Q3 2023 Choice Hotels International Inc Earnings Call
Okay.
I'll now turn the conference over to Allie Summers Investor Relations Senior director for choice hotels.
Good morning, and thank you for joining us today before we begin we'd like to remind you that during this conference call certain predictive or forward looking statements will be used to assist you in understanding the company and its results.
Actual results may differ materially from those indicated in the forward looking statements and you should consult the company's Form 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 first quarter 2020 free.
Earnings press release, which is posted on our website of choice hotels Dot com under the Investor Relations section.
Morning, Pat the patience of our President and Chief Executive Officer, and Scott The Oak Smith, our Chief Financial Officer, who will speak to our first quarter operating results and financial performance.
Joining us also today for the Q&A portion of the call is Tom Dragovich current executive Vice President operations, and Chief Global brand Officer, and former CFO.
Following pat's Scott's remark would be glad to take your questions and with that I'll turn the call over to Pat. Thank.
Thank you Allie and good morning, everyone. We appreciate you taking the time to join us.
I'm very pleased that Scott Smith is joining us on our call today. Following his recent promotion to Chief Financial Officer, Scott has extensive experience across our finance division and he's well known to all of you in the investment community given his interactions over the years I've.
I've had the pleasure of working with Scott for 18 years and I am confident he is the ideal person to lead our financial strategy.
His appointment demonstrates the depth of our bench and the importance of thoughtful succession planning.
I'm also joined by Dan <unk>, who as you know served as our CFO for the past seven years and recently stepped into a newly created operational role where he leads our brand segment franchise development segment services and corporate development.
Before I get into our quarterly results I want to briefly discuss our proposal to acquire Wyndham hotels and resorts.
We decided to make our offer public after six months a private negotiations that resulted in little progress.
Our goal is to resume a constructive dialogue with Windows board to make this combination a reality.
We are confident that our combination with Wyndham represents compelling value for both companies' shareholders franchisees.
Yes and guests.
And we've heard positive feedback across these groups as well as from third parties.
For choice shareholders, our proposal provides significant financial and strategic benefits.
Wyndham shareholders would receive a substantial premium and immediate value for their shares.
And both sets of shareholders would have the opportunity to participate in the significant value creation that we believe the combined company would unlock.
To put this in simple and direct terms, we are interested in combining with Wyndham because we respect their business and we see it as highly complementary to what we have built.
Together, we believe we can accelerate and build upon what each company could do on its own.
With an asset light fee for service model, we are confident that the combined company would generate stronger free cash flow and profitability.
And have the financial strength to accelerate growth quicker.
Quickly de lever and enhance returns to our combined shareholders.
Sure franchisees, combining our companies with nearly double the resources available to $1.2 billion of spend on marketing and reservation activities.
Drive more direct revenue to their hotels with an even stronger rewards program.
And lower their operating costs.
As such we see an even brighter future for the combined companies.
We also see a clear path to completion, and we're ready to move expeditiously negotiate terms, including ways to provide market standard protections for Wyndham shareholders.
Importantly, while this transaction remains important and highly valuable for us to pursue.
We remain laser focused and committed to executing daily on our business and enhancing the value of choice as evidenced by our strong third quarter results.
Now, let's turn to our quarterly results.
Our distinct growth strategy and best in class franchising business engine drove our adjusted EBITDA to record levels in the quarter.
And I'm also pleased to say that we raised the midpoint of our full year guidance, which represents a 12, 3% increase in our adjusted EBITDA for the full year.
We expect to build on that strong momentum through the rest of the year as we grow our franchise business with hotels that generate higher royalties per unit.
While leveraging the investments we have made in our systems to improve our franchisees' profitability.
This impressive growth is fueled by the successful execution of our key strategies, which are unique to choice.
These strategies include.
Executing the nearly completed rapid integration of Radisson, Americas, which has already realized synergies, 5% above our original plan and ahead of schedule.
Driving organic growth of our brand portfolio and the quality of earnings with hotels that generate higher than brand average royalty per unit.
Investing in our brands designed to appeal to the guest up tomorrow, while providing a compelling return on investment for our franchisees.
Increasing the velocity of hotel openings through our best in class Hotel conversion capability.
Further bolstering our platform capabilities through strategic partnerships and other ancillary revenue opportunities.
And expanding our international growth, where we doubled our EBITDA contribution in the quarter.
Let me start with the successful acquisition of the Radisson America's brands.
When we executed this transaction, we made it clear that the Radisson Americas portfolio would be effectively integrated and contribute to our results in a timely manner.
The successful integration process is tracking well ahead of schedule towards completion.
Importantly, what our integration teams have accomplished with Radisson Americas further validates our capabilities to replicate this great success with the Wyndham combination.
The Radisson Americas <unk> acquisition has created a step function change in the size of our business.
Expanded our rewards program.
Extended our co brand credit card opportunity.
Increased our geographic reach in the Americas region.
And opened up new incremental earnings streams.
Thanks to our integration expertise and strategic investments in our state of the art proprietary technologies.
We have achieved $84 million in annual recurring synergies.
Exceeding our prior target by 5% and.
And we now anticipate additional future cost and revenue synergies.
In the third quarter, we integrated the digital channels and rewards programs all within less than a year of acquisition.
We are now delivering improved business performance to the Radisson Americas hotels as the process of on boarding these hotels onto our best in class business delivery engine is well underway.
At the same time.
We have been able to help our radisson Americas franchise owners reduce reliance on third party distribution channels.
And as a result of our improved hotel footprint. We have recently negotiated improved terms for not only the radisson Americas owners, but the whole choice system with one of the major third party distributors.
This in turn has helped lower the overall operating cost for our franchisees, which is so critical in a time of rising labor costs and interest rates across the entire portfolio of brands, our franchisees and guests are reaping substantial benefits since the digital integration spin.
Specifically, we are driving stronger performance for the Radisson America's brands with bookings on our digital platform, increasing by over 20% given the higher traffic and booking conversion rate on the choice website and mobile apps.
This in turn lowered customer acquisition cost for our franchisees and following the integration of the rewards programs. We now have 63 million choice privileges members, who book directly with our franchisees.
Pay them higher rates and return more often than non members, which all translate again to lower customer acquisition costs and higher margins for our franchisees.
The entire choice system now has access to over 1600 nationally and globally managed corporate accounts.
Actually accounts.
And over 28000 small to medium business accounts from which we now can provide incremental revenue growth as we move ahead.
Radisson America's properties are also enjoying access to our hotel profitability tools and choice University. The most widely awarded learning program in the hospitality industry.
As of today at a pace faster than anticipated, we have seamlessly and effectively migrated 75% of Radisson Americas hotels onto our property management system.
And we expect the remaining properties to be on boarded by the end of the year.
With the full integration moving towards closure, we expect to help further drive Radisson Americas hotels topline performance.
And reduce their operating costs to bring their profitability to the next level as they leverage the power of choices systems and tools.
The excitement generated by the Radisson Americas business unit is underlined by its performance.
In the third quarter, the Radisson upscale brand Revpar grew over 6% year over year.
Outperforming the upscale segment by three percentage points.
And achieving Revpar index share gains versus competitors.
Our future growth is now enhanced by the addition of the Radisson America's brands to our best in class business delivery engine and we believe we can provide similar benefits to wyndham franchisees different transaction can be consummated.
Our selective organic unit growth strategy is also delivering results and enhancing the attractiveness of our brands.
Over the last five years, we have expanded the reach of our franchise business in more revenue intense segments.
The new franchises in these segments are more accretive to our earnings and are another key driver of our future growth.
In fact year to date through September New hotels, we added within a brand generated an average of 20% higher royalty revenue that hotels exiting the brand.
We are also executing new hotel openings at an impressive pace.
Through September we averaged more than four openings per week.
This resulted in a 24% increase in openings year over year with 159 domestic hotel openings.
At the same time brand equity is elevating as we are seeing improved guest satisfaction scores and are enhancing our brand value proposition to consumers.
We also continue to invest in our business. Our recent brand investments are designed to appeal to the guests of tomorrow, while providing a compelling return on investment for our franchisees.
And these investments are already gaining traction.
Our first new comfort prototype hotel opened this quarter and marks the next chapter for our flagship brand, which continues to attract significant developer demand with 136 projects in the pipeline.
In addition earlier this year, we debuted the next generation sleep Inn prototype.
And a country Inn and suites room refresh.
And our newest extended stay brand ever home suite is gaining meaningful traction across the development community with over 60 domestic projects in the pipeline, including 12 under construction.
Fueling our success is our commitment to strengthening the value proposition, we provide to our franchise owners.
In fact over the past decade, we have tripled the number of rewards program members and raised the direct booking contribution to our franchisees by 50%.
In the current hotel development environment are more diverse and strengthened brand portfolio.
Our core competency are best in class hotel conversion capability, even more impactful.
Specifically in the third quarter, we drove a 27% increase in our global rooms pipeline growth for conversion hotels quarter over quarter.
And 11% year over year.
We expect nearly 70 additional domestic conversion project to open by year's end.
In addition, 72% of the domestic agreements awarded in the first nine months of the year were four conversion hotels.
We are especially pleased with the prospects for a radisson upscale conversion brand given it generates on average six times more royalty revenue than our economy portfolio.
Through our superior speed to market conversion processes and best in class franchisee support we're able to move projects quickly through the pipeline.
In fact, the velocity of our conversion openings has been so high that some conversion hotels never appeared in our quarterly reported pipeline numbers.
Of all the domestic franchise agreements, we executed four conversion hotels in the first nine months of this year.
Two thirds have already opened or are expected to open by the end of this year.
And we expect our brand portfolio conversion activity to remain robust for the foreseeable future.
We are also encouraged by the traction we are gaining in our efforts to expand our platform business and ancillary revenue growth opportunities.
One example, we're very pleased with is the new co brand credit card.
This strategic partnership should be a long term tailwind given that it continues to drive loyalty to our brands.
As our rewards members with credit cards stay with us on average four times as often as non rewards members.
On the international front, another exciting development benefiting our customers as a new strategic partnership with one of the largest hotel operators in Mexico, which is known for its portfolio of upscale upper upscale luxury hotels and resorts in Mexico and the Caribbean.
The arrangement will grow our international portfolio and is expected to enhance choice hotels rewards program by allowing our members to earn and redeem points at these award winning all inclusive properties.
Beyond the strategic partnership we also continue to improve our international business performance.
Our international portfolio.
Third quarter Revpar increased 14% with.
With the Americas region growing 25% compared to the same period of 2019.
We believe we have a significant opportunity to further gain international market share and realize additional EBITDA growth in the coming years.
The results we achieved in the third quarter confirm the effectiveness of our deliberate approach to growing our company with hotels that generate higher royalties per unit.
We remain confident in our versatile asset light fee based model, which has proven its ability to generate multiple avenues of earnings growth throughout various economic environments.
As we look ahead, we are well positioned to build on the success, we achieved in this quarter and our powerful earnings algorithm and speed of execution will enable us to further capitalize on growth opportunities in 2023 and beyond.
I will now turn the call over to our CFO Scott.
Thanks, Pat and good morning, everyone I'm excited to be joining you on the call today and continue to build upon the strong partnership we have developed over the last 18 years.
I also look forward to working closely with Tom in his new role to drive our key financial objectives focused on maximizing long term shareholder value.
Today I'd like to provide additional insights on our third quarter enterprise and segment results.
Update you on our balance sheet and capital allocation approach and share expectations as we move ahead.
Throughout my remarks today I would like to note that all figures are inclusive of the Radisson Americas portfolio and excludes certain onetime items, including Radisson Americas integration costs, which impacted the third quarter reported results.
For third quarter 2023, compared to the same period of 2022 <unk>.
Revenues, excluding reimbursable revenue from franchised and managed properties increased nearly 9% to $219 $6 million.
The successful integration of the Radisson Americas portfolio and the robust performance of our platform procurement and international businesses and our adjusted earnings per share were $1 82, an increase of 17%.
Let me turn to our key revenue levers, which include our unit growth royalty rate and Revpar performance.
In terms of unit growth our portfolio is absolute size and the royalty revenue per hotel our key advantages.
Our strategic goal has been to accelerate quality room growth and more revenue intense segments end markets, while simultaneously growing our effective royalty rates, which ultimately results in an outsized increase in royalties. In addition to a mix shift strategy for the broader portfolio.
We're driving more revenue intensity at the individual hotel and brand level across the system.
In fact year to date through September New hotels, we added within the brand continue to generate an average of 20% higher royalty revenue than hotels exiting the brand.
Our domestic system size of the more revenue intense upscale extended stay and mid scale segments for choices legacy portfolio grew.
<unk> grew by one 6% for units.
One 9% for rooms year over year.
At the same time, both units and rooms in our international portfolio increased approximately 1% year over year.
We are particularly pleased with the growth of our international rooms pipeline, which nearly doubled in the third quarter year over year.
During the quarter, we also leveraged our best in class conversion capability as we expanded our global rooms pipeline for conversion hotels by 27% since the last quarter.
These results demonstrate that the deliberate decisions and strategic investments, we have made and will continue to make in our value proposition franchisee tools.
Brand portfolio and platform capabilities are contributing strong returns across all our segments.
First we strengthened our upscale franchise business for the first nine months of 2023, we grew our domestic upscale units by 11% year over year highlighted by a 50% increase in the number of new hotel openings.
Second we accelerated our growth in the extended stay segment.
For the first nine months of 2023, we grew our domestic extended stay unit system size by 13% year over year.
Highlights by a 38% increase in the number of new hotel openings.
At the same time, we grew our domestic extended stay conversions room pipeline by 36% year over year.
We remain very optimistic about our extended stay franchise business growth and expect the number of our extended stay units to increase an average annual growth rate of more than 15% over the next five years.
Third we continue to invest in our mid scale portfolio and as of the end of the third quarter, we reached over 4300 domestic hotels.
In fact after executing a franchise agreement our Midscale properties open their doors as royalty generating hotels and just under 100 days on average.
And fourth our economy segment transient hotels are continuing to benefit from the improved value proposition as.
As a result in the segment year to date through September New hotels, we added continue to generate an average of 20% higher royalty revenue within hotels exiting.
Our effective royalty rate also continues to be a significant source of revenue growth.
Our domestic system effective royalty rate for the first nine months of 2023 increased six basis points year over year, representing $4 $4 million of incremental royalties.
Including a six basis point increase for the choice legacy brands to five 1%.
The third revenue lever I will discuss is our revpar performance.
Our third quarter Revpar increased 12, 1% from the same quarter of 2019, including 13, 7% growth from the choice legacy portfolio.
Revpar was down 80 basis points year over year in the quarter, reflecting tougher year over year comps as we were the first hotel company to return to and significantly exceed pre pandemic revpar levels.
While we expected softness in the lower Midscale and economy chain scales in the back half of this year, we are optimistic about revpar growth prospects for the coming year, given the favorable long term business and leisure trends and the initiatives, we put in place to capitalize on these tailwind.
As Pat mentioned, we continue to build on the strong momentum of our platform business specifically in the third quarter, we increased our platform and procurement services fees by 8% to $15 5 million compared to the same period of last year.
We believe that we can drive this strong revenue growth in years ahead, as we increase the number of products and services, we offer to nearly 7500 hotels.
<unk> of guests and other travel partners, while expanding our platform at the same time as a result of our strong organic growth and the acquisition of Radisson Americas, we doubled the EBITDA contribution of our international portfolio in the quarter.
I'd like to now turn to our well positioned low leveraged balance sheet marked by gross debt to EBITDA of two seven times, which continues to be below the low end of our targeted range of three to four times.
Year to date through October we've returned over $390 million to shareholders. This included nearly $57 million in cash dividends and $335 million in share repurchases.
Over the past year alone, we have repurchased nearly 8% of our outstanding shares and returned over a half of 1 billion to shareholders.
With our strong cash flow and debt capacity, we are well positioned to continue accretively growing the company.
Our strong capital structure positions us well to increase investments to further expand the scale of our business to drive franchisee and shareholder value.
It can also effectively support the acquisition and successful integration of Wyndham.
Beyond our focus on continued organic earnings growth and a large strategic opportunities. We have discussed we will continue to make targeted investments in our business to drive growth focused on hotels that generate higher royalties per unit further.
Further enhanced our franchise owners value proposition, while expanding our international and platform business.
Okay.
I would like to turn to our expectations for the remainder of the year.
For full year 2023, we are raising the midpoint of our adjusted EBITDA guidance to $537 5 million.
Which represents 12, 3% growth at the midpoint year over year, and approximately 44% growth compared to the full year 2019.
From a full year perspective, when assuming a like for like portfolio, our organic adjusted EBITDA, Excluding Radisson Americas is expected to grow an impressive eight 4% over the prior year.
For full year 2023, we are also raising our adjusted diluted earnings per share to range between $5 95.
And $6 <unk> per share.
Underlying our outlook are the following assumptions for our full year 2023.
We are updating our expectations for domestic revpar to be approximately 1% year over year, which builds on the approximately 13% growth relative to 2019.
We expect domestic system growth of the more revenue intensive segments to be in line with our prior guidance of approximately 1%.
And finally, we are maintaining our outlook for full year 2023 effective royalty rate to grow in the mid single digits year over year.
As we look into 2024, we continue to expect to generate adjusted EBITDA growth of approximately 10% year over year, driven by incremental contribution for Radisson Americas as well as organic growth in more revenue intense segments end markets strong effective royalty rate growth and other factors.
This outlook does not account for any additional M&A activity.
Today's results are a testament that our strategy is working and we intend to keep investing in those areas of our business that will generate the highest return on our capital.
At this time, Pat and I would be happy to answer any questions operator.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a sweet home prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two.
If you're using a speakerphone you will need to lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions.
And your first question will be from Shaun Kelly of Bank of America. Please go ahead.
Hi, Good morning, everyone. Thank you for taking my questions and Scott Congrats on the on the promotion.
I'd love to lead off with just sort of I think very obvious high level question of sort of what are the next steps here for Wyndham.
So as we see it obviously you've taken your offer public.
<unk> is the next step.
A possible proxy battle.
How would you think about directly buying shares in Wyndham is that an opportunity for you.
Or is there a way to.
Address maybe some of the very specific concerns that they put out in their detailed response, including <unk>.
Further evolve here. Thank you.
Yes, Thanks, John appreciate it.
The top priority.
We've been talking to our shareholders their shareholders. Our franchisees are franchisees the top priority is to get.
Reengagement to come back to the table every issue that's been identified can be solved by coming back to the table and negotiating these are two great companies.
Combined we would be even better positioned to deliver this incredible value to stakeholders.
As you're all aware, we're very committed to this transaction we have been evaluating this over the last 10 months Theres a lot of value to be created here and the strategic rationale is just simply too compelling not to see it all the way through.
As far as seeing if there is additional value to be unlocked there can be additional value to be unlocked if wyndham re engages.
As you mentioned.
Some of these questions around how to protect the risk allocation.
We're well advised and we're confident in our ability to complete this in a reasonable timeframe.
We are willing to offer transaction terms as we stated to them. When we were talking privately that provide the appropriate level of risk mitigation uncertainty for for their shareholders. So a lot of these.
Conversations are things that we want to continue to engage wyndham on.
But we're going to do that with them privately, but we're well advised we're well aware of what our options are.
To see this all the way through and we're confident we'll get the transaction completed.
Thanks, and just to be very clear, if we kind of stay in this agree to disagree because again you want them back to the table, but they've been I think pretty clear on some sort of economic move probably needs to occur for them to do so so.
Again.
Could you give us any sense of the options of what that could entail to push that along and again hopefully I think in all terms you have to turn this conversation friendly would you Bob John on economic terms here to help I guess return them to the table is that on the table for you.
Well Jack can be surprised so im not going to have that conversation on this call, but we're happy to have that conversation with the wind aboard.
Sure. Thank you very much.
Thank you.
Next question will be from Stephen Grambling of Morgan Stanley. Please go ahead.
Hey, Thanks, So I'm just going to follow up on Sean's question, but maybe a little bit more direct have a question just how do you think about the right level of termination fee <unk> willingness to put a collar in place are there any.
Comparable transactions that you look at.
Yeah. Thanks, Steven I mean, obviously when you look at an opportunity like this we've looked at what.
Market terms look like for deals of all different sizes and shapes a lot of it comes down to how each side is evaluating the execution risk.
One of the benefits of bringing the public the proposal public three weeks ago is we've been able to engage in pretty extensive conversations with our franchisees many of whom are their franchisees I would say in the last three weeks, we probably spoke into hundreds of franchisees across the spectrum.
They are very supportive of the combination these are sophisticated investors themselves and they immediately grasp how a combination like this is going to improve their profitability.
See more direct bookings they see a larger rewards program.
And they understand how that can drive down their costs and improve their profitability, so understanding the sort of execution risk around.
Getting a deal like this completed.
The last three weeks I think had been really.
Supportive from the input we've heard from franchisees from shareholders and from third parties on seeing a transaction like this happen. So I think when you when you look at evaluating that the last three weeks have really helped us understand.
What it's going to take I mean, effectively we're looking for the opportunity to have sufficient time to get through the required approvals to make this transaction occur and I think as you said have we looked at market terms, yes, we have we understand what those are and we're certainly willing to engage in those conversations with the wind aboard.
And maybe it.
Two quick follow ups. One you then had conversations with the FTC or how would you frame the path there and then unrelated M&A question, how do we think about.
Licensing fees that you've earned from Blue Green and the impact on the HDD transaction.
Yes, let me talk about the HGV transaction, we are well aware of their transaction we've been in discussions with them I think it's important for investors to understand that there is a change of control provision in the existing blue-green agreement.
And we provided a lot of benefit to that entity over the past I think.
Probably a dozen years I think close to a dozen years, we've had a great working relationship with Blue Green and we would expect that's going to continue on the.
HGV takes it takes control as well so we're looking forward to those those conversations and creating more value as far as engaging with regulators it's too early in the process.
It is something we've obviously looked at we've been studying this as I said for about 10 months and we.
Very confident that there is a clear path to completion to get this transaction through the required approvals.
Thank you.
Thank you next question will be from Michael Bellisario Baird. Please go ahead.
Thanks, Good morning, everyone.
Good morning, Mike.
Just one more question first on the topic of Wyndham I think you mentioned or you said if Wyndham re engages I mean, you obviously have to reengage too. It takes both sides to do a deal. So I guess my question is sort of how long do you let the process go.
In the public realm before you either say.
Enough is enough and we're going to go do something different or we're going to walk away from the deal just trying to understand the thought process about how long it hangs out in the public market in the public realm. Thanks.
Yes, I think Michael where obviously, we were looking to continue the conversation at the time that they kind of surprisingly disengaged. So we are hopeful that through the conversations we can have in the future we're going to get back to the negotiating table.
I think it's important.
For us to realize we are aware of the calendar.
We have as a company have been very patient in our growth strategies, but when we look at what the opportunity here sitting in front of US is today the time to execute this transaction is now.
If you look at our franchisees and you look at the cost that they are bearing with rising labor costs rising interest rates.
And the pro competitive nature of what's happening in our segments.
Now is the time to get a transaction done.
I think when we've discussed this with the when the board and with their shareholders everybody sees the strategic rationale of getting this transaction done. So it's just a matter of getting back getting engagement again and realizing.
The issues that remain are things that can clearly be.
Matt and answered if we were able to get back into the negotiating room and solve these issues.
Got it and then just one follow up on the <unk> statement.
Statements I know they've publicly come out and stated that they don't support that transaction can you maybe help us understand.
Their role and their influence in the industry, especially with your franchisees.
I think what's important is.
We as an organization have seven franchisee Association. These associations elect their own members and those are the associations that we've been talking to this too about this transaction. They are most familiar with our programs that are most familiar with all of the benefits we bring to them the cost reductions that we've been able to achieve.
<unk>.
And it's been really exciting in the last three weeks talking to our franchisees and seeing their enthusiasm. They see this combination not as a promise that these these benefits are coming that way, it's a reality because we're achieving those cost benefit reductions to them right now through the Radisson acquisition the cost.
Reductions were able to drive are going across not just the radisson brands, but all of the choice legacy brands and so this is a reality that's occurring now and so our franchisees are seeing that performance improvement on the top line. They are seeing the cost reduction on their bottom line and ultimately they see this combination as something that could really accelerate.
And be a real game changer for their brands and as I said many of them own Wyndham brands as well. So the response, we've heard has been very enthusiastic and they get it. They understand that this is something that's going to benefit them at the street corner level.
Okay.
Fair enough. Thank you and then just one unrelated question on the fundamental front just on the pipeline kind of trying to focus on the domestic rooms here conversions look like they stepped way up so maybe what happened on the new construction front and are you seeing any incremental pressures on the signings front there. Thank you.
Okay.
Yes, so Michael Thank you.
Very pleased with what we've seen on the conversion side as you know that's something that we're very good at as a company driving the conversion market.
Two thirds of our openings typically come through conversion. So we're able to grow in all market conditions and even if the financing environment. It comes a little bit tougher we have the ability to grow in all market conditions point back to the great financial crisis, where about 90% of our or our openings came from conversion. So.
We're pleased with what we're seeing on the step up of conversion. So in terms of new construction, we're still seeing a lot of <unk>.
Great demand there I think one thing as Pat mentioned as our investment in our brands as we continue to look at ways to drive down the cost of our prototypes to make them more financial and for the most part our owners are more small business owners that still have access to that local level bank.
It's able to still drive in finance, new construction of hotels as an example, since we relaunched the Cambria brand with US a lower cost prototype, we signed 23 new agreements since its launch. So we're pleased with our ability to continue to drive conversions as well as make our new construction prototypes are more affordable is to continue to build at all.
Market cycles.
So do you have any further questions.
I'm all set thank you.
Thank you next question will be from David Katz of Jefferies. Please go ahead.
Hi, Good morning, appreciate all the detail on the strategic rationale and all the background.
My one question is on.
On the back side of this leverages getting up to a relatively high level higher than I think historically, you've seen at least in my.
Covering tenure.
Just how do you get comfortable with that and talk about how long you expect that leverage level to stay there.
<unk>.
Thanks, David Yeah. As you said, we've typically operated our targeted leverage levels are that three to four times and we have typically been below that which really shows the strength in our balance sheet, which allows us to think about a transaction like this we don't enter into that lightly but for such a transformative acquisition.
Think it's prudent to be able to leverage up the balance sheet at.
Temporarily and then quickly Delever as you know we have a very high free cash flow generating company as as Wyndham and so the combination of those two can handle a little bit higher debt load on the short term.
Pressure tested it we believe that even with a slightly elevated leverage we can continue to reinvest in the business to grow as well as delever and we kind of think we can do that within 24 months, a little over that timeframe to get back to the high end of the three to four times.
Good ratios that we have.
Got it and would there notionally be some.
Refinancing required and with the cost of debt.
Walter you sort of comfortable with that.
Where we sit today I guess right the cost of that lends itself to doing us and.
Before I forget.
Congrats on the promotion Scott I should really I've said that at the outset.
Thanks, David now we are comfortable there are a few when you look at our bonds that are outstanding that could be rolled over in the transaction, but there will be new debt that needs to be issued and we're comfortable with what we see in the marketplace as far as interest rates that we'll be able to delever quickly our interest coverage ratios will be at least three times coming out of the gate post.
<unk> combination so we're comfortable again that we can invest in the business. We've stressed it if we saw a recession and again feel very comfortable that businesses can handle the debt load and again delever quickly.
Thank you very much I appreciate it.
Thank you next question will be from Robin Farley of UBS. Please go ahead.
Great.
Going back to the topic of next steps and I know you've discussed it a bit already but.
Wyndham continues to not engage in that sort of public stance. Jill is the next thing that you have to wait until may two to have.
Something in front of shareholders does that.
Is that something you are prepared to do sort of timing wise in that.
I don't know if you feel that there would be any sort of uncertainty between now and then that can impact franchisees on either side.
Yes, Robert I would just say, we're well advised about what the potential options are to continue to move this ball forward and get the transaction consummated im not going to speculate on sort of what will happen between now and then.
The next several months here, but.
We're confident we're going to get this done where we're going to do everything we can to two.
To drive Reengagement.
From from the Wyndham side and as I said, we're aware of what the opportunities are and the options are and we're also aware of what the calendar looks like in order to get the transaction completed.
Okay. Okay. Thank you and just as a follow up.
Is there are you expecting any more removals of Radisson when we just look at the.
Change in the number of Radisson properties, among all of the brands combined from Radisson.
In terms of.
Any more removals from that system from here forward more than maybe what you would think of as a typical rate just looking at the change in the last couple of quarters and then.
Also just that.
Kind of related on the total rig count for the full year.
If your expectation for that and whether that's changed I know the two 1% increase in the revenue intense segments, but just thinking about on a combined basis.
Whether that's changed since last quarter and just looking at the Radisson removals.
Yeah. Thanks, Yeah. So in terms of net unit growth, we're really pleased with when you look at R. R.
Our legacy choice brands and our revenue intensive units they are up one 6% year over year and our rooms are up one 9%. So we're very pleased with that and in terms of Radisson all of the deletions that we've had at this point in time once we expected that we had underwritten in the deal. So no surprises at this point, we should be on the back end of that at this point in the.
Cycle as we're now about a year.
And then the acquisition so we're confident that we can grow both.
Our flagship Radisson brand as well as the country and brand our plans for the <unk> brand will probably most likely would be to grow.
Through the conversion engine. So we believe we will be able to kind of bring that back to new unit growth coming into 2024 and beyond with a country, it's going to be a mix of conversions and new construction. So the timeline for our growth on that may be a little bit elongated given the new construction environment, but we're very confident that both of those brands that we can grow those <unk>.
Second scale for the company.
Robert I would just say to them.
The Radisson brand itself.
The amount of refinancings that are going to occur in the next 18 months for upscale full service hotels is fairly elevated and that's a real opportunity for brands to come in and Reflag and our development team for the upscale segment is engaged in a lot of those conversations so we do think that.
Sort of reshuffling of our potential financing is going to lead to more opportunities for us on that conversion.
Upscale full service conversion opportunity as Scott said.
Okay, great. Thanks very much.
Thank you next question will be from Meredith Janssen at HSBC. Please go ahead, yes, hi, Thanks, I was wondering if you could speak a little bit about the extended stay portfolio and how we can think about segmentation between economy.
And then mid scale with ever.
And then the potential sort of white space for upscale extended stay and sort of timing or thoughts on that front. Thanks.
Welcome Meredith.
And then Scott on that.
Can you sort of fill in I mean, I think when you look at the extended stay opportunity for US we're really excited by the four brands that we have in that segment.
I think as we've stated publicly we expect our compound annual growth rate over the next five years to be in the double digits like 15% growth.
Going forward, we're really excited by what we're seeing at ever home, we had a developer summit down in Atlanta.
Atlanta, a couple of weeks ago that was standing room only for that brand and as we mentioned we've got 12 under construction.
And a lot of developer interest for forever home in particular, we're also seeing a lot of.
Conversions from transient hotels, two extended stay hotels.
And if you look at our mainstay and suburban brands and the growth that we're seeing there. Those two are also contributing significantly I think when you look at the white space as you mentioned and upscale extended stay brand is not something we have today.
It is something that as we built our upscale capabilities with Cambria now the Radisson acquisition.
And we have our already strong competency in extended stay that's the white space in our portfolio that could be.
T cell with a future brand launch or potential acquisition.
Yes, I'll just I'll just add to Pat as he mentioned, we're very excited about the opportunity. We look at our pipeline of extended stay hotels, we've got over 360 hotels.
The profile of that developer institutional capital.
Have we are we have the systems put in place with over 60 field service people to make sure that we're driving what they call us.
And to stay occupancy, which is so important in that business. So we've proven out our business model with the Woods Spring brand, which has really been a great acquisition for us and we've been able to accelerate the growth of that and and developers have seen that and we're bringing that to the mid scale segment with ever home. So we're very pleased with where that is today with the 12 under construction and 60 in the pipeline and see an acceleration of.
Demand trends if you look at.
So infrastructure, Bill and and reassuring of American jobs. So we see there's a huge amount of new business coming in 50 to 100 million room nights over the next decade that really are going to feed the extended stay profile and having woodson brand and building out the ever home brand, we are well positioned to capture that demand.
Great. Thanks Super helpful.
Okay.
Thank you next question will be from Patrick Scholes of choice.
Securities. Please go ahead.
Hi, yes, good morning.
Good morning have you.
Have you bought any shares already to establish a position in the.
Proxy battle.
<unk> to lower your basis in the deal.
If you do see this.
So yes fruition.
Yes.
Yeah, Patrick Thanks for the question, we are a nominal shareholder of the Wyndham.
A wyndham at this point.
Okay.
I wanted to move on just to ask a question on the guidance here.
It looks like you took your revpar down slightly but adjusted EBITDA up slightly.
What's driving the EBITDA range.
It sounds like something in the court cost item is that going to be the one hotel costs or.
SG&A coming down a little bit versus prior expectations, and then I'll have one more follow up questions. Thank you.
Usually there is a range and that represented performance that was towards the high end of our range of potential outcomes. So moving our guidance to approximately 1% just represents the lower end of the range of where we are.
But if you think about our revpar.
So really it's a factor that we.
We were so much farther ahead of recovery on the pandemic and some of our competitors were first ones to get back to 2019 levels and exceed 2019 levels. So.
Our full year Revpar is still expected to be 13% above 2019 levels in terms of the other puts and takes we've been very pleased with.
The.
Performance of our platform revenues in our international business, which has been higher than what was expected which is offset towards that lower range on the on the Revpar and then we've done a really great job on cost containment slips are coming in better than expected. There. So with all of that we took the low end of our range up from $5 30 to $5 35, and which then.
Got up the midpoint to $5 37, five so it's really those puts and takes of what gave us confidence to raise the midpoint of our guidance.
Okay and then just the last question you actually kind of swinging back to the.
Related to the.
The potential acquisition and trying to compare things apples to apples.
No.
Every company talks about strengthen their guest loyalty program I'm wondering how much occupancy.
Does your choice privileges I think it's 60% 63 million members.
Contribute to your typical hotel thank you.
Yes, I think perhaps the way to think about it is each segment is a little bit different so as you move up the chain scales. The loyalty contribution generally becomes sort of a higher.
Contributor to contribution into occupancy I mean, when we look across our system size and we've talked about this before effectively four out of every $10 thats coming into a hotel is coming from the loyalty program that number has been.
Increasing as we've added more feature functionality to the to the loyalty program I think what's interesting too as you look at the co brand credit card opportunity, it's really an opportunity to keep your brand.
Relevant and in front of consumers, even when they're not traveling.
And so the rewards program not only can deliver heads in beds and bring bring higher rated customers and a lower customer acquisition cost, but it also provides an overall brand halo.
For the business. So the strength of that rewards program not only delivers direct business. So the hotels, but also supports the overall brand equity and the entire system.
Okay. Thank you.
Thank you next question will be from Joe Greff at Jpmorgan. Please go ahead.
Okay.
Good morning, guys.
One thing that was noticeable to us in the third quarter was.
Nice reduction in the adjusted SG&A, both year over year and sequentially can you talk about what's embedded in the fourth quarter and then with respect to your 580 $590 million of 'twenty four EBITDA guidance, what's contemplated that as an adjusted SG&A number there and then I have a follow up.
Yes.
We're currently working through our 2020 for budget, but we feel very confident on the 10% EBITDA in terms of during the quarter RCA did decline adjusted about $333 million. It really it was slightly around a couple of things one just the timing of some incentive compensation that was recognized in Q3 of the prior year as well as.
Yes.
Some of it is we started to step down and realize the synergies on the Radisson. So if you think about radisson, it's about $19 million of totally SG.
SG&A for the year, and we expect to eliminate about $13 million of that for a for a $6 million run rate. So when you look at Q4, I would think about that to be kind of similar reduction against Q4 of last year. When you are modeling that out.
And then going forward, you would expect us to be able to kind of maintain SG&A growth rate in that low single digit year over year.
Perfect and then.
Going back to the.
The fund with Wyndham.
I believe you mentioned or maybe it came from then in conversations previous conversation you have with you.
You were talking about pro forma free cash flow about $1 billion a year can.
Can you, maybe refine that a little bit and talk about the pieces that get you. There if I'm correct in that billion dollars pro forma free cash flow that Im presuming includes a fully synergize the EBITDA level in there and that's all for me. Thanks.
Yes, so that $1 billion is really representative of what we had available to service debt. So that was that was before interest interest expense. So if you think about kind of a synergize EBITDA multiple.
<unk> EBITDA of around $1 $4 billion of the two companies and you take out taxes Capex and the dividend that gets you right around that $1 billion of available cash flow to service debt and then you would have obviously interest expense and then the remaining ability to delever. So.
That's where that $1 billion came from.
Got it and so we have interest expense standalone for two companies and then pro forma for the deal that net down to about $500 million of pro forma free cash flow. Okay. That's all thanks.
I'd say its a little bit north of that based on what we're modeling is probably closer to $700 million.
We're going to have interest coverage of well over three times did you think about the pro forma business.
Thank you.
Thank you next question will be from Dan Westlake.
Please go ahead.
Hey, good morning, guys. Two if I may so going back just to Revpar guidance I know slide.
Revision downward.
Anything in the environment that you would call out that's maybe changed over the last few months and then I guess the second question.
Your conversations.
With third party owners looking to convert or sign into your umbrella.
Is there any conversations of those owners looking to pause until there is some resolution with the Wyndham deal. Thank you.
In terms of the Revpar guidance really this is a factor of tougher comps as we go through the year.
When you look at as we mentioned on the prepared remarks, our Q3 Revpar for choice legacy still up 13, 7%.
Over 2019, many of our competitors are under 10%.
Against 2019, so really just that we recovered faster. So we haven't seen any change anything change in the business in terms of occupancy level.
And ADR levels and then when you look at Q4, we had a really really strong Q4 last year, we were about 6% higher than the prior year, and then 20% higher than 2019, so really just a deceleration of Revpar is something that we had talked about at the beginning of the year that we expected during the year given just the tough comps and while we're still working on our two.
24 budgets, we do expect growth in Revpar.
2024.
And then Dan on the.
Signings are for new franchise agreements I mean dominate were just out in Phoenix Sunday and Monday with.
About 200 of our franchisees several of our other executives over there as well and obviously the topic. They wanted to talk about was their enthusiasm around the Wyndham combination, but right on the back end of that they want to talk about either improving their hotel or signing their next agreement with us. So we're seeing a lot of enthusiasm a lot of this is based off of.
Where we've gone with our brands and the value prop we've created.
And the return on investment that they are seeing from our existing brand portfolio. So.
Not seeing anything where owners are telling us they want a pause we're actually seeing owners, who continue to be enthusiastic and as we said on our remarks a lot of this is it is a conversion game right now.
And this is where choice hotels over the past has always sort of.
Ceded expectations from that standpoint, just given our brand portfolio and the support we provide to franchisees who are looking to convert into our flags.
Perfect. Thank you.
Yeah.
Thank you.
Next question will be from Alex <unk> at Redburn Atlantic. Please go ahead.
Hi, Thank you for taking my question.
It's really just.
Hi, Good afternoon, just on the Robertson deal Youre, obviously ahead of schedule and I should think that that comes a lot into the EBITDAR upgrades does that increase the ultimate achievable synergies that you anticipate or if you're just being fast and extract the synergies that you had in mind in the first instance, thank you very much.
It's actually a combination of both so we're about 5% ahead of the realized synergies that we initially had underwritten in the deal and we've achieved them faster than we thought and we're not done at this point in time, we still think there's additional opportunity to.
Find more synergies over the next quarter or six months. So we've been very pleased with the ability to extract synergies and it's really a muscle we've built as a company first with the Atwood Spring acquisition and now now Radisson then as Pat mentioned before it's kind of proving out in real time that that as a management team, we do know how to acquire companies and integrate them quickly and produce.
This is the benefits that we've talked about so a combination of both there yes, Alex the other thing that normally I think companies up in and integrations is the technology stack.
And we took and native built our res system in the Amazon cloud and we did have about four or five years ago. That's provided the scalability and the extensibility that you need when you're combining with.
More hotel rooms, more more brands and more travel partners and so because we've made the investments in those proprietary technologies. It allowed us to do the integration of the digital platforms and our loyalty programs and 11 months.
It's pretty remarkable and as I said in our remarks, that's something that we see as our ability to realize the synergies quickly Wyndham transaction and bring those benefits to the franchisees in a really really short timeframe.
Fantastic and then just as a follow up.
The revpar environment.
I guess, it's pretty easy to say that you might have known the comps kind of as we went into the quarter.
Does that kind of slowdown or the reduction in the guidance is kind of just squaring off as you look into Q4, whats your expectation of where revpar growth will come in.
The business in that.
I guess, if we're kind of exiting at flat or down what are the things that will that change to make revpar positive for 2024.
Yes. So in terms of Q4, we expect our revpar to be slightly negative.
Through through year to date, we're at about one 4% so to get down to the approximately one that does imply a slightly negative environment, but when you look at that if you look at kind of it really is still accelerating against 2019 and as I mentioned earlier, 20% Revpar increase last year over 2019. So even if we are slightly negative will be ahead of the <unk>.
<unk> of 2019 that we were in the third quarter, which was close to 14% on our legacy brands in terms of next next year. So we're still early in our budgeting process, but still believe there is an ability to continue to push rate. When you look at a long term tailwind.
I think first quarter may be a little tougher again back to comps given that we were.
A little bit stronger in the beginning of the year, but most of the Prognosticators believe that leisure travel and business travel will continue to accelerate second quarter and beyond.
It really it's a function of.
The economy as we kind of ride through this I think we.
Feel like the Prognosticators are so we feel like we've avoided a recession.
And that we see the long term tailwind.
<unk>.
Increasing our retirement of the baby Boomers and $3 5 million additional retirees every year, which are a big driver of leisure travel.
Work and believes or travel continues to be strong 30% of all business trips or are now.
Expect it to have a leisure component to it and then as I mentioned earlier, the reassuring of American jobs and the infrastructure Bill are really a good tailwind for a drive in our to our consumers and our brands and I think that's the demand picture and I think when you look at the supply picture.
<unk> growth for next year is expected to be around 1%. So when you have a much more slower supply growth with that demand increase going up.
Paints, a nice picture for healthier Revpar environment moving forward.
Thank you next question will be from Brett mantra at Barclays. Please go ahead.
Hey, good morning, everybody. Thanks for squeezing me in here just.
Everything you guys have given so far has been helpful. On most of my questions have been asked and answered.
So just one for me and back on Windham from a longer term strategy perspective, you guys have been focused on.
Revpar intense intensive segments and sort of less on the economy segment.
Whereas Wyndham is most.
Prominently economy branded in terms of their.
The center of gravity and launching new brands in the economy, So I guess with the combination.
Change in your wood that maybe constitute a change in your long term strategy from a mixed perspective, how do you think about sort of bridging those two those two sort of.
Worlds there.
No quite the opposite.
Yes.
As we said we respect the business that April we respect the brands that they have in the economy segment.
And we think with a much larger footprint and the financial capacity.
There is opportunity here to grow the brand equity and to grow the royalty contribution coming from each hotel is similar to what we've been doing not just in the revenue intense segments, but we've also been doing that in our economy segment. I think it's very important that investors understand that that our revenue intense strategy is coupled with a.
A brand improvement strategy, that's occurring in our economy brands as well and we think there is an ability here when the two companies together to unlock that kind of value in their brands and ours as well.
Okay. Thanks, so much.
Hi.
If you think about just the combination of that marketing and reservation fund that I know, we've talked to a lot of investors a lot of analysts about I mean, you are effectively taking what is a $600 million marketing and reservation fund on both sides of the equation combining that theres, probably some synergy there as well so youre effectively sitting in a position where you can deploy well over $1 $2 billion of market.
And reservation capability to drive traffic into these hotels. So in addition to what Pat say, where what we're seeing at choices every economy product that's coming into the portfolio today is driving 20% more revenue versus what's leaving the portfolio youre going to be able to actually drive even further performance in those brands as well as our two weight based segments.
In upscale and extended stay so that's a huge compliment to the transaction as well.
That's really helpful actually one more for me.
If you don't mind capex in the quarter it looks like it's stepped up a little bit.
Quarter over quarter, and sort of I guess, it looks like a little bit higher than that.
The last several quarters anything in there that you want to highlight one timer or otherwise.
Yes, we do have some onetime costs around were actually about ready to relocate our office corporate offices down the street here. So.
December 1st we're moving so we've had some elevated capex related to the leasehold improvements on the new space.
Okay got it thanks, so much everyone.
Thank you and at this time, we have no further questions. Please proceed.
Well. Thank you operator, and thank you everyone again for your time. This morning, we will talk to you again in February when we announce our fourth quarter and full year 2023 results have a great day.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
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