Q3 2022 Choice Hotels International Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to choice hotels International's third quarter 2022 earnings call.
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After todays presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Ali Summers Investor Relations Director for choice hotels, Ma'am you may 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 thing choosing K and other SEC filings for information about important risk factors affecting the company that you should consider there.
These forward looking statements speak as of today's date, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances.
Can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our first quarter of 2022 earnings press release, which is posted on our website at choice hotels Dot com under the Investor Relations section.
This morning pods patients, our president and Chief Executive Officer, and Dragovich, Our Chief Financial Officer will speak to our third quarter operating results and financial performance.
Following part and Don's remarks, we'll be glad to take your questions and with that I will turn the call over to Pat.
Thanks, Sally and good morning, everyone.
Our third quarter results and the acquisition of the Radisson Americas business are a significant leap forward in the evolution of both choice hotels competitive position.
And future growth potential.
Or 11 consecutive quarters, our revpar growth has outperformed the hotel industry.
Confirming that our strategy of focusing our investments and growth on Revpar accretive hotel segments and locations is working.
Our future growth is now enhanced by the addition of the Radisson America's brands to our best in class business delivery engine and.
And we now expect to drive an incremental $80 million in recurring adjusted EBITDA from this business unit upon its full integration in early 'twenty 'twenty four.
We are excited about the new growth vectors. These brands will provide.
Our strategy allowed us to achieve these remarkable operating results invest in our strategic acquisition.
And return over $230 million to shareholders through our share repurchase program in the third quarter, representing nearly 4% of shares outstanding.
I am pleased to report that we now expect to grow our full year 2022, adjusted EBITDA by more than 15% versus full year 2021.
And by more than 25% versus our full year 2019, which was our pre pandemic peak.
This year's growth builds on last year's record results. When we became the first hotel company to surpass pre pandemic performance.
Our impressive results and outlook clearly demonstrate that we are in a stronger position than ever to further capitalize on outsized growth opportunities over the long term that will continue to pay off for our owners and shareholders alike.
Thanks to our integration efforts in the first two and a half months since acquiring Radisson Americas, we have unlocked additional value drivers that we expect will fuel significant incremental growth for years to come.
This upside demonstrates how the Radisson Americas acquisition complements our existing strategy and opens additional opportunities for growth.
The level of enthusiasm around the acquisition from developers franchise owners and guests continues to be remarkable.
And after getting to better know the Radisson America's brands and meeting with the franchisee community I'm more energized than ever about the prospects for Radisson Americas future as part of choice.
Finally, I wanted to acknowledge and thank both the choice and Radisson Americas teams, whose hard work was instrumental in bringing this transaction home.
Adding to our optimism is our strong topline growth fueled by sequential acceleration in quarter over quarter Revpar growth.
For comparative purposes throughout the remainder of our remarks, we will now provide revpar performance data that excludes the impact of the Radisson Americas acquisition.
The third quarter marked our strongest quarter for Revpar growth this year with domestic revpar, increasing 15.2% from the same quarter of 2019 and.
And we expect this momentum to continue into the fourth quarter.
Including October Revpar growth results, which surpassed 2019 levels by approximately 20%.
We have now exceeded our 2019 revpar levels for 17 consecutive months.
At the same time, we continued to drive Revpar index gains as compared to 2019 again outpacing our competitors.
We have been surpassing 2019 levels for the past year and a half because of the strategic decisions and investments we have made to position us to further increase our share of travel demand.
Our goal was not to simply returned to our 2019 performance levels, but rather to leverage the strength of our business to capitalize on current and future investments to fuel our long term asset light growth in revpar accretive segments and locations and drive.
Our performance to new levels.
We have built on that strength throughout the third quarter and are confident that the changes we are observing in leisure and business travel behavior that favor our brands.
It will enable us to maximize growth opportunities well into the future.
As discussed on our prior calls we've been highlighting the long term consumer and industry trends that are driving a significant uptick in travel demand.
And we've been making deliberate investments to reap the benefits from them.
Specifically, we are capitalizing on long term fundamentals that we call the five ours.
<unk> work.
Retirements.
Road trips.
Rising wages.
And re shoring of American manufacturing.
We now know that the pandemic has accelerated these trends.
Each of which favors our brands and locations.
As consumers continue to prioritize travel we believe our business will continue to benefit in an outsized way from additional travel demand.
Coming to our segments.
We see these trends as strong tailwind for our company's long term growth.
Importantly choices resilient business model has historically delivered stable returns throughout both expanding and contracting economic cycles.
Looking ahead, our optimism is further reinforced by the strengthening of our business transient and group travel segments.
In the third quarter, we drove sequential quarter over quarter increases in our business travel bookings.
In addition to continued robust leisure travel the business travel component of our guest mix continues to approach historical levels and accounted for approximately 30% of stays in the third quarter.
Furthermore, our strongest occupancy growth during weekdays in September year over year was on Tuesday, and Wednesday, illustrating the strength of returning business travel.
We expect business travel in our key industry verticals to increase fueled by the additional onshoring of the U S supply chain and significant nationwide investments from the infrastructure Bill.
Likewise, we anticipate additional tailwind from business travelers in sectors, such as healthcare technology and professional services.
Especially in the context of the Radisson Americas acquisition.
And our growing presence in more revpar accretive segments and locations.
Our third quarter results demonstrate that the deliberate decisions and strategic investments, we have made in our brand portfolio and value proposition.
Platform capabilities and other franchisee tools are paying off.
I will now provide a brief update on our key segments, excluding the impact of the Radisson Americas acquisition.
First we continued to strengthen our core portfolio of brands the.
The mid scale segment generated strong developer demand with a 39% increase in franchise agreements awarded in the third quarter compared to the same period of 2021.
The comfort brand has now registered 11 straight quarters of unit growth year over year since its successful refresh and consumer confidence in our updated product has continued to drive the brands average daily rate and occupancy index gains versus it's Lee.
<unk> competitors.
This performance underlies the continued attractiveness of this iconic brand to hotel developers and guests alike.
Our new comfort prototype is now under development in several locations and marks the next chapter for our flagship brand.
We also further invested in the extended stay segment, which continues to be a significant driver of our unit growth and revpar growth.
Specifically in the third quarter, our extended stay domestic pipeline expanded to nearly 470 hotels.
A 45% increase year over year.
Our newest extended stay brand ever homes suites recently celebrated the Grand opening of its first hotel and its initial performance exceeded our expectations fueling our optimism for the brand's trajectory.
This midscale new construction extended stay offering is on the cusp of major growth.
<unk> impressive traction across the development community.
With 56 additional projects already in the pipeline, including a recent commitment from one of the largest extended stay developers in the nation to build more than 20 ever homes suites hotels.
In addition, we expect a substantially higher number of the brand's domestic contracts for 2022 as compared to last year.
Our investments in the Woods spring suites brands marketing and distribution capabilities enabled us to achieve revpar growth of nearly 28% in the third quarter of 2022 compared to the same period of 2019.
Driven by increases in both occupancy and rate.
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 are also pleased with our upscale portfolio, where our brands outperformed the segment's revpar growth by over 13 percentage points versus the same period of 2019.
At the same time, we increased the number of upscale franchise agreements executed in the third quarter by nearly threefold.
The Cambria brand is having one of its best years ever.
The brand grew by over 5% year over year, reaching more than 60 units.
With an additional 69 domestic properties in the pipeline over one third of which are projects under active construction as of the end of September .
The recently introduced Cambria Hotel prototype designed for secondary and leisure markets has been enthusiastic Lee received by the developer community with 20, new agreements signed as of the end of the third quarter.
In addition, we expect that the Radisson Americas acquisition will enable us to further build on our momentum in the upscale segment.
Accelerating the growth of our Cambria hotels, and ascend hotel collection brands.
And at the same time, allowing us to expand the radisson portfolio.
The addition of the Radisson upscale brands in the Americas increased choices global footprint in the upscale segment to over 74000 rooms as of the end of the third quarter.
All that we've accomplished this quarter certainly could not have been done without the strength of our award winning culture.
Our central focus of our ESG efforts is our commitment to fostering an environment supportive of diversity and inclusion.
I'm proud to share that choice was recently recognized by Forbes as one of the world's best employers.
And one of the worlds top female friendly companies in 2022.
These awards are particularly meaningful as they are based in large part on responses from our dedicated associates and franchisees.
I'm also pleased to report that we recently had been recognized among the top franchise companies for our commitment to diversity equity and inclusion by entrepreneur magazine.
We were the only hotel brand company to make the list.
Which speaks to the many initiatives our organization continues to undertake to fuel diversity and equitable opportunity across the entire hotel industry.
Specifically, our fully dedicated franchise development and service team continues to drive diverse ownership of choice franchised hotels, among underrepresented women and minority owners with over 320 franchise contracts awarded since the program began over 15 years ago.
In closing I'm confident that our effective strategic investments and commitment to our franchisees' profitability will continue to create value and deliver results for our owners and shareholders.
We look forward to continuing to integrate Radisson Americas as part of the choice family and to accelerate the growth of these brands by leveraging choices scale.
Network of owner and franchise relationships.
And best in class digital platforms.
We believe we are well positioned to build on the success achieved this quarter and that our increased earnings power will enable us to further capitalize on growth opportunities for the remainder of this year and beyond.
With that I will hand, it over to our CFO Dom.
Thanks, Pat and good morning, everyone I'm very pleased to be with you today to report our third quarter financial performance.
Specifically I will provide additional insights on our third quarter results update you on our balance sheet and capital allocation approach and share expectations for what lies ahead.
Throughout my remarks today I would like to note that our financial results unit growth and pipeline figures are inclusive of the Radisson Americas portfolio from the August 11th transaction close date, while our Revpar performance effective royalty rate and franchise agreements figures do not include impacts from the ACA.
Position.
For the third quarter 2022, compared to the same period of 2021 total revenues were $414 $3 million or 28% increase.
Our adjusted EBITDA grew to $139 $4 million driven by our continued impressive revpar performance effective royalty rate growth and contribution from other platform revenues.
And as a result, our adjusted earnings per share were $1.56 for the third quarter.
From August 11th through the end of the third quarter, the Radisson Americas portfolio contributed $42 million in total revenues and $6 $8 million and adjusted EBITDA.
I'd like to now turn to our three key revenue levers beginning with Revpar.
Our domestic Revpar increased 15, 2% for the third quarter with our average daily rate growing by 15, 1% compared to the same quarter of 2019.
Our revpar and rate growth also represents an acceleration of the gains achieved in the second quarter of this year compared to 2019.
In addition, we expect our Revpar performance for the fourth quarter to continue to accelerate from our third quarter results.
The strategic investments, we have made in key segments and our value proposition capabilities enabled us to outperform the industry and revpar growth by over four percentage points for the third quarter.
We believe that the new enhancements to our award winning revenue management tool will allow us to further optimize rate and occupancy growth for the remainder of 2022 and beyond.
This capability coupled with the expert advice from our revenue management consultants allows our franchise owners to quickly execute the right pricing strategy and effectively reach their target customers, which continues to be critical in this inflationary environment.
Given the strong revpar trends, our ongoing strategic initiatives and continued optimism, we're raising both the bottom and top end of our forecasted revpar growth range and now expect full year 2022, domestic revpar to increase between 13% and 15% as compared to full.
Year, 2019, which represents 11% to 12% growth versus 2021.
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 five basis points for both the third quarter and year to date through September 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.
Owners continue to seek choices proven capabilities to consistently deliver strong topline revenues that maximize return on investment while reducing total cost of ownership.
For full year 2022, we expect our effective royalty rate to continue to grow in the mid single digits 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 our hotels are key advantages.
Our strategic goal has been to accelerate room growth in revpar accretive segments and markets, which ultimately results in an outsized increase in royalties.
In fact currently every new unit entering our portfolio has continued to generate on average twice the revenue as a unit, leaving it.
The addition of approximately 60000 Radisson America's domestic rooms open or in the development pipeline as of the end of the third quarter marks the next chapter in choices higher revenue per room growth trajectory.
For the third quarter, our domestic system size grew by five 4% year over year, including both the Radisson Americas acquisition and the previously discussed onetime exits from our portfolio.
Although the removal, but would spring suites properties impacted this overall unit growth the exit triggered a more than $67 million one time cash benefit.
This resulted in an increase in our reported revenue of approximately $23 million, which has been excluded from our adjusted EBITDA results.
Furthermore, this cash benefit will offset more than five years of royalty fees associated with the exit of this portfolio.
Importantly, not only has the woods spring suites pipeline expanded by 68% year over year as of the end of September reaching nearly 290 domestic projects, but we also expect the brand's openings this year to significantly exceed 2021 levels.
For full year 2022, we expect our domestic system size to grow approximately 7%, including both the Radisson Americas acquisition and the one time exit of the wood spring suites hotels.
Furthermore, we expect a 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.
I am pleased to report that our domestic pipeline increased 16% year over year, and 12% quarter over quarter exceeding 1000 domestic hotels at third quarter end.
Even excluding the incremental Radisson Americas hotels, our domestic pipeline increased by 11% year over year and over 6% quarter over quarter, reaching 969 domestic hotels at third quarter end.
In addition in the third quarter, we reported a 38% increase year over year and new domestic franchise agreements awarded.
Two thirds of the agreements sold in the quarter were four conversion hotels, representing an increase of 42% versus the same period of the prior year.
Most importantly, these hotels are expected to open more quickly than our new construction projects.
Our developers are increasingly optimistic about the long term fundamentals of the lodging industry.
Specifically, we are very pleased to see the demand for our new construction brands increased by over 30% in the third quarter year over year.
A 23% year over year increase in new applications for domestic franchise agreements year to date through September .
And even stronger momentum recently with over one third of the total domestic franchise agreements for the quarter executed during September further reinforces our confidence in our continued growth prospects for the rest of the year and beyond.
I'd like to now turn to the strength of our balance sheet. One of the major reasons why we believe that our prospects for growth are even stronger today than they were pre pandemic.
Even after the completion of the Radisson Americas acquisition, and recent significant share repurchases, our impressive performance and effective allocation of resources to drive top line outperformance has ensured our strong liquidity position.
In fact, we continue to maintain a best in class balance sheet with a gross debt to EBITDA leverage ratio of two five times well below the low end of our targeted range of three to four times as of the end of the third quarter.
Reflecting the confidence driven by our business performance ongoing strategic initiatives and our continued optimism for the outlook. Our board of directors recently approved an increase in our share repurchase authorization by 5 million shares.
Year to date through September we have returned over $286 million back to our shareholders. These.
These returns came in the form of approximately $40 million in cash dividends and $247 million and share repurchases.
I'm also pleased to report that we made impressive progress executing on our capital recycling strategy.
Following the sale of one of our own Cambria assets in June 2022, we sold an additional asset in July recycling another $110 million.
Most importantly, we also secured a 30 year franchise agreement with the buyer.
Following the closing of this transaction, we will have recycled over $140 million of prior investments and Cambria development projects during 2022.
The strategic sale of these cambria assets reduced the company's third quarter adjusted EBITA from owned hotels by $2 $7 million compared to the same period of the prior year.
Our strong cash flows and debt capacity position us well to continue to make strategic investments grow the business and return excess cash to shareholders well into the future.
Moving forward, we plan to continue to use all pillars of our capital allocation strategy.
Before opening it up for questions I'd like to turn to our expectations for what lies ahead.
We expect full year 2022, adjusted EBITDA to range between $465 million and $470 million, representing 15% to 17% growth compared to full year, 2021, and 25% to 26% growth compared to full year 2019.
This adjusted EBITDA outlook includes $14 million to $15 billion of adjusted EBITDA contribution from the Radisson Americas business unit since the acquisition through the end of the year.
Additionally, we expect to generate $80 million in recurring adjusted EBITA from Radisson Americas upon its full integration in early 2024 underlining the value added from combining these two great companies.
We intend to continue to invest in the core growth vectors across the higher value and more revpar accretive midscale upper mid scale upscale and extended stay segments.
Even with these increased investments and excluding the impact of the Radisson Americas acquisition, we expect our full year 2022, adjusted EBITA margin to exceed our full year 2019, adjusted EBITA margin.
We are proud of the accomplishments we have achieved to advance our long term strategy and are excited about the value creation, we expect radisson Americas to bring to choice.
We look forward to providing you with further updates in February during our next earnings call.
In closing, we remain confident that our long term strategic approach and resilient business model will enable us to continue to deliver strong operating results and generate substantial levels of cash through multiple growth levers.
Combined 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, Pat and I would be happy to answer any questions operator.
Ladies and gentlemen at this time, we'll begin the question and answer session.
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Yeah.
Okay.
And our first question today comes from Shaun Kelley from Bank of America. Please go ahead with your question.
Hi, good morning, everyone.
Dom Apart you wanted to start with the Revpar outlook. You mentioned, obviously October is off to a strong start your outlook for <unk> is that things will accelerate from the third quarter can you just talk a little bit about the drivers there and that's actually a little bit better than what we're seeing across a number of the other.
Hotel chains, and specifically, we probably would have thought with a more leisure heavy Ben.
You may not be moving into kind of peak seasonality here. So what's kind of the driver of that kind of pushed that up quarter on quarter.
Yeah, Shawn I think fundamentally it's something we've been talking about on these calls for quite some time that the time of year and the time of week that people are now able to travel post pandemic. These changing travel behaviors are really going to.
Provider significant tailwind for our business and we saw that in the third quarter, we saw it in October .
You know I mentioned in my remarks in September which is sort of the kind of expected return of business travel we saw at Tuesday, and Wednesday occupancy pick up when you look at the quarter as a whole we saw Sunday night, and Thursday night occupancy gains.
Year or quarter over quarter. When you look at Q3 last year. So these five of ours that we're talking about rising wages remote work re shoring of a manufacturer of American manufacturing road trips and retirements. Those are all things that we believe are long term fundamentals that are going to keep driving our business and.
Traditionally you saw things slow down in Q3 in the back half of Q3, and then into Q4.
And we're not seeing that anymore and we believe is partially due to these trends that are really changing the time of year and the time of week that consumers are able to travel and as I mentioned the business traveler is coming back for our industry verticals.
Super Thanks, Thanks, Pat and then my follow up would be on sort of the NOG outlook. If we if we back out what spring and Radisson. Obviously, you continue to I think refine the core portfolio here a little bit can you help us put some parameters around how that those refinements and kind of the dispositions are going to move as we start.
Looking out into 2023 is it is this a specific initiative that you're undertaking across some brands that should meet its end or should we expect some of this churn to continue or.
It will be material as we move out into 2023 and beyond.
Yeah. So I think it's reflective of our long term strategy to reposition the company.
The brand.
Issue, it's really building in the segments that we expect to see a long term growth. So as Dom mentioned in his remarks everything we're bringing in is twice the revenue.
Life time revenue of every hotel.
He increased our.
Unit growth by 7%, but if you remember from the investor deck that like to like if you go back and look at 2019, the Radisson system was delivering 38% higher revpar than the choice system at that time, so it's a reflection of our shift into upscale upper mid scale.
And extended stay in particular those three segments.
And Dan can fill in kind of the the exact numbers on kind of what we did in the quarter, but youre right. It is more of a segment shift that we're going to experience as we move into 2023 and beyond yes, Sean and so when you put some numbers around it you know overall.
Our our unit growth guide for the year is about 7% year over year that doesn't include the 100 and tenant terminations associated with the woods bring exits now that would also imply an acceleration from Q3 into Q4, so we're expecting to see some of that and Doug pick up here in the fourth quarter. When you take a look and UN package Q3 in particular.
<unk> your revenue intense unit growth without any of the onetime impacts both the onetime impacts of the acquisition the onetime impacts of the.
Terms, it's about a half a percentage point positive and so youre basically growing 50 basis points. When you take a look at broader apples to apples not a lot of that churn is coming from the same segments that we talked about before it's from that economy segment.
Revenue intense unit growth is actually expected to also accelerate heading into the fourth quarter as well. So we're expecting that revenue intense unit growth in the fourth quarter.
B, obviously outpaced the 50 basis points for the full year that revenue intense unit growth is expected to be about one percentage point I think what gives us further optimism. Obviously is the very strong pipeline growth that we've seen now over the last two quarters. So we're pretty optimistic about the long term outlook on the Dod side of the house.
Thank you very much.
Thank you.
Our next question comes from Dori Kesten from Wells Fargo. Please go ahead with your question.
Oh. Thanks, Good morning, Hi, can you walk through your key assumptions behind the 2024 EBITA for Radisson and just provide some context on the swing in results that there could be in regard to your comment that you said you couldn't reasonably reconcile 22 or 24.
Okay.
Yeah, I think if you look at the business that we bought and we mentioned this when we announced the deal.
It was a.
624 hotel portfolio that was sitting on an infrastructure that was built for a much larger company.
So the opportunity here.
Is to remove a significant amount of that infrastructure cost.
Which we've already begun to do I think the exciting part moving forward is when you look at let's just say a country inn and suites take that and compare it to our comfort in our legacy choice brand.
<unk> O T a contribution for our country and in suites was double what it covered a comfort inn was and the loyalty contribution was half so that.
T a guest pays a they're more price sensitive and that loyalty program remember there generally.
Generally a higher rated customer so when we think about bringing those new contracts onto the choice platform. When the integration is completed in the coming year here, we expect to see a significant revenue boost.
Coming from those hotels and we also think at the corporate level, there's a lot of.
Duplicative costs that are that we're obviously going to be pulling out of the business and.
And then what I would just to put some numbers around that dori. When you take a look at that $80 million.
The vast majority of that is still the fee business and so about $70 million of that 80, essentially the fee business. Obviously the acquisition came with three owned assets. So that's about $10 million. When you take a look at what the drivers are of the outperformance because candidly when you take a look at what we shared with the investment community just a couple of quarters ago, we're exceeding those numbers.
A lot of that has to do with the revenue synergies being much stronger than expected obviously the benefits of putting it on our platform to pass point.
We've found some additional revenue streams to unlock some value we do have a higher synergy figure than previously expected as well, obviously, we're not disclosing the specific synergy figures, but you can pretty much back into them. When you take a look at that $80 million and I would argue that that 80 million certainly has some upside as we continue to unlock some of this value associated with the acquisition.
The disclaimer language is really around some of the puts and takes and the more granular you know net income figures. When you take a look at 2024, we don't want to provide guidance right now around.
The purchase accounting elements of the depreciation and amortization will be providing some of that guidance and in the future, but again very optimistic about that that 80 million. The vast majority of that comes from that fee business, which is a high margin business and we're expecting to see additional value unlocked here over the course of the next several quarters.
Okay and when you when you think about growing the Radisson Americas brands do you expect to have to make your own capital to that anyway.
At this point Dory, we don't what we see for our opportunities with there.
The two largest brands the Radisson full service upscale brand and the country Inn and suites brand, we don't see those as needing outsized capital there.
There are some additional brands that we acquired as part of it that are more.
<unk> limited in their unit count that we may give some thought to over time, but at this point, we don't see any additional capital requirements to grow the brands.
Okay. Thank you.
Our next question comes from Michael Bellisario from Baird. Please go ahead with your question.
Thanks, Good morning, everyone.
Okay.
Just one more follow up on Radisson can you talk about the deletions that have occurred within the portfolio since you.
First announced the deal and in June .
Maybe why where the property is deleted in them sort of what's the near term outlook for.
More rooms to maybe exit the system in the coming months and quarters.
Yes, Michael I was in the underwriting when we were going through the diligence there were hotels in the existing unit count that were already transitioning out. So we were aware of that I.
I think Tom what was the number 7777 in total.
So we were aware of that that's sort of the normal.
As a you know what at 624 hotels Youre going to have hotels that are coming up on their routes and owners have decided to to make an exit and these are these owners weren't aware that the ownership was about to change hands either so.
We do think and we look at the existing portfolio that we have and the cigna.
Significant optimism, we've heard from both the existing owners and future investors in these brands.
We do expect to get these bank branch back into a growth mode.
Got it and then.
Modeling question for Tom just on the SG&A during the quarter that the step up there can you maybe break down how much was choice legacy versus a radisson costs.
Yeah broadly speaking I would say about 300 basis points or so of the margin really as a result of the core business and so some of that is timing. So when you take a look at the return of certain onetime costs, obviously our convention.
It came back this year some of that cost spilled into Q3, so its about $800000 or so there we saw some bad debt reversal last quarter or last year during the third quarter I should say.
About $2 5 million Delta there when you compare year over year in quarter, three and then obviously the return of some onetime costs like <unk> and whatnot. The way I would look at this Michael is as you know.
It's a noisy quarter a lot of its timing of certain expenses. Some added cost obviously associated with the Radisson acquisition you want to look at it on a full year basis and when you take a look at what we're guiding to it from a full year perspective. Your EBITA is up about 15% to 17% I think that's the punch line there even if you remove the added benefit of radish.
Send your EBIT is still up organically, 12%, 13% year over year. So we're very optimistic we're going to continue to invest in this business for long term growth much like we've done in the past.
Okay helpful. And then just last one from me on the owned portfolio, particularly on the legacy side, you've taken some properties back recently, where you've done a lender on maybe what's the outlook there for you to take ownership.
More properties and I'm, just sort of the health of the franchisee on the on the Cambria side would be helpful. Thank you.
Well, we don't anticipate taking ownership of any any properties in the future you know on the franchisee side of the house.
Obviously, we're very excited about some of the capital recycling.
You've seen this year every single quarter, we've actually recycled significant capital with 20 to 30 year franchise agreements on every one of those assets. So obviously, that's having an impact from a modeling perspective on the owned EBITDA I mentioned in my prepared remarks, the $2 $7 million in the quarter, you are expecting to lose probably like 3 million.
So in Q4, but obviously those are that's a strategic our strategic.
Initiative in terms of selling those assets and recycling significant capital.
<unk>, putting long term franchise agreements in place.
Thank you.
Thank you.
Our next question comes from David Katz from Jefferies. Please go ahead with your question.
Good morning, gentlemen, how are you.
Yeah.
So we.
We occasionally periodically regularly debate with investors.
The sort of progression that you're making.
Up the Revpar scale and understanding the logic around revenue intensity of those hotels, but I was hoping you could talk about is the degree to which are the evidence or any data points around no getting traction or prospective traction out there from customers who.
You know are looking coming to choice looking for 100 box rather than sort of the core you know historically, that's been somewhat lower than that.
Yeah, David you know what's interesting is we've talked to the Radisson owners and they look to us and say can you drive upscale rates.
What's really fascinating is when you look at what we're driving in our Cambria brand choices like Napa Valley in places like Nashville.
Tennessee, where we're driving you know in some cases $700 a night, so and that's coming from the choice platform. So this whole question, which I believe we crested there's probably five six years ago and choice deliver the upscale customer.
We've proven that.
In a in a significant way in the both the growth we're seeing in Revpar in our upscale brands.
And also the new growth new.
Developers, who are building Cambria is today cameras having.
One of its best years ever with regard to new contracts sold.
On top of that by adding another.
A significant amount of upscale rooms, which brings that upscale guest brings that corporate account that stays in upscale hotels. The radisson acquisition really cements our position in that upscale segment. So when I look at the type of rate, we're driving in Cambria when I look at Cambria is outperformance versus the upscale select service segment.
We talked about in our remarks.
That's that's a that's an achievement that the company.
Surpassed several years ago and at the Radisson acquisition as we look at what we're doing going forward.
It's really going to accelerate that presence of that momentum that we have in the upscale segment, yeah, David and it's showing up in the in the performance figures as well when you take a look at the broader upscale segment. We were up 18, 3% versus 2019 levels. Obviously, we're seeing continued improvement sequentially is while we were only up about 10%.
In quarter, two when you compare that against what the industry driving it's over 13 percentage points higher than the industry. So we're feeling very good about the share that we're taking in that segment and obviously the revenue intensity story not isn't just that upscale specific segment, but it's the right product in the right locations in that core mid scale segment as well.
Well, we're seeing that show up at the same time.
Got it thank you very much.
Thank you.
Our next question comes from Robin Farley from UBS. Please go ahead with your question.
Great. Thanks, just circling back to I'm looking at your organic growth and I know that there was a big one time with spring change, but even excluding that it looks like it was down slightly sequentially and I know you've talked about moving to more revenue intense segments I Wonder if you could.
Just clarify a little bit about what's happening in the economy segment. There are you sort of intentionally.
Forcing brand standards.
Kind of intentionally print some of those economy units out or I'm. Just curious if it's just it's such a good.
The demand environment and good travel environment that are you finding that maybe some of the the economy.
I feel like they don't need any extra help from our loyalty program because the travel environment is so good and they're sort of leaving I'm, just kind of wondering which dynamic is driving that.
Well I think we'll go back to what we've talked about.
A number of times that the segment of the economy segment itself really has been shrinking the only growth brand.
Where the highest growth brand I guess I should say in the economy segment as would spring, which is an extended stay brand and that's that's on our platform. So we are focused on that consumer.
And they are feeding a significant driver of our both unit growth and Revpar in that segment. So it's less about the consumer and it's more about.
Economy hotels and that in that transient sector that has actually continued to shrink what we've seen particularly in the post pandemic environment or during the pandemic is a lot of those economy hotels being repurposed.
For other forms of shelter.
So you're you're seeing hotels exit for non hotel use.
And so that's another factor in all of that I would say that what we've done in the economy sector for our brands has continued to as you as you stated two to maintain the quality levels and if owners are not going to do that then they will churn out of our system and so we have seen.
Some of that as well, but.
Our overall strategy is to be growing in segments that are growing and the two highest growth segments today, our uptick in the transient sector, our upscale select service and upper mid scale and.
We've got great brands positioned and are taking advantage of those trends and then extended stay which is just a segment that is.
Under you know go in significant growth and we've got four great brands that are that are positioned for that trend as well.
Okay. That's helpful. Thanks, and just as my follow up.
Looking at the your expectation for this sort of early 2020 for hitting that number with Radisson. What's is it a matter of waiting for the OTT agreements that that brand had to expire and then they moved to the to the choice OTT agreements or is it that it will take you know 18 months.
Sort of I T work for the loyalty programs to be combined or what's the sort of.
Yeah, the gating issues between the synergies you you'll get six months after it but it versus you know the ones 18 months after acquisition wish it it sounds like it's.
It can take more 18 months to get to this.
Sure I mean, so day, one we had to make sure we can check guests in and check them out we had to make sure that the the people are in the you know that we acquired are getting paid so we are today still running two systems to make that happen.
We would expect by the second half of next year.
To be completed with the technology integration. So once you've done that then you're on a single reservation system a single website you're.
You're using a single call center provider all of that integration and when I look at the teams that we have working on this.
And other large acquisitions, how long it's taken them to do that.
We're going to do this in a remarkably short amount of time to bring the loyalty programs together and really bring that business delivery engine to the Radisson brands.
It's exciting is we're making investments today in their website already.
That is going to drive.
I would expect some revpar increases in some proprietary contribution increases for those brands, even before we get to the to the future state platform and the second thing is there are things they were doing.
That are better than what we were doing a choice. So this isn't all put everything on the choice system.
The combined platform going forward is going to really.
Be inclusive of what we were doing great and what they were doing great. So I think the overall value proposition for all of our franchisees by the time, we get to the second half of next year.
It's really going to be another bump forward and when I look at that 80 million that's the starting point.
So the growth from that and the opportunity as we get into 2024 and beyond to really accelerate the revpar, that's being driven into those hotels is a pretty exciting prospect for our company and for our shareholders.
Okay, great. Thank you.
And our next question comes from Patrick Schultz from True Securities. Please go ahead with your question.
Hi, good morning, everyone.
A couple of questions. Good morning couple of questions here for you.
Are you able to tell us in that full year EBITDA guide how.
How much.
Is assumed for a radisson and then a.
Are you able to.
Two.
Give us what that also about full year Revpar guide growth would be if you were to include Radisson and Mike. Thank you and then I have a follow up question.
Yeah, Patrick so the the full year guide includes about $15 million associated with with Radisson adjusted EBITA.
Tying it back to the previous question as well. This is why we're extremely optimistic about that that 80 million plus in 2020 for that $15 billion is just for the stub period. So from the time, we closed the acquisition mid August through the end of the year, we expect to generate $15 million, that's really due to the great work that our integration team has done on this acquisition for us the Revpar.
<unk> would obviously be even higher when you take a look at a more normalized revpar environment in 2019, the Radisson Revpar was up actually 38% higher than choices organic revpar. So just for comparability purposes. We felt that it was wise to just continue to report that on a core business basis now.
Going forward, we expect to see continued tailwind associated with the return of business travel. Obviously, you know when you look at it on a year over year basis choices Revpar has continued to outpace the industry and also outpaced the.
<unk> business, so going forward, we expect that to be a tailwind for our revpar as well.
Okay.
Thank you and then on the share repurchases.
Well historically I would say choice has been a.
Fairly lumpy quarter to quarter or year to year with the activity and share repurchases.
Now would you see this as a sort of a consistent growth going forward consistent.
Dollar values being spent per quarter or do you take it or do you think of that more of a sort of a quarter to quarter activity.
Going forward. Thank you.
Yeah, I think when we've talked about our capital allocation strategy overall, I mean, the third quarter was actually a very interesting one where we pulled all the levers we invest in the core business, we made a strategic acquisition.
We bought back a significant amount of stock and our strategy always says we want to do that when we believe it's dislocated.
From the the actual valuation is dislocated from from what we believe internally.
I have a stock to be so.
And we our payback I think double the amount of dividends this year than we did in the prior year. So all all the while keeping our leverage level is actually below target as Tom mentioned in his remarks so.
The expectation of what we will do going forward on share repurchases is similar to the strategy we've executed in the past and if it shows up as a lumpy.
On the on the timeline, that's that's probably a fact of kind of where the stock sits versus what we believe the future growth opportunity is for our shareholders.
Okay. Thank.
Thank you for the color on that I'm all set.
Thank you.
And our next question comes from Joe Greff from JP Morgan. Please go ahead with your question.
Good morning.
Good morning.
What percentage of the room in your development pipeline.
In Revpar accretive geographies segments relative to your core and pro forma weighted average absolute revpar performance.
What is that average premium.
Revpar at Delta.
So let me I can just provide high level composition of the pipeline Joe.
No. If we have those numbers off the hidden from a geography perspective, but when you look at the composition of the pipeline just under 50% of that is extended stay. So obviously, we would consider extended say revpar accretive environment much larger room counts higher occupancies et cetera, we've got about 10% of the pipeline is sitting in ups upscale and about.
Just under 35% of it is sitting in Midscale, so 5% of our pipeline is in those those lower revpar economy segments from a geography perspective, you know just taking a look at the top 25 markets. We've got about 25% of our pipeline that's sitting in those top top 25 markets obviously are.
Strategy is really even within that core like I said prior even within that core mid scale. The goal here is to be the most revpar accretive street corner location. The most revpar accretive products. So feeling very good about it for both from a macro perspective as you can see in the composition of the pipeline and a micro perspective at that hotel level.
Great. Thank you and then our conversions generally revpar cleaner and much segments.
Are you seeing anticipating the most conversion.
It's all for me thank you.
Yeah.
Yes, I think when you look at in our upscale portfolio.
Portfolio today, both the ascend collection and I would expect most of the Radisson will be conversion.
As you move down into upper Midscale country, and comfort, particularly the strategic pivots that we do for those brands.
It's where you get a lot of Revpar accretive.
Our unit growth from from the upper mid scale brands and then as Dom said it and this isn't just a brand. It says it's a location so pulling a quality in into our system that is sitting in a.
A higher revpar market than one that's leaving is also part of our strategy as well so you're really getting at both with the what we're bringing in from a segment perspective, but also from a location.
Thank you.
Thank you.
And our next question comes from Dan <unk>.
<unk> from Morningstar. Please go ahead with your question Hey, good.
Good morning, guys. Thanks for taking my questions. Two if I may so just on Radisson wondering if you might maybe give us a room night.
Excuse me a mix of the room nights leisure versus business and also were Radisson Revpar was in the quarter as a percent of 2019 and then just a second question along with that going back to kind of the SG&A. You mentioned some one time costs wondering if you might maybe give some additional information there as far as like the you mentioned a onetime cost.
Radisson and the bad debt reversal, if maybe some quantification could be provided with that and that's it for me. Thanks.
Yeah sure Dan So the Radisson brands system was 60% leisure 40% business historically.
Historically choice has been 70% leisure, 30% business. So it's a nice.
Mix on the on the additional business travelers that are that would be.
We'd be picking up.
And then when you take a look at the just the Revpar performance, obviously, I mentioned revpar accretive by about 38% on an apples to apples basis. When you look at pure Radisson versus 2019, the whole portfolio was up a little over three percentage points versus versus 2019 levels year to date, it's up about two percentage.
Points. So again this goes back to what we believe the revenue synergies to be on our side when we put them on our platform. We believe that both the tailwind that the broader.
We're seeing in business travel quarter over quarter when Youre looking at just the strength of the platform. We expect to see an acceleration of that revpar growth in the future now the quantification of your kind of those onetime costs are so.
Convention, we talked about returning costs associated with that that was about $800000 for the quarter. The bad debt reversal is there was about just under 3 million.
Apples to apples year over year for quarter, three and then the one time costs.
$1 million to $2 million or so associated with tenet and some of these other onetime costs that are coming back into the business.
Okay very helpful. Thank you.
Thank you.
Once again, if you would like to ask a question. Please press star and one our.
Our next question comes from Brent <unk> from Jpmorgan. Please go ahead with your question.
Hey, good morning, everybody. Thanks for taking my questions.
So I'm going to circle back on.
On the Aneth unit.
Net unit growth and just focusing on the upscale and upper mid scale segments, excluding radisson, excluding the Cambria Hotel you sold and just on a quarter over quarter basis for those two segments. You know, we see a little bit of churn in the quarter, but I think I also heard you mention them that.
Apples to apples there was an acceleration in those higher intent higher revpar intensity segments I, just want to make sure like what.
If we're copying this wrong and maybe there's something else that we need to adjust to see what you just what you cited in the early part of the Q&A I want to make sure we can credit to that.
So when you take a look in the exhibit if you if you look at the choice legacy brands.
Total net unit growth year over year for quarter, three was about a decline of 50 basis points now that the primary driver of that churn was in the economy segment. When you look at roadway and <unk> in particular, those blended shrunk by between five and five 5%. So most of the churn is coming from those two segments obviously were.
Seeing some churn and.
Kind of a lower mid scale call. It the lowest 25% of certain brands that we obviously continue to strategically evaluate the good news is is when you look at the churn for the entire company. This year, we're still expecting our historical average of about 4%. The vast majority of which is choice elected churn. So it's essentially us taking advantage of the window and making.
Sure that the product is performing the way it needs to be when you look at specifically that revenue intense unit growth. We're up about 50 basis points. So that's inclusive of Midscale upper mid scale upscale extended stay and we do expect to see an acceleration from Q3 into Q4, so we're guiding to.
About one percentage point of year over year full year revenue intense unit growth and so again, we're continuing to see some optimism in those revenue intense segments. We think that the the turn in the economy segment the trends that you've seen in the past will probably continue into the future, but from a revenue multiplier perspective, we feel like it's set.
That's up for a really nice 2023.
Okay. Thanks for that clarification, and then just as a quick follow up the domestic royalty rate.
For Radisson, if you could give us that on a radisson sort of.
Separate basis. The reason I ask is because it seems like you know you only have half of a quarter in there in the third quarter, but if I'm reading between the lines in your guidance, it's lower and so I just wanted to understand if for the next three or four quarters, we sort of have to lap the integration of Radisson before we start to see that domestic royalty rate grow.
Again on a system wide basis.
Yeah, the effective royalty rate for the Radisson portfolios is certainly lower than the 5%.
5% that we see in choice I think it's closer to about four so you would expect to have to lap in order to see a more apples to apples will likely continue to report are some of those operational metrics.
On a on a core basis, just so that you have the ability to model it more effectively and our guidance did not include the effective royalty rate guidance that we provided for the full year is exclusive of the Radisson business unit.
Okay.
Very helpful. Thank you.
Yep.
And ladies and gentlemen at this time, we will conclude today's question and answer session.
I'd like to turn the floor back over to Pat patients for any closing remarks.
Great. Thank you operator, thanks, everyone again for your time. This morning, we wish you a really wonderful holiday season, and we will talk to you again in the new year have a great rest of your day.
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We do thank you for joining you may now disconnect your lines.