Q3 2024 Choice Hotels International Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to choice hotels International's third quarter 2024 earnings call.
At this time all lines are in a listen only mode.
I will now turn the conference over to Alistair much Investor Relations Senior director for choice hotels.
Alistair: Good morning, and thank you for joining us today before we begin we'd like to remind you that during this conference call certain predictive or forward looking statements will be used to assist you in understanding the company and its results.
Actual results may differ materially from those indicated in forward looking statements and you should consult the company's forms 10-Q, 10-K, and other SEC filings for information about important risk factors affecting the company that you should consider.
Alistair: 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.
Alistair: You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our first quarter of 'twenty 'twenty four earnings press release, which is posted on our website at choice hotels Dot com under the Investor Relations section.
This morning, Pat patients President and Chief Executive Officer will speak to our first quarter operating results, while it's called Oak Smith, Chief Financial Officer will discuss our financial performance and 2020 for outlook.
Following our prepared remarks, we'll be glad to answer your questions and with that I'll turn the call over to Pat.
Pat: Thank you Allie and good morning, everyone. We appreciate you taking the time to join us.
Pat President: Choice hotels delivered yet another quarter of strong earnings results.
Alistair: We drove our adjusted EBITDA, 14% higher.
Alistair: Our adjusted EPS, 23% higher year over year.
And raised our full year, adjusted net income and EPS guidance.
This strong performance resulted in our raising of the midpoint of our adjusted EBITDA range by $5 million to an expected 10% year over year growth.
Through the successful execution of our strategy, we have expanded the versatility of our business model.
Alistair: Which combined with our projected continued unit growth acceleration.
And our ability to drive better than expected Revpar performance provides us confidence in our new growth outlook.
Our global hotel pipeline of over 110000 rooms set a record for the third quarter and 11% increase year over year.
Importantly, 99% of rooms in our global pipeline are in are more revenue intense brands, which means that the pipeline represents a meaningful revpar premium compared to our existing portfolio.
We also accelerated our global unit growth, both domestic and international.
As we increase the velocity of moving hotels from our pipeline to open hotels.
<unk>, 75% more hotels globally in the third quarter compared to the prior year.
Alistair: Notably, we realized a one 8% year over year net increase in global rooms across our more revenue intense brands.
Including a 4% net increase for our international room portfolio.
A key addition to this growth story is the performance of the Radisson America's brands.
The significant improvement in digital traffic and booking conversion rates since the integration.
Attracting new hotel development commitments.
Alistair: Which in the third quarter led to a 10% year over year increase in the number of rooms in the pipeline across the global Radisson Americas portfolio.
Including a 53% increase in new construction rooms.
Alistair: We are also pleased to be expanding our lead in the cycle resilient extended stay segment.
Alistair: For five consecutive quarters, we have grown our extended stay unit size by over 10% year over year.
Alistair: And with over 350 extended stay hotels in the pipeline. We are on track to achieve a long term average annual unit growth rate of 15%.
Just two weeks ago, we celebrated a key milestone of 500 open domestic extended stay hotels with the opening of our sixth new construction ever homes suites in the greater Phoenix area.
Property will serve the local booming infrastructure projects and industries, providing much needed longer term lodging options.
Do you ever home suites brand continues to see strong traction with 66 domestic projects in the pipeline, including over 20 under construction.
Our strategic focus on more revenue intense hotels means that the pipeline continues to be of significantly higher value than the current hotel portfolio.
This higher revenue contribution is driven by a few factors.
One the hotels in our domestic pipeline represent a revpar premium of over 30% compared to our existing portfolio.
Two they have higher average effective royalty rates driven by our strengthened value proposition to franchisees.
And three they have on average over 40% higher room count per hotel than our current domestic system.
Importantly, our best in class hotel conversion capability moves projects rapidly through the pipeline and is a key differentiator for winning new franchise agreements.
In fact.
The domestic franchise agreements, we executed for conversion hotels over the trailing 12 months we.
We opened 141 during the same period, a 17% increase over the same period of the prior year.
As of the end of September we grew our domestic rooms pipeline for conversion hotels by 68% year over year.
Alistair: And we expect our hotel conversion core competency to continue to be a key growth driver throughout the remainder of this year.
Alistair: Turning to Revpar.
Our domestic revpar in the third quarter was ahead of our prior expectations.
In addition to the continued positive trends in leisure travel we are seeing renewed strength in our corporate transient business travel, particularly in the transportation and government verticals.
Alistair: And we are now driving an acceleration in the growth in group travel year over year.
Both of which are further signs of the normalization of travel patterns, we discussed on our prior call.
As a result of the incremental demand we are delivering to our hotels.
And exceeding our third quarter and October expectations.
We are raising our outlook for the full year and we now anticipate returning to positive revpar growth in the fourth quarter.
Alistair: I'd like to turn now to our international business, where we expanded our rooms portfolio by three 8% year over year.
Highlighted by a three fold increase in openings.
Alistair: And with a pipeline that has increased by over 20% compared to the prior year. We continue to see a significant opportunity to further gain international market share in the coming years.
Alistair: In our key strategic region of EMEA, we delivered a 9% increase in Revpar performance year over year, and we are attracting strong franchisee interest.
Our EMEA team just recently executed our first direct franchising agreement in Spain, where we are adding over 700 rooms to our portfolio.
Alistair: With most to be on boarded by year end.
Alistair: And in France, we've already on boarded approximately 2000 rooms through our recently awarded direct franchising agreement with Vantiv stewed residential hotels.
Alistair: Strengthening the value proposition, we provide to our franchise owners by investing in our best in class franchisee success system continues to fuel our success.
The state of the art tools, we provide for our franchisees to run their businesses efficiently help them maximize their profitability.
For example, last month, we began deploying a mobile friendly one stop platform for our franchisees to successfully manage all of their properties from wherever they are and in turn help further reduce their operating costs.
Relentlessly enhancing the value we bring to our owners is among the reasons why our existing owners choose to expand their hotel portfolio with choice hotels and contributes to our industry, leading voluntary franchisee retention rate.
Alistair: Our franchisees are deeply connected with their local communities and we have always been at the forefront of relief efforts. When these communities are impacted by natural disasters.
Alistair: I wanted to express our concern for everyone affected by the recent hurricanes.
Pat: And I am proud that the choice Hotels' family. Once again came together to support our owners and guests and the recovery efforts.
Alistair: We have partnered with FEMA and are working closely with franchisees in impacted areas to help them accommodate emergency workers repair crews and displaced families.
Alistair: We were also the first lodging company to launch a matching campaign for our rewards members to donate their points to our signature partner the American Red Cross.
Alistair: Turning now to our customer base at quarter end, we further expanded our rewards program choice privileges to 68 million members, an 8% increase compared to the prior year.
Alistair: This growth is the direct result of us, creating a more compelling program, including adding exciting new experiences such as music and sporting event redemption options.
Alistair: And adding new aspirational hotels.
Our 68 million rewards members now have access to over 1000, upscale upper upscale and luxury hotels around the world.
Alistair: Our continued expansion into more revenue intense segments has also resulted in us strengthening our business delivery to both the group and business transient segments.
Alistair: In the third quarter, we drove an over 5% year over year increase in revenues from group accounts.
Alistair: Driven by our strength with the Smurf business.
Alistair: At the same time, we increased our business transient revenue supported by our strengthened upper mid scale portfolio.
Alistair: Where revenues were up by more than 9% year over year in the third quarter.
Alistair: I'm also proud that we were recently named to time magazine's world's best companies list of 2024.
Alistair: This achievement is a testament to our strong company culture, where we prioritize our people do.
Alistair: <unk> innovation.
Alistair: And seek to deliver long term value for all of our stakeholders.
Alistair: In closing the positive momentum, we've created along with our proactive strategic investments.
Alistair: And more versatile model.
Alistair: Meaningfully enhanced our company's growth profile.
Alistair: We believe we position choice to deliver sustained earnings growth and created long term value even in the current domestic revpar environment.
Alistair: We continue to generate attractive free cash flow annually and our priority use of this capital is to reinvest in our organic growth.
Alistair: Particularly in initiatives tie directly to driving the revenue intense growth of our brand portfolio.
Alistair: While returning excess cash to shareholders.
Speaker Change: I will now turn the call over to our Chief Financial Officer.
Alistair: Scott.
Scott: Thanks, Pat and good morning, everyone.
Scott: Today, I will discuss our third quarter results update you on our balance sheet and allocation of capital and comment on our outlook for the remainder of 2024.
Scott: For third quarter 2024 revenues, excluding reimbursable revenue from franchised and managed properties increased 17% to over $256 million and our adjusted EBITDA grew 14% to a record $178 million year over year.
Alistair: This was driven by a combination of global rooms growth and more revenue intense segments and markets.
Alistair: Strong effective royalty rate growth.
Alistair: And the robust performance of our non revpar dependent programs.
Alistair: Our third quarter adjusted earnings per share also reached a record reporting $2 23 per share a 23% increase year over year.
Speaker Change: Let me first discuss our key levers for franchise fee growth, which include our unit growth Revpar performance and royalty rate.
Speaker Change: For the third quarter, our domestic unit growth improved sequentially and increased by one 3% year over year across our more revenue intense upscale extended stay and mid scale portfolio.
Speaker Change: Supported by our expanded domestic pipeline, which has increased 10% year over year, we expect to see an acceleration of our growth for the remainder of the year and.
Alistair: And continue to anticipate achieving our full year growth target of approximately 2%.
Alistair: We opened 190, new hotels year to date through September.
Alistair: 19% increase in domestic openings year over year, our best performance since 2019.
Alistair: We are pleased to see our new hotel construction starts in the third quarter are on track and we have seen an increase in new construction hotel openings over the prior year.
Speaker Change: Our deliberate decisions and strategic investments in our franchisee tools brand portfolio and platform capabilities are delivering results across all our brands segments.
Speaker Change: Which is evident in our third quarter performance.
Speaker Change: First we continue to strengthen our presence in the upscale segment nearly doubling our upscale domestic rooms pipeline year over year.
Speaker Change: Second we grew our domestic extended stay unit system size by over 11% year over year.
Speaker Change: And I am pleased that choice is the fastest growing domestic extended stay portfolio in the industry.
Speaker Change: With two thirds of all domestic economy extended stay rooms under construction being choice hotel brands.
Speaker Change: And third we expanded our domestic midscale Rus portfolio to approximately 335000 rooms highlighted by a 70% increase in hotel openings year over year.
Alistair: Turning now to our Revpar performance.
Alistair: Our third quarter domestic revpar exceeded our prior expectations as we drove better than expected performance from our Radisson Americas portfolio and extended stay segment.
Alistair: Importantly, domestic occupancy levels for the third quarter improved quarter over quarter by 80 basis points.
Alistair: Furthermore, we have seen an acceleration of our domestic revpar performance headed into the fourth quarter with October revpar growing approximately 5% year over year.
Alistair: We are driving increasing demand in multiple regions of the country.
Alistair: Our global and local sales capabilities are allowing us to capture incremental demand generated by the recent hurricanes.
Speaker Change: While domestic Revpar was down two 5% year over year much of it was driven in part by the calendar shifts in the third quarter compared to the prior year.
Alistair: The negative impact of Hurricane Debbie in early August.
Speaker Change: And ongoing normalizing travel trends.
Speaker Change: For the third quarter, our overall domestic upscale portfolio delivered revpar growth led by our Radisson upscale brand, which increased four 2% year over year.
Speaker Change: Notably our Radisson upscale brand outperformed str's upscale segment by nearly three percentage points.
Speaker Change: And achieve Revpar index share gains versus competitors.
Speaker Change: Given the better than expected third quarter and October results, we are raising our full year U S. Revpar guidance and now expect the range to be between negative, 2% and negative 1% compared to our prior expectation of between negative three 5% and negative one 5%.
Speaker Change: Turning to our third revenue lever our effective royalty rate also continues to be a significant source of revenue growth.
Speaker Change: Our domestic system effective royalty rate for third quarter 2020 for accelerated sequentially and increased six basis points to over 5% year over year Rep.
Speaker Change: Representing approximately $6 million of incremental royalties on an annual basis.
Alistair: We continue to expect our full year effective royalty rate to increase in the mid single digits driving significant growth in our overall adjusted EBITDA.
Alistair: This performance demonstrates the positive impact of our strategy to drive the growth of our revenue intense brand portfolio and our enhanced value proposition to our franchise owners.
Alistair: We are optimistic about the continued upward trajectory of our effective royalty rate for years to come.
Alistair: Given that the contracts in our domestic pipeline have on average a 70 basis point higher effective royalty rate than those in our current portfolio of open hotels.
Alistair: We continue to build on the strong momentum of our platform business.
Alistair: Our ancillary fees benefit from expanded offerings to our franchisees and guests increased transaction volume with our qualified vendors and the broader reach of our initiatives.
Speaker Change: These fees more than doubled year over year in the third quarter.
Speaker Change: Particularly our co branded credit card program has been yielding impressive results.
Alistair: In fact in the third quarter credit card revenues grew 9% year over year.
Alistair: Continuing to expand our platform business and increase the number of products and services, we offer as one of our key initiatives and.
Alistair: And we believe that we can drive the strong revenue growth in the years ahead.
Alistair: During the nine months ended September 32024, we generated approximately $240 million, including $123 million in the third quarter and operating cash flow net of franchise agreement acquisition costs.
Alistair: Our business continues to produce strong cash flow, which coupled with our well positioned balance sheet allows us to execute on our capital allocation priorities, including investing in our growth while also returning significant capital to shareholders.
Speaker Change: Year to date through October, we returned $408 million to shareholders, including $56 million in cash dividends and $364 million in share repurchases.
Speaker Change: We repurchased two 9 million shares representing over 6% of our outstanding share count and we had approximately $3 9 million shares remaining in our authorization as of the end of October.
Speaker Change: With a strong cash position and total available liquidity of $676 million at the end of the third quarter.
Alistair: Our capital allocation priorities remain unchanged.
Alistair: We intend to build on our long track record of delivering outsized value buy accretively investing to further expand our business.
Alistair: I'd like to now turn to our expectations for the remainder of the year.
Alistair: We are raising the bottom end of our adjusted EBITDA guidance, primarily reflecting the improvement of our full year Revpar outlook, which we have increased by 100 basis points at the midpoint.
Alistair: We now expect our adjusted EBITDA to be between $590 million and $600 million.
Alistair: Reflecting a 10% year over year increase at the midpoint compared to the prior expectation of between $580 million and $600 million.
Alistair: In addition, we are increasing our adjusted earnings per share guidance to now range between $6 70.
Speaker Change: And $6 87 per share, which is an 11% year over year growth at the midpoint due to the higher adjusted EBITDA and lower than expected interest expense.
Alistair: Our ability to continue to deliver attractive earnings growth in light of the normalizing revpar environment demonstrates the increased versatility of our model.
Alistair: This outlook does not account for any M&A repurchase of the company's stock after October 31, or other capital markets activity.
Alistair: In conclusion, we remain confident in our ability to create value for all of our stakeholders overtime as we continue to deliver organic growth across more revenue intense hotels and markets.
Alistair: Realized robust effective royalty rate growth.
Alistair: Drive co brand credit card revenues.
Alistair: Expand our international business and maximize revenue generating opportunities from our expanded scale and versatile business model.
Pat President: At this time patent I would be happy to answer any of your questions operator.
Speaker Change: Thank you Lee.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone you will hear a pumps that you had has been raised.
Alistair: Ladies and a speaker phone please lift the handset before pressing any case.
Speaker Change: The first question comes from Shaun Kelley Bank of America. Please go ahead.
Shaun Kelley: Hi, Good morning, everyone. Thanks for taking my question.
Shaun Kelley: Pat or Scott just can we start with what's going on with sort of the the net reimbursable side I think we're getting a number of questions on this but on the on the net reimbursable revenues they accelerated pretty meaningfully this quarter can you just help us think about that how much of that maybe either timing or what's a good run rate to think about and then more.
Shaun Kelley: I think Scott as we as we lap the Radisson deal and some reclassification kicks in here can you remind us of the timing of that how to think about this piece as we move into 2025.
Speaker Change: Perfect Sean Yes, we've talked about in prior calls.
Speaker Change: So really we were able to integrate fully the choice and radisson platforms at the beginning of last year at Q4 2023. So since then we have that opportunity to unlock some more ancillary ancillary incremental revenue streams. So for the first couple of quarters of this year, we were around that $10 million to $12 million in incremental EBITDA from those programs.
Speaker Change: It was a little bit higher in the third quarter of round about $15 million I really that is a reflection more of the seasonality of some of the programs that we have given that third quarter is one of our largest quarters in terms of our guest traffic through our hotels. So through the first three quarters of the year, we're about around $35 million of.
Shaun Kelley: Rental revenue.
Shaun Kelley: As we discussed before we will lap those comparisons beginning in Q for Q4 last year that was around between eight and $10 million in revenues in the fourth fourth quarter. So you should think about these going forward being kind of.
Alistair: Outside of the Q3.
Alistair: We're a little bit higher.
Alistair: Between 10, and $15 million of quarterly incremental EBITDA, which as we go forward should grow in concert with the size of the system as well as other opportunities will have to continue to further penetration to grow those revenue streams.
Shaun Kelley: Great. So just to clarify it moves out of the.
Shaun Kelley: The add back piece beginning in Q4 as you lap it or does that not start until calendar year 2025.
Speaker Change: Yeah, we'll re class those revenues beginning in Q1 of 2025, and we have full year comparability, but for Q4, they'll still be sitting in the same reimbursable line item.
Speaker Change: Great. Thank you very much.
Speaker Change: Thank you. The next question comes from Michael Bellisario Baird. Please go ahead.
Michael Bellisario: Thanks, Good morning, everyone.
Michael Bellisario: Okay.
Michael Bellisario: Hi, Good morning, good morning, just.
Michael Bellisario: First question for me just on your own hotels in Capex and thanks for splitting those lines in the cash flow statement I think that's helpful.
Michael Bellisario: Can you just remind us how many 100% owned hotels are on your balance sheet today, how many are under construction and maybe what do you expect to start next year and beyond and then if you have those same numbers for the Jv's too I think there'll be helpful to provide some context on the capital spending front for owned hotels.
Speaker Change: Sure Michael So we have 10 hotels that are open and operating at this point in time with a with a handful of other ones under construction. So as we've talked in the past.
Alistair: Our capital support programs are primarily related to growing our cambria and ever home brands really the thought processes is to use our balance sheet to accelerate the growth of newer introduction introduced brands.
Speaker Change: To prove out the performance of those brands and then to recycle that capital. So if you think about this program we've been at it a little bit longer for Cambria.
Speaker Change: And we've put out about $800 million around the Cambria brand, but we recycled about $300 million of that so constantly we're in the process of.
Alistair: Watching as these new hotels, and then and then selling them so as that opportunity awaits US we will continue to look for those recycling opportunities. So today, we have just a handful of hotels under construction.
Alistair: On the Cambria never home brands, and maybe five to seven <unk> that are currently under construction.
Speaker Change: Got it that's helpful. And then just switching gears on your Revpar commentary can you maybe quantify the hurricane benefit that you saw in October and then you mentioned a pretty big step up in group and business transient what percentage of your total room nights are.
Alistair: Group and business transient and that's all for me. Thanks.
Speaker Change: Yeah. Thanks, Michael I think when you just step back October was up.
Speaker Change: Basically, 5% and Revpar some of that was hurricane related but.
Speaker Change: We want to make sure investors understand it was not primarily a hurricane driven event.
Speaker Change: We're seeing strength in a variety of areas outside of the impacted regions. So if you look at Texas, Louisiana, New England, those those states, which are sort of outside of the impact area. Those also saw.
Speaker Change: Pretty significant outperformance for us regarding our expectations I think the broader Revpar story is really you look at the Radisson brand family performance as a whole that was up 1%. The upscale segment Scott mentioned at Radisson itself was up four 3%. The Cambria brand was up three 3% so the upscale segment.
Shaun Kelley: Outperformed our expectations and then the third element is the extended stay segment, which has continued to be a really strong.
Shaun Kelley: Performer for us.
Shaun Kelley: You look at the year.
Shaun Kelley: Your second question around the business transient piece.
Shaun Kelley: These are.
Shaun Kelley: Primarily a.
Shaun Kelley: In the quarter, it's kind of hard to sort of designate how much is sort of the normal expectation, but it's.
Shaun Kelley: It's basically back to almost the 2019 levels, which speaks to this.
Shaun Kelley: Theme, we're seeing which is kind of a return to the normalization of what it looked like back in 2019 prior to the <unk>.
Shaun Kelley: Pandemic impacts so.
Shaun Kelley: The growth in both business transient and group.
Shaun Kelley: It's pretty impressive it's interesting because the business versus leisure mix in the quarter for us was 65% leisure and 35% business, which is really a reflection, which is pretty high for us on the business transient side pretty high given.
Shaun Kelley: Now that we have the radisson brands as a component of our total.
Shaun Kelley: Total hotel inventory, we're able to drive more business travel as a percentage of the overall rooms count. So it is expected for us to be a key driver for us as we move forward.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from Stephen Grambling at Morgan Stanley. Please go ahead.
Stephen Grambling: Hey, I just wanted to touch on expenses a little bit.
Stephen Grambling: How will you be generally thinking about inflation G&A or just overall G&A expense growth as we think about 'twenty 'twenty five and beyond.
Speaker Change: Yes, so on the SG&A front, we're pretty pleased with our ability to manage the SG&A. This year in the quarter. Our adjusted SG&A was up just about 4% we're around mid single digits for the full year about 6% so.
Speaker Change: Given that we are a scale business, it's something that we think we can continue to maintain our SG&A growth in that mid single digits.
Speaker Change: And so we've been pretty successful at over over time.
Speaker Change: And then I guess, a follow up on free cash flow.
Speaker Change: A couple of questions I touched on this a little bit but.
Speaker Change: How should we be thinking about free cash flow conversion.
Speaker Change: Heading into next year is there.
Speaker Change: You front loaded any of the capital spend into some of this growth and that should ease off or are you anticipating that things are going to continue into next year.
Speaker Change: Yes in terms of free cash flow as the year as you know, we're a seasonal business so year to date, our cash our free cash flow was about 62% and we expect to be around that number for the for the full year and I would expect a similar free cash flow conversion into 2025 percentage just as a reminder, that excludes the recycled water <unk>.
Speaker Change: Capital that we've talked about where we're investing and growing our brands at the end of the day those are being invested in hotel. Those that are open that we have the ability to recycle.
Speaker Change: Through this year through the year to date, we've spent about $135 million and we've had some recycling opportunities already in the fourth quarter. So we expect that to be a similar pace about $135 million for the full year when a recyclable capital we're still working through our 2025 planning process, but we would expect probably a similar law.
Speaker Change: All of that into 2025, and then 2026 and beyond we should start seeing some more meaningful recycling of that capital.
Speaker Change: So just just to be clear another 135 million I guess Ryan investor.
Speaker Change: Investment into next year net outflow.
Speaker Change: Yeah, roughly that it should be about the same as this year.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you. The next question comes from David Katz at Jefferies. Please go ahead.
David Katz: Hi, good morning, everyone.
David Katz: Thanks for taking my question.
Speaker Change: I apologize.
David Katz: Joseph I missed this but I wanted to sort of talk about the <unk>.
Speaker Change: Overspend under spend.
Speaker Change: And the marketing funds.
Speaker Change: I know that there can be timing differences as we move through the year, but we usually think about kind of getting to the end of the year approximately flat.
Speaker Change: Is that an expectation that we should change or any color there would be helpful. Thank you.
Speaker Change: Yeah. Thanks, Thanks for the question David for our marketing reservation. We obviously operate these over a very long term period and our contractual obligation to our franchisees is to ensure that we breakeven over the long term, but if you go back and take a look at our history we've had.
Speaker Change: More of our investment and then repayment cycles versus operating needs at every year at around a breakeven. So if you were to go back. The last couple of years, we ran some pretty hefty surpluses, especially through the pandemic win.
Speaker Change: Some of the marketing with more elevated leisure travel wasn't needed and so we've come into this year with a pretty hefty got cumulative surplus. So this year were expected to be in a deficit of just under $40 million, but we're still in a net surplus for that fund and that we should end the year somewhere between $25 million and $30 million surplus.
Speaker Change: So over time as we look for areas of investment, which makes sense to continue to drive our value proposition capabilities.
Speaker Change: Overspend that going forward, but that's something we take usually five year view.
Speaker Change: A few points and outlooks on how to manage that to ensure that we're balancing in your investments with really continuing to grow long term abilities for us to provide value to our franchisees.
Speaker Change: Understood five years, if I can just as my follow up.
Speaker Change: We're noting.
Speaker Change: Increasing focus.
Speaker Change: Incrementally on group.
Speaker Change: And intuitively that seems as though it's commensurate with moving upscale.
Speaker Change: Our up the Revpar Scott is that the right way to think about that or is there some sort of a focused strategy to that that we should consider also.
Speaker Change: Yes, David it's actually more broad based than that if you think about the extended stay segment.
Speaker Change: The ability to drive.
Speaker Change: Group business, that's focused on a particular project it might be a commercial customer that's bringing together a team for three weeks to work on a specific project and they need long stay accommodations.
Speaker Change: True as you mentioned in the upscale segment larger meeting spaces in the hotels. The hotels are located in more.
Speaker Change: Urban markets as well so that's a key driver, but the real highlight and where our.
Speaker Change: Largest footprint is in that sort of midscale and upper Midscale segments, we did see a pretty significant pick up in group travel there.
Speaker Change: I mentioned, the Smurf business, the social military education, religious and fraternal. So those are small groups, but still a good driver of business and those tend to to stay in our sort of upper midscale and Midscale hotels. So it's more broad based than just than just upscale and it impacts us significant amount.
Speaker Change: Of our total portfolio.
Speaker Change: Thanks, very much I appreciate it.
Speaker Change: Welcome.
Speaker Change: Thank you thank.
Speaker Change: Your next question comes from Robin Farley at UBS. Please go ahead.
Robin Farley: Great. Thanks.
Robin Farley: Going back to your commentary about Q4, Revpar being positive some others are calling out November being kind of a weak month because of the election period. So just understanding that your October came in strongly how much visibility do you have.
Robin Farley: <unk> second half of November and into December and maybe extended stay business gives you more visibility, but just maybe compared to others being cautious about November. Thanks.
Speaker Change: Yeah. So I think just Rob when you start to look at the macro.
Speaker Change: We're seeing trends that are correlated with the broader macro trends and so if I look at the macro consumer confidence is high it's actually the highest it's been in in a number of months GDP growth, which correlates very highly to Revpar has been 3% the last two quarters.
Speaker Change: Labor force participation rate, which is back to almost 2019 levels when people have a job they travel.
Speaker Change: And then you don't youre, not seeing that sort of new supply growth coming in it's expected to be muted kind of less than 1%. So the broader macro.
Robin Farley: Trends.
Robin Farley: Trends are pretty pretty pretty positive for for our segments and in our in our type of traveler.
Robin Farley: Regarding in November when we look at.
Speaker Change: What we're seeing on the books for November.
Speaker Change: Is higher than it was at this point last year.
Speaker Change: Which is giving us more confidence to what we saw trend wise in October will continue into the month of November as well.
Speaker Change: Okay, great. Thank you and then.
Speaker Change: I don't know if you said when you were talking about.
Speaker Change: Investing in.
Speaker Change: What percent of your gross additions Danfoss key money.
Speaker Change: So in terms of key money.
Speaker Change: Each deal we look at it is predominantly in new construction is where we're at with our primary heavier users or key money and really that's to help.
Speaker Change: The cost of construction to make sure the deals get done.
Speaker Change: But then we do selectively use those as part of our revenue intense strategy to bring higher rated units into our system. So we haven't disclosed the exact amount of key money, we use per project, but it's typically in our midscale and above hotels.
Speaker Change: Where we use it as a customer acquisition tactic that helps bring on more higher revenue intense hotels at a faster pace.
Speaker Change: Would you say kind of as a as a.
Speaker Change: Total units.
Speaker Change: And of course that it is.
Speaker Change: Compared to.
Speaker Change: Previous models in other words, not so much the dollar amount of key money per deal, but just total percent of deals and what's your kind of key money at that.
Speaker Change: Generally trended up a little bit.
Speaker Change: Yeah. There has been just given the competitive environment and the tougher new construction environment, there hasn't been an increase in the use of key money you can see that in our dollars.
Speaker Change: Most of that is around the revenue intensity of our hotels, obviously, usually key money is size based on the revenue that those projects will bring to choice.
Speaker Change: We have seen an elevation of our key money just simply because we've moved more of your upper up the chain scales, but there has been an increase.
Speaker Change: Did they use key money on more deals maybe that we previously had.
Speaker Change: Had experience, but we think that's really more of a cycle, where we are just given the muted supply growth. We would expect long term that to be back to where it has been historically.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. The next question comes from Lizzie Dove at Goldman Sachs. Please go ahead.
Lizzie Dove: Hi, good morning, Thanks for taking the question I guess bigger picture question looking into 2025.
Lizzie Dove: Ben Zucker with benefits this year in terms of the Radisson synergies and some of the under spend and I think some early termination fees high level I know you've talked longer time in the past about kind of high single digits EBITDA growth I'm curious with those kind of different factors that I talked about that's been a benefit. This year. How you do think about kind of the outlook, especially for 2025 going forward.
Lizzie Dove: Yes.
Speaker Change: Yes. Thanks Lizzy, we'll we'll give our 2025 outlook in February as is our normal practice I think when you look at kind of what's next for the company.
Speaker Change: It's really kind of three key areas. It's the realization of the pipeline, we spoke about 30% Revpar premium of hotels that are sitting in that pipeline and the realization of that.
Speaker Change: Second is the growth of our international business, which.
Speaker Change: We've doubled that EBITDA from that business and we had a really strong international growth in the third quarter.
Speaker Change: And then finally continuing to grow our ancillary revenue business as Scott mentioned, the co brand credit card some of our partnerships and the like.
Speaker Change: These are these are things that are growing outside of that sort of revpar domestic revpar environment and.
Speaker Change: And I do think those are things that will be key drivers of growth for us in the coming years.
Speaker Change: Got it that makes sense and then I just wanted to follow up, especially on the kind of extended stay side of things given that you know that scene Hilton pseudo whereas getting more in that area is there anything you've been seeing in terms of competitive pressures.
Speaker Change: No I think when you look at our four brands in those segments, we have both new construction and conversion the.
Speaker Change: The conversion opportunities for both mainstay and suburban are significant I think we crested the 100 opened suburbans.
Speaker Change: <unk> and.
Speaker Change: And we are seeing on our new construct brands. If you look at the wood spring brand and investors looking for a proven prototype a proven operating model and a proven exit.
Speaker Change: And we've been able to demonstrate that in a very significant and robust ways for the for the wood spring brand. The wood spring brand is actually two thirds of all economy extended stay new construction projects that are going on in the country right now so.
Speaker Change: We're actually seeing more interest in our brands and.
Speaker Change: The ability of our company to stay on top of that and stay in front is something that's a key focus for all of our teams.
Speaker Change: Got it thanks.
Speaker Change: Yeah.
Speaker Change: Youre welcome.
Speaker Change: Thank you. The next question comes from Joseph Greff at Jpmorgan. Please go ahead.
Joseph Greff: Good morning, guys I have a question that has been similarly asked and you answered it in different ways.
Joseph Greff: But if we think about your longer term growth drivers and longer term growth algorithm. When we think about it before you know.
Joseph Greff: Any kind of consequence of net reimbursable excesses are a deficit.
Joseph Greff: How closely do your fee or EBITDAR screen matched the compounding of Revpar growth in net rooms growth.
Joseph Greff: But I think in terms of the kind of speaking to the algorithm Joan.
Speaker Change: Longer term right and not necessarily if you want to be more specific but if we were look at beyond this year. If we were to look at Revpar growth. That's net rooms growth of why G&A growth to Zee and we put them in the blends or how closely does EBITDA off the.
Speaker Change: Growth match those three drivers.
Speaker Change: Before the call.
Speaker Change: Making adjustments for the Reimbursable stuff.
Speaker Change: Yeah. So obviously the royalties is still the lion's share of our revenue so that that algorithm of.
Speaker Change: Rooms growth royalty rate and Revpar was still drive a significant lift.
Speaker Change: Lift to our to our EBITDA, but as we become a more versatile business over the last several years and particularly since the Radisson acquisition.
Speaker Change: Our ancillary fees are allowing us to grow our top line revenues even.
Speaker Change: All different types of Revpar environment. So certainly the size of the system will still be important in terms of the more rooms, you have the more opportunities you have to leverage that for those ancillary revenues, but that that metric of of revpar royalty rate and room still remains intact. The other thing I'll just remind you is as we move more upstream.
Speaker Change: There is a multiplier effect as the hotels were bringing into the system are 20% more valuable than the ones that are exiting so as you get that growth in the higher rated chain scale segments. There should be an accelerator on the royalty side, but I still think if you look at the building blocks for choice. This year you could stick.
Speaker Change: Kind of build through.
Speaker Change: Those levers.
Speaker Change: Yes, Joe I think you know you look at that unit growth and effective royalty rates this quarter effectively offset the revpar decline that we saw then you add to that international being up about 4% platform and procurement was up co brand in particular as Scott mentioned was up 9%.
Speaker Change: And then I think the real focus here is at the Radisson revenue synergy opportunity is continuing to be realized and we do expect.
Speaker Change: That as Scott said those those units are now going to flow through some of the procurement partnership.
Speaker Change: Co brand opportunities that we have so.
Speaker Change: It is a it's a factor that I think is going to help sort of flow through from Revpar unit growth ultimately into those ancillary revenue streams and then you add to that the international component.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. The next question comes from Meredith Meredith Jensen at HSBC. Please go ahead.
Meredith Jensen: Thanks. Good morning, I was hoping you might sort of look out five years or so and if you could give us an idea of what your world that chain scale might look like versus.
Meredith Jensen: By the end of last year or whatever point makes sense.
Meredith Jensen: And sort of the breakout in chain scale and also how it may look in leisure and business and international guests.
Speaker Change: As things play out towards shared more revenue intense strategy.
Speaker Change: Yeah, Meredith, we look at the long range trends that are that are going to impact our business in the segments, where we operate let's start with retirements.
Speaker Change: Yes.
Speaker Change: 75% of the wealth in the country is held by people 55 and older and.
Speaker Change: A number of.
Speaker Change: You know the trend towards retirement by the end of this decade, one in five Americans will be retired so that that traveler has a lot of network that travel has a lot of discretionary time.
Speaker Change: And they're spending that and prioritizing travel over other things we're seeing in the.
Speaker Change: Research, we're doing the increase in people traveling for sporting events and for music events and for a variety of other you know its licensing things road trips as our second one that we see continuing to be a key driver for.
Speaker Change: For the brands that we operate in particularly our mid scale.
Speaker Change: Brands about 5000 of our hotels are within.
Speaker Change: A mile of a.
Speaker Change: Highway exit.
Speaker Change: So being where you know travelers want a goal of being the stop along the way we do see road trips continue to be a long term driver.
Speaker Change: I look at remote work, while it's not as robust as it was two three years ago. There were a number of jobs that have moved to that that that type of.
Speaker Change: <unk> status and so people have flexibility in the day of week when they can travel. So we are expecting that to be a long term driver of growth for us as well and then finally when you look at our extended stay segment.
Speaker Change: We do expect to continue to see the rebuilding of American manufacturing plus the infrastructure investments that are going on in the country to be a key driver of that segment and if you look at that segment alone. We have 500 extended stay hotels today 350 over 350 in the pipeline.
Speaker Change: So to your point as you look out in five years, we feel like our portfolio is very well positioned to take advantage of some of these pretty significant Max.
Speaker Change: Macro tailwind that will drive lodging demand in the next five years.
Speaker Change: Thanks, and one quick follow up on international.
Speaker Change: The growth, you're seeing there and outside of potentially rather send into Asia and other areas, what kind of the fee tax or should we think about those international pipeline adds in the business in general.
Speaker Change: Yeah.
Speaker Change: Yes, it really depends on the market and the type of of franchise agreement we have in place so as you're well aware of some of our markets. Our master franchise agreements. So if you look at Japan, the Nordic countries.
Speaker Change: Brazil in particular.
Speaker Change: India. Those are those are master franchise agreements, where we're doing direct franchising, though is where we usually get higher effective royalty rate.
Speaker Change: So what we're seeing on that front is as we mentioned you know EMEA continues to grow for US we've added new hotels in France and in Spain.
Speaker Change: And then here in the Americas, there's excitement around the park in brand by Radisson in Canada. There is interest in our Radisson greenstein and above brands into Latin American and Caribbean market.
Speaker Change: And what's exciting about those hotels as they are generally larger hotels than we might see domestically so from a unit.
Speaker Change: Perspective, the revenue intensity of those units generally tends to be higher than what we'd see domestically.
Speaker Change: Great that's super helpful. Thank you.
Speaker Change: You're welcome.
Speaker Change: Thank you. The next question comes from Patrick Schultz actually Securities. Please go ahead.
Speaker Change: Hey, good morning.
Speaker Change: Good morning can you talk about the rest of the good morning, when we think about your raised guidance for the rest of the year certainly sounds.
Patrick Schultz: Theres something organic in there and then Theres some hurricane.
Speaker Change: Positive demand tailwind.
Speaker Change: You break out that.
Speaker Change: That extra point of Revpar for the for the full year, which certainly would be greater for the fourth quarter, how would you break that down between.
Speaker Change: At that point, a hurricane impact versus sort of that organic.
Speaker Change: The improvement.
Speaker Change: You mentioned thank you.
Speaker Change: Yes, I think Patrick the thing we really looked at in Q3 that that's a really positive and that's a broad based increase we're seeing in occupancy quarter over quarter up 1%.
Speaker Change: So as everybody knows you know occupancy sort of leads right.
Speaker Change: So when occupancy is going higher.
Speaker Change: The the franchisees have an opportunity to to follow that with rate with muted supply growth.
Speaker Change: We do expect that that's going to continue to be a key driver for revpar.
Speaker Change: As we as we move into the fourth quarter I think when you try to break out the hurricane impact it's not that easy to do it is certainly impacting the length of stay as families need to relocate for renovations and the like but I think when we when we sort of bake it into our numbers.
Speaker Change: The full year hurricane impact would probably be about 40, maybe 50 basis points.
Speaker Change: Of impact and so if you take a look at that and you look at the overall.
Speaker Change: Pick up that we are guiding to we're seeing strength outside of that region, we're seeing strength outside of the segments that normally get impacted by the hurricanes. So this is not just a hurricane impact story, we are seeing the trends moving in the right direction, which gave us confidence to to move the revpar guidance in the in the in a.
Speaker Change: A positive direction.
Speaker Change: Okay. Thank.
Speaker Change: Thank you.
Speaker Change: Youre welcome.
Speaker Change: Thank you. The next question comes from Brent Mantra at Barclays. Please go ahead.
Brent Mantra: Hey, good morning, everybody. Thanks for taking my question.
Brent Mantra: I just wanted to circle back to the $15 million in the third quarter.
Speaker Change: Ancillary unlock.
Speaker Change: Can you break that out between them.
Speaker Change: Radisson and legacy choice.
Speaker Change: Yeah, it's a mix of both sub rent so as we talked about as part of it was the realignment of our contracts as well as.
Speaker Change: The radisson, bringing that in so.
Speaker Change: It's probably you know so.
Speaker Change: 75% choice, 25% Radisson, if you did the allocation there where we've really seen an opportunity is.
Speaker Change: Not only unlocking that but obviously to sell more services across a larger.
Speaker Change: Portfolio for instance, one of those revenue streams are a property management system, we've been able to roll that out not only to the radisson.
Speaker Change: Properties that we've acquired but also expanded into additional segments for choice.
Speaker Change: So for now our all of our extended stay brands are now using our choice advantage proprietary management system, which they had not previously so it's a little bit of a mix of both but we're excited not only that we were able to realign the contracts, but to find additional ways to grow those revenue streams through our broader based system.
Speaker Change: Great. Thanks for that and then just a follow up question on Revpar.
Speaker Change: Looking at the Revpar that you guys report for Midscale and upper Midscale. It looks like it was down about 300 basis points year over year. The STR for those segments was flat and so I'm curious if that if there is a reason why you saw underperformance in those two segments and then I know that things got better for you.
Speaker Change: So the thing anything slip from the third quarter into the fourth quarter and why.
Speaker Change: Why that might not be the case or if you're still sort of seeing that <unk> seen.
Speaker Change: Seeing some sort of relative drag versus what STR would be seen.
Speaker Change: No Brian its really a factor of where our Midscale hotels are located in the regions are located in so if you break out the STR numbers by region.
Speaker Change: Where we have a significant amount of our inventory those regions did not perform as well as regions, where we under index. So it's primarily a regional story as to what drove that.
Speaker Change: Perfect. Thanks, everyone.
Speaker Change: Thank you. The next question comes from Dan with Morningstar. Please go ahead.
Dan: Hey, good morning, guys. Thanks for taking my question. So just wanted to dig a little bit more into the infrastructure Act.
Dan: You referenced that you have 5000 hotels within our miles of Interstate just kind of I believe some of the states have.
Speaker Change: The gun to allocate funds here and I'm wondering in those states in those locations for the hotels that you have.
Speaker Change: Seen any incremental room night benefit coming from infrastructure space and if so if you can maybe offer some.
Speaker Change: Location, just kind of wondering how to think about this over the next few years. Thanks.
Speaker Change: Thanks, Dan.
Speaker Change: I mean, the infrastructure Bill is certainly starting to roll out our opinion it will be a kind of a more a phased rollout throughout the country is as different states are more advanced and how quickly they can allocate that into projects. What we've seen is overall construction spending is up about 4% year over year across the country.
Speaker Change: But really there's really some top 10 states that have received most of the infrastructure dollars today and about 38% of our hotels are actually located in those top 10 states. So we are starting to see that come through in particular into our extended stay product, but we've also seen some.
Speaker Change: I'm good.
Speaker Change: Increased business in oil markets, where we've got a decent share there. So we are starting to see that infrastructure.
Speaker Change: Don't be a because it's rolling out so much regionally there'll be more of a regional players we see that come through but certainly we were well positioned to capture that increased demand that that spending will drive.
Speaker Change: Okay, and so should we think about kind of the 500 extended stay hotels currently that you have as being the main beneficiaries versus kind of maybe the broader portfolio that scenario the inter state or is it kind of a combination of both.
Speaker Change: Yeah, It will really be a combination of both as we've stated many times while the extended stay product is perfect for that type of of stay occasion, I, it's definitely an under supplied.
Speaker Change: Segment. So there's two types of demand than the supply so as there arent extended stay product located next to all of these projects, we certainly see that in our economy and mid scale hotels, which are net beneficiaries of those those are travel locations.
Speaker Change: Okay, Great and Dan I would say that you know.
Speaker Change: Well, while the work crews maybe staying in the extended stay product.
Speaker Change: The project managers, and the architects and design folks and the engineers there there's a variety of other incur.
Speaker Change: Incremental room night occasions that occur that that might not be on site full time, but come in every couple of weeks and those those tend to benefit our more transient oriented hotels.
Speaker Change: Okay, great. Thank you guys.
Speaker Change: Thank you and the next question comes from Christopher Stathopoulos Susquehanna. Please go ahead.
Christopher Stathopoulos: Good morning, everyone. Thanks for taking my question just wanted to make sure I have this right and start to go back to this.
Speaker Change: Again here 40 to 50 Bips impact.
Speaker Change: From the Hurricanes on full year Revpar did you quantify.
Speaker Change: Or size up so far as election impact and the calendar shift, which I think you alluded to in the prepared remarks.
Speaker Change: Yeah, I think the calendar shifts I mean, I think in Q2, we had two or sorry, Q3, we had two less weekends.
Speaker Change: So that's a that's a that's a factor that impacted us by about a 90 basis point drag Chris.
Speaker Change: Christopher so.
Speaker Change: Calendar shifts do you have to have a meaningful impact on the quarter.
Speaker Change: And obviously you make it up on the in the full year.
Speaker Change: When you look at the election, we actually have seen pick up in markets like Wisconsin and Minnesota.
Speaker Change: So those are you know hopefully the election will be over tomorrow, but you know when these elections drag on that does drive a tailwind business as well.
Speaker Change: So we have seen some of that as well I think I think the other thing that we're seeing broad based is I mentioned, you know people are traveling for sporting events.
Speaker Change: The realignment of college football is driving a significant amount of.
Speaker Change: Fan bases traveling until the markets. They normally had not too traveled before so, Texas and Georgia in Austin that occurred at the same time around the F. One race and so in a market like Austin really picks up a business you know in Oregon goes to Michigan in Ann Arbor to play those fan basis travel and yeah. There.
Speaker Change: Not that they're not the local fan basis. So.
Speaker Change: We are expecting that that's going to continue to be driver.
Speaker Change: That's sort of our local market level of those sporting events and music as well you know when Taylor Swift goes to Miami, you do see a pickup in business so that.
Speaker Change: That is a trend that we do think is going to continue more of the sporting and music event driven travel we're seeing it in the consumer research and we're seeing it in the actual numbers as well.
Speaker Change: Okay. Thank you and then Theres a follow up if you could just put a finer point I realize you're still in your planning.
Speaker Change: Planning process for 25.
Speaker Change: But generally speaking as we think about leisure business group transient domestic international.
Speaker Change: High level thoughts.
Speaker Change: It sounds like on the.
Speaker Change: The business side.
Speaker Change: Transient grinding higher we do have updates to our T O policies group's solid.
Speaker Change: Is there a reason you know.
Speaker Change: On the leisure piece domestic.
Speaker Change: We should expect anything at this point beyond.
Speaker Change: You know seasonally in line with perhaps a downside bias to that anything is it just some color here as we're thinking about the.
Speaker Change: The segments, if you will for 25.
Speaker Change: <unk>.
Speaker Change: Yeah, I think if you just step back and look at the macro.
Speaker Change: Revpar in the U S. Generally grows between two and 3% and if you look at our Revpar going all the way back to 2019 were up I think it's 9% Scott right in the quarter. So so that if you're if you're looking at the long term trends.
Speaker Change: That's a that's a normal sort of growth rate for a normal year.
Speaker Change: We will give our guidance when we get to a when we get to February but I step back and as I mentioned I look at the macro that generally correlates well and and that Revpar to GTP correlation usually has a lag effect. So when GDP grows you see the revpar pickup.
Speaker Change: Not immediately but in the coming months and so the fact that the last two quarters.
Speaker Change: For G. D. P have grown is important because the economy's growing that means business travel is going to grow.
Speaker Change: We mentioned some of the other key drivers the infrastructure Bill.
Speaker Change: This re shoring of American manufacturing, which is continuing to drive both.
Speaker Change: Struction projects and then ultimately long term business in certain markets, that's really helping the extended stay segment and I do think it's gonna be a long term demand drivers for that as well. So those are those are the macro things. We look at that they tend to to correlate well with Revpar and a as I said, we'll give our guidance for 2025 in February.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you we have no further questions I will turn the call back over to Pat patients for closing comments.
Pat President: Great. Thank you operator, thanks, everyone again for your time. This morning, we will talk to you again in February when we announce our fourth quarter and our full year 2024 results have a great rest of your day.
Speaker Change: Ladies and gentlemen. This concludes your conference for today, we thank you for participating and we ask that you. Please disconnect your lines.
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