. Please go ahead with your question.
Hi, good morning, everyone.
I'm wondering a question.
How is the acquisition of Radisson can you give us update on.
And domestically what you're.
Geographic exposure will look like historically, you've been more concentrated in the southeast.
How will that change post acquisition.
Yeah.
Yeah, Patrick it'll it'll give us more of a presence on the west coast and in the upper Midwest. Those are two areas, where the current radisson portfolio is strongest.
And to your point, we are we over index in the southeast.
And then in that sort of Texas, you know across the debt into the southwest as well, but we were underpenetrated in particular really on the west coast and in upper Upper Upper Midwest. So it gives us a nice geographic strength and then as we said we will be doing direct franchising again in Canada.
In our current Canadian portfolio, it's a 50 50 joint venture so we will have.
More units and more growth opportunity in Canada, as well as the Caribbean and in the rest of Latin America. So it's a nice geographic fit.
In areas that we feel we have a lot to bring to the table and certainly the are the sellers felt the same way. So I think it's going to be a nice.
Geographic complementary.
Aspect to our to the to the business going forward.
Okay. Thank you and then a little bit more of a technical question here.
SG&A in the quarter was up 20.
27% year over year.
You know, obviously that that's probably going to change post the acquisition, but you know what's what's the.
Including the acquisition what is it what's a fair run rate to think about the SG&A line for the rest of the year and going into next year. Thank you yeah really the bump was the return of our annual convention, which we did in may but.
Ill pass it to Don.
So broadly speaking when you take a look at just youre, comparing apples and oranges, a little bit you know Patrick so you're up at.
That those levels that you highlighted but when you take a look I think the better comp is probably against the 2019.
We're actually down by about 8% versus 2019, and so long story short on that we talked about previously that we would be cutting our SG&A anywhere from 10% to 15%. So we're still in that range. When you layer in the things that we talked about before which was really our SG&A growing kind of in that mid to mid to high single digit range on an apples to.
<unk> basis, I think post acquisition, obviously when you take a look at just what.
A lot of the a lot of the investors and analysts are putting 70, 80% margin on the on the Radisson business as well and that's what a lot of folks are forecasting. It really is a business that looks and feels a lot like our business today and so historically speaking our SG&A has grown by anywhere from low to mid single digits on an annual basis now again, we're focusing.
On the growth of this business. So maybe you could see some elevated SG&A to spur growth in the short term, but broadly speaking you expect to continue to see margins expand in the mid to long term and do you expect to grow at that that historical call. It low single digits to mid single digit range.
Okay fair enough. Thank you for the color.
Thank you.
And our next question comes from Eric Field from Jefferies. Please go ahead with your question.
Thanks, and good morning, I'm on here for David Katz, just curious for an update on latest growth strategy for Canada, I'm curious about how may be synergy Radisson could change your strategy or how that might affect you.
Specifically about Canada, Eric Okay, sorry, about Cambria wondering if like higher revenue intensity of moving upscale which strengthen that brand or maybe shift your focus to or away.
Yeah, It's a nice network effect of additional corporate accounts that are that are in the Radisson Americas business from a business travel perspective.
The loyalty program members that will be adding which is 10 million members that.
That will be added to our 53, those SKU business traveler those skew higher income.
So from the standpoint of the combined business delivery engine, it's only going to accelerate the.
Opportunity and the value proposition that we have for both Cambria and the ascend Hotel collection. If you remember Cambria is limited service hotel.
Radisson the Radisson Greenstein is a full service hotel so much more meeting space F&B and the like so.
So the two brands will will will co exist nicely.
But you know the Cambria brand is really focused on that kind of.
Local feel and the as.
As we call it the casually tailored business travelers so that consumers is a different consumer than what you see in the Radisson.
Core brand, but that the business delivery capabilities the corporate accounts.
Higher income all of that is going to help feed the growth that we are already seeing in Cambrian I think it'll be a nice accelerant for both Cambria and ascend.
Yeah.
Understood. Thanks.
Once again, if you would like to ask a question. Please press star and then one too.
So withdraw your question you May press Star two.
Our next question comes from Dan <unk>.
While select from Morgan start Morningstar. Please go ahead with your question.
Good morning, guys. Thanks for taking the question so just going back to the wood spring deletions.
Just wondering if it is it ballpark that these deleted units represent maybe around 2% of fees year to date, just kind trying to get a sense of that and then one question maybe kind of on a long term unit growth opportunity.
Any any kind of guidance or color on how to kind of think of net unit growth a couple of years from now as you know 3%.
Still kind of in the realm of possibility. Thank you.
Sure so.
The estimate is about right the 2%.
From a from a from a <unk> perspective on the exit.
With regard to unit growth. If you look at what we are what our strategy is already achieving which is every unit coming in is worth twice every unit this leaving over the past year and a half if you look at our pipeline.
Which three quarters of that is comfort Inn would spring Cambria, it's our upscale brands and our extended stay brands.
We do expect that if you revenue weight our unit growth.
You're already at that kind of 335%. So every deletion is really <unk>.
Half of what everything that is coming in so when you look at the unit growth and you actually revenue weighted which is what we do to sort of look at what our earnings power is going to be in the coming years, we're effectively already there. The addition of the Radisson brands again Revpar accretive.
Higher revpar higher royalty higher.
Segments again that sort of unit growth I think you really need to take a look at how your.
Where these units are coming in and where the units are leaving the business. Because if you just look at the net unit growth number it doesn't really affect reflect the earnings power.
That we're creating by repositioning the company up into these higher revpar segments.
Okay, Yeah, no that's helpful and clear thank you.
And ladies and gentlemen, I'm showing no additional questions at this time I'd like to turn the floor back over to Pat patients for any closing remarks.
Great well, thank you operator, and thank all of you for your time. This morning, I Hope you enjoy the rest of your summer and we will talk to you all again in the fall have a great rest of your day.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for joining us.
Now disconnect your lines.