Choice Hotels International, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's first quarter 2020 earnings call. At this time, all lines are in a listen-only mode. I will now turn the conference over to Ali Summers, Investor Relations Director of Choice Hotels. Please go ahead.

Good morning, and thank you for joining us today. Before we begin, we would 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 Form 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 the first quarter 2020 earnings press release, which is posted on our website at choicehotels.com under the investor relations section. We would like to acknowledge that this is a challenging time for the hospitality industry, including Choice Hotels, and refer everyone to the earnings release we issued this morning and the thank you we'll file later today for important details about how COVID-19 has impacted and may continue to impact Choice. Instead of reiterating that information here, Pat Pacius, our President and Chief Executive Officer, and Dom Dragozic, our Chief Financial Officer, will primarily focus during this call on a few items we believe are of strategic importance and differentiate us from our competitors. They will be joined in the room by Scott Oaksmith, Senior Vice President, Real Estate and Finance. Following Pat and Dom's remarks, we'll be happy to take your questions. And with that, I'll turn the call over to Pat.

Thanks, Allie, and good morning, everyone. We appreciate you taking the time to join us and hope you and your families are well. Before we begin, I first want to express my gratitude to those on the front lines who've been working tirelessly to keep all of us safe through this crisis. I'd like to also recognize the dedication of our franchise owners and their staff who've been caring for essential travelers during this trying time. They are truly remarkable. On behalf of all of us at Choice Hotels, thank you. While the current situation has no true precedent, Choice is uniquely positioned to outperform its peers as it has in past economic downturns, a trend that is once again bearing out. It is the strength of our well-known brands that drives the performance of our company in both rising and declining demand environments. Our hotels outperformed the competition in the first quarter on several fronts. System-wide occupancy rates were higher than the overall industry, especially for our extended stay brands. This contributed to a domestic system-wide RevPar growth rate that outperformed the overall industry by 430 basis points. Additionally, our brands RevPar outperformed the primary chain scale segments in which we compete, as reported by STR. These trends have continued throughout the worst weeks of the pandemic into the second quarter. For the past eight weeks, our brands have consistently achieved RevPar share gains versus the competition, And as shown in Exhibit 7 of our press release, occupancy rates have been climbing since early April, and even this past week, occupancy continued to grow over the previous week. We attribute this outperformance to our long-term strategy of growing the right brands, in the right segments, and in the right locations. Our mid-scale brands represent two-thirds of our total domestic portfolio. a segment that outperformed in the first quarter of 2020 and continues to do so through early May. Our 410 extended stay hotels maintained an occupancy level of 60 percent in the month of April, and our WoodSpring brand was even higher at 64 percent. And almost 90 percent of our domestic hotels are in suburban, small-town, and interstate locations. areas that, according to STR, retained higher industry-wide consumer demand than hotels in urban or resort destinations. There are additional factors that contributed to our RevPar and occupancy outperformance. Since our hotels mostly serve domestic travelers, our portfolio has been insulated from the precipitous drop in international travel caused by the pandemic. Finally, we benefited from the loyalty of those who know us best, business customer segments like transportation, logistics, construction, and government travelers who have been staying with our brands for years. Our company also entered the crisis with a strong balance sheet, thanks to years of exercising a prudent capital allocation strategy and maintaining low levels of debt. Our financial position and liquidity allowed us to take a strategic, measured approach to cost management and additional capital needs based upon our revised view of the environment. Dom will cover this in more detail in his remarks. Choice Hotels outperformed the competition thanks to a combination of our resilient franchise owner base and the significant level of support We've provided them throughout the crisis. Our typical franchisee is an owner-operator with two hotels financed with low overall debt levels, which provides them financial flexibility in down cycles. To adapt to a softer demand environment, our franchisees can flex payroll costs, reduce operating expenses, and postpone capital expenditures. These limited service hotels are less labor intensive and in general operate at higher margins as compared to full service hotels. In response to the crisis, we reduced several fixed program fees, extended brand program deadlines, and adopted more flexible brand standards to lower owner's costs. We've contacted nearly every franchisee in the system to help them manage their cash position according to each owner's individual situation, with an eye towards helping them succeed in the longer term. To date, 10 percent of hotels have been enrolled in our tailored fee deferral program. Just for perspective, the average occupancy across our portfolio has been above 30 percent since the week of April 12th, indicating that many owners have been able to operate without additional assistance. At the same time, we ramped up our advocacy efforts at the federal level to expand our franchisees' access to capital. I was fortunate to have a substantive exchange with President Trump when I visited the White House along with my industry colleagues on March 17th. Because 90% of our hotels qualify as small businesses, I used the opportunity to call for specific provisions that would expand eligibility for owners and provide relief for their workers through the Small Business Administration. We are pleased that the SBA provisions we advocated strenuously for were included in the CARES Act. Even before the CARES Act was signed into law, we launched an outreach and online education program to enable our franchisees to access this new capital as quickly as possible. To date, Nearly 70 percent of our hotels have applied for or secured vital SBA loans through the Paycheck Protection Program and Economic Injury Disaster Loans, or EIDL. We've also taken steps to help franchisees reduce their operating costs in a lower occupancy environment through proactive outreach, online training, and virtual town halls to share best practices. We've delivered business to our owners that they would not otherwise have with a robust sales team that we not only retained during this crisis, but plussed up by redeploying a number of choice associates to support the sales effort. And we developed and launched our Commitment to Clean initiative, which highlights for guests the many ways our franchisees' professional housekeeping staff achieve appropriate levels of cleanliness, and the additional steps they are taking in this new environment. The relationship with our franchisees has always been strong, as demonstrated by our 98% voluntary retention rate and the high proportion of new franchise agreements awarded to existing and returning owners every year. The feedback we've received from our owners about the overall level of support we've provided during this crisis has been overwhelmingly positive. As our occupancy rates show, our long history of investment in a franchisee-first approach paid off during their most difficult time. This is also a difficult time for the country, which is why, together with our owners and guests, we're giving back to those affected by COVID-19. Many of our franchisees have committed their rooms at discounted rates or on a complimentary basis. to support communities in need. As in previous crises, our Choice Privileges Loyalty Program members are stepping up to help as well. Choice is matching CP member donations at various levels in addition to making our own contributions to several great organizations, including the American Red Cross and Operation Homefront. While there are hopeful, tangible signs that states are beginning to contain the virus, broad uncertainty remains regarding the course of the virus, the lifting of travel restrictions, and the economic impact on the consumer. Our expectation is that the near-term recovery will be sporadic and regional. There are, however, several reasons to believe our franchisees will be well positioned to capture demand as conditions improve. First, leisure travel, which comprises about two-thirds of our room nights, is expected to lead the recovery and rebound faster than business travel. Second, our brands are at the right price point and location for the type of traveler who's been on the road these past eight weeks and who we expect will lead the return to travel, the resourceful American, our core customer. As they did in previous down cycles, we expect these guests will replace lavish trips with lower-cost getaways, presenting an opportunity for our portfolio when folks get back on the road. And speaking of the road, we expect Americans will choose to drive when their ability and appetite for travel return. We believe that heightened concern about the safety of air travel, low gas prices, and our strong presence in drive-to locations will, taken together, allow us to capture an outsized share of pent-up travel demand as stay-at-home orders are lifted. While we do expect new franchise agreements to be lower than last year, we do see development opportunity on the horizon. During the Great Recession, we continued to grow at a faster pace than the overall industry supply, through increased hotel conversions. In Q1, our pipeline grew 2% year-over-year to 1,000 domestic hotels, nearly a quarter of which are conversions, representing a 5% year-over-year increase. Despite the COVID-19 pandemic and travel restrictions weighing on the industry, we awarded nearly 60 new agreements in the first quarter, nearly three quarters of which were for conversion hotels. Further, approximately half of the contracts in the first quarter were awarded in the last two weeks of March. The company's brands are well positioned to grow in this environment, and I'll highlight a few. The refresh of the Comfort brand over the past several years positions us well for the expected demand recovery. Comfort hotels that completed their renovations continued to experience REVPAR index gains versus local competitors for the past four consecutive quarters. And nearly half of the domestic Comfort portfolio has now installed new exterior signage with the modern brand identity. Comfort's high brand awareness is expected to attract both travelers and hotel developers looking for a brand they know and trust to deliver proven value. Finally, even amid a lower demand environment, Comfort's loyalty contribution was 45% in the month of April. Our strategic focus on the cycle-resistant extended stay segment and investment to grow our new construction WoodSpring Suites brand afforded us a competitive advantage as the crisis unfolded by allowing us to capitalize on demand for longer-term stays. In the first quarter, We grew the number of WoodSpring Suites hotels by more than 8% and its pipeline by 20% over the same period of the prior year. We launched our newest brand, EverHome Suites, back in January to provide franchisees with another opportunity to capitalize on one of the fastest-growing segments of the hotel industry and help drive returns in practically any economic environment. The upscale Ascend Hotel Collection, which saw its initial growth during the last recession and today is 373 hotels strong globally, will likely attract interest from independent and boutique hotel owners looking to improve their reservations delivery, reduce customer acquisition costs, and improve their revenue management tools. There's also opportunity for our upscale Cambria Hotels brand, which, while designed for the modern business traveler, over-indexes on leisure travel demand as a result of being affiliated with our system. Cambria Same Store Hotels also outperformed the upscale chain scale in the first quarter. Taken together, our upscale brands experienced RevPar growth rates 270 basis points better than their competitive set in the first quarter of 2020, as reported by STR. We anticipate that, as the current period of low travel demand and occupancy wears on, new owners will seek to affiliate with a large, proven franchisor like Choice. In closing, we are confident in our ability to weather this storm while supporting our franchisees. Choice Hotels has been through challenging times before in our 80-year history, and each time we have always emerged stronger given our long-term focus proven brands, broad franchisee base, and high caliber associates. Before I hand it over to Dom, I want to say how proud I am of the entire Choice Hotels team around the world who have been working tirelessly these past eight weeks. Our company's purpose statement puts our franchisees at the center of what we do. And when this crisis began, our people knew exactly what to do and moved with incredible speed to support our owners. Our associates have demonstrated resilience, focus, and commitment at every turn, and we greatly appreciate all they've done and continue to do to help the 13,000 largely small business owners who fly the Choice Hotels flag. Dom?

Good morning, everyone. I'd like to echo Pat's sentiment and thank the incredible Choice Associates for their continued contributions to our company. Choice continues to benefit from its resilient, primarily asset-light, franchise-focused business model, which has historically provided a stable earning stream, low capital expenditure requirements, and significant free cash flow. Today, In addition to delving a bit deeper into our first quarter performance, I will provide more insights around our liquidity profile, cost management efforts, and approach to capital allocation. I'll close by sharing our thoughts on the outlook for the road ahead. For the first quarter 2020, total revenues excluding marketing and reservation system fees were $107.8 million. Adjusted EBITDA totaled $69.2 million, representing an adjusted EBITDA margin of 64%, and adjusted earnings per share were 76 cents per share. Our domestic REVPAR for the first quarter declined 15% compared to the same period of the prior year due to the COVID-19 crisis and its subsequent impact on the travel industry. Through February, domestic system-wide REVPAR trended at the high end of our previously provided guidance. However, in March, domestic system-wide REVPAR declined 37% year over year as occupancy levels fell below 50% for the month. The most pronounced occupancy softening occurred over the last week of the month, averaging 29%. While domestic system-wide RevPAR declined 60% year-over-year in April, we observed consistent daily occupancy improvement in the last two weeks of the month, with continued outperformance versus our competition. Rising occupancy trends continued into May, with average occupancy rates of 34% and reached 39% mid-last week, the highest since mid-March when the crisis began. Despite the challenging environment, our brands have continued to perform ahead of the primary chain scale segments in which we compete. In terms of our first quarter unit and room growth performance, we increased the number of domestic hotels by 1.2% and rooms by 2.7% year over year. We are particularly pleased with the expansion of our domestic extended stay portfolio to 410 hotels in the first quarter, a 9.6% year-over-year increase. We were also able to grow our upscale room count by 42% year-over-year, with Cambria and Ascend increasing their room counts by 25% and 48% respectively. Finally, we are pleased to report that our Comfort brand family posted positive unit and room growth as the brand's transformation journey enters its final stages. Our domestic effective royalty rate increased 10 basis points in the first quarter versus the same period of the prior year to 4.94%. Given the attractive value proposition we provide to franchisees, their continued desire to be affiliated with our strong brands, and our current pipeline, we expect to observe continued growth of this lever for the remainder of the year, despite the softer environment. We entered this crisis with a strong balance sheet and liquidity position, highlighted by a gross leverage ratio of approximately two and a half times which is below our long-term target range of three to four times. In addition, we prudently refinanced our senior notes offering in the fourth quarter of last year to take advantage of the low interest rate environment with a new 10-year senior note offering. This allowed us to push all material debt maturities to mid-2022. As the current situation evolved, we decided to take precautionary steps to increase our financial flexibility and ensure our strengths will carry us through this uncertain time. Specifically, we borrowed $300 million of our $600 million senior unsecured revolving credit facility and had $322 million in cash on hand at March 31, 2020. We also obtained, in April, a 364-day, $250 million term loan with the possibility of a one-year extension to further enhance our liquidity position. As a result of this action, as well as the remaining capacity under our $600 million revolving credit facility, we improved our current liquidity position which now includes over $725 million in cash and available borrowing capacity through our revolving credit facility. In preparation for a lower consumer demand environment, we've also taken steps to adjust the company's cost structure, resulting in 2020 SG&A cost reductions of approximately 25%. We expect these measures will more optimally align our cost structure in the post-pandemic environment. I would now like to turn to our capital allocation approach. As we navigate through unchartered waters, we will continue to follow a prudent and disciplined approach to decision-making and ensure the level of investment activity is aligned with the current environment. This includes scrutinizing all investments and reducing or delaying spending as we reassess priorities. In the first quarter of 2020 and prior to the COVID-19 crisis, we returned approximately $67 million back to our shareholders through a combination of $12.8 million in cash dividends and approximately $54.1 million in in share repurchases. In addition, the company declared a cash dividend on its common stock of 22.5 cents per share, which was paid on April 16th of this year. We previously announced that we are suspending the payout of future dividends for at least the remainder of 2020 in response to the crisis. We expect this decision will increase our 2020 cash flow by approximately $25 million, reinforcing our already strong balance sheet position. In addition, and as previously announced, we have temporarily suspended share repurchases under our stock repurchase program. Before closing, I'd like to offer some thoughts on what lies ahead. The ultimate and precise impact of the pandemic on our business in the second quarter, full year 2020 and beyond is largely unknown, as is the exact trajectory of our industry's recovery. Both are dependent on many factors outside our control, such as government mandates, the nature of the virus itself, consumer confidence to travel, and the overall macroeconomic backdrop. While we are not issuing formal guidance today, we currently expect the impact of COVID-19 on our performance to be more significant for the second quarter versus the first quarter 2020. Despite the uncertainty, we remain optimistic that we will see some degree of sequential improvement in the back half of the year, spurred by the government stimulus and anticipated pent-up travel demand. we will continue to evaluate the impact of COVID-19 across the business and will provide further updates in August during our next earnings call. While we are not immune to the pressures faced by the industry, we entered this crisis with a strong financial foundation and low leverage levels. As we have done in the past, we will continue to manage our business conservatively through this period of uncertainty, keep listening to our guests and franchisees, and take necessary steps to prepare for a post-pandemic future as travel restrictions lift and markets recover. At this time, Pat and I would be happy to answer any questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Sean Kelly with Bank of America. Please go ahead.

Hi. Good morning, everybody. Can you hear me okay?

Morning, Sean.

Absolutely. How are you, Sean? Hope you and your families are well.

Yeah, I hope everybody's safe and healthy. Thank you for taking my question. So, Dom, you made an interesting comment about the royalty rate, and that's a little bit unique, as you guys have seen pretty strong growth in that metric throughout the last couple of years. Can you talk to us about how you would expect that to perform, not just in 20, but maybe just kind of throughout a cycle or how it performed last cycle, if I recall correctly? it tends to be somewhat kind of market condition, and I'm not saying it's specific to choice, that you do give some rebates or discounts on initial franchisees and things like that to accelerate unit growth after some of the development activity slows down. So just cyclically, can you remind us of some of the behavior there?

Absolutely. So if you think about it and if you go back to the prepared comments, Sean, I think it's clear that based on what we have in the pipeline today, those agreements that have already been signed, based on what we're seeing from a pricing perspective, the value prop, et cetera, we would expect to see continued growth in that effective royalty rate through 2020. Obviously, I wouldn't expect to see a 10 basis point increase going forward. We talked about that earlier this year that we would see it moderating back to call it those low to mid single digits. Now, in an environment where development activity slows a little bit, you tend to see some discounting. So you might see some pressure on that effective royalty rate in the out years, but obviously we can't give formal guidance right now on what we think that effective royalty rate is going to be 2021 and beyond.

Great. And then my other question would be, and this goes back to I think some of Pat's comments in the prepared remarks, but I believe you said that 10% of your hotels are in the fee deferral program, so thank you for quantifying that. Could you give us a little bit more color on what that program either consists of or what it looks like, specifically what fees are available for deferral, and does this impact, I think most importantly, does this impact the royalty rate, or is it some subcomponent of other components of the overall system fees? Thank you very much.

Sure. So broadly speaking, Sean, what we did is a lot of our fixed fees were things that we took a discount on offering to our franchisees, so things like revenue management and the like. With regard to the franchise fees and the marketing fees, those are the ones that we included in that tailored program. We looked at this in more of a strategic nature. You know, 60% of the portfolio is, you know, performing above 25% occupancy. So not everybody needed relief. And so what we wanted to do was approach this in a more strategic fashion. So it is more, when we say tailored, we are doing more of a, rather than programmatic, we're doing more of a targeted type of deferral program. And so those fees, it could be a mix of franchise or marketing fees. or system fees, so it can impact both. And then what we've also done differently is we've given our franchisees a longer period of time to pay it back. Again, the focus here was on their liquidity needs in the near term, and also we needed to be thinking about what happens if we have a more jagged recovery and we have another downturn in the fourth quarter and the like. So we wanted to be thinking more long-term and we wanted to be more strategic with a real focus on the franchisee's cash position. Just one other item I would answer on your prior question to Dom. We're entering this downturn with a different set of brands than we had the last time. So we don't discount on WoodSpring. We have the Ascend collection, which is if you look at where our royalty rate was on that brand back 10 years ago versus where it is today, that's increased. And then we've also raised the royalty rate, rack rate, on all of our brands over the last three years. So from an overall sort of comparing apples to apples, it's really different because the brand portfolio is different and the value of our brands is in higher demand during this downturn than we had in the prior downturn.

Yeah, Sean, and just to address your question on the effective royalty rate, you would not expect to see an impact on either revenue or effective royalty rates, given the fact that these are deferrals and not necessarily waivers on the royalty fee. A lot of the deferral comes on the marketing and reservation fee, and so it's fairly immaterial when you take a look at it overall, and there may be, you know, call it, you know, anywhere from a $10 to $20 million networking capital drag that you see, but we do expect to see those fees being collected over the next, you know, one, two, three years or so. And so fairly immaterial in the overall grand scheme of things, but no impact whatsoever that we expect on the effect of royalty rate or royalty revenues.

Thank you very much both for the detailed answers.

Thank you. Our next question comes from Michael Bellisario, with Baird. Please go ahead.

Good morning, everyone.

Good morning.

Just thinking out a little bit, I guess the big picture question is when can you go on offense? And I guess I'm asking it from both a strategic perspective but also in the context of any restrictions that are in place because of your new term loan and your credit agreement that might limit your ability to invest in the near term. How should we think about both of those aspects of going on offense?

Yeah, I think on offense, I mean, this is, as we've said over multiple calls, this is a business model that can play in both cycles, both the, you know, rising demand and also lowering demand because of our new construction portfolio as well as our conversion portfolio. We don't have to shift. A number of our brands are all new construction. A number of our other brands are all conversion. So it's a continued sort of – I would think of it as about two lungs – one on the left, one on the right, and they both keep the entire entity moving during different periods. I think from that standpoint, we've always been growing. Our quality in-brand last year, I think, was the highest growth brand in the mid-scale segment, and that's a 100% conversion. At the same time, we were building a significant portfolio of new construction comforts in our portfolio as well. It's a market or a portfolio route that approaches the market in both sides because you do have owners that are more interested in new construction and you have others that are, you know, interested in conversions even during the good times. And the same thing is true on the downside. It's just that conversions will probably be a much larger contributor to our unit growth over the next couple of years as we recover from COVID-19.

Yes. And then just in terms of the balance sheet and the question on the term loan, Michael, I mean, at the end of the day, we did this under a fully precautionary lens. It's not because we had to, but frankly, it gave us a little more liquidity. Overall, it was fairly cheap when you take a look at when you compare our term loan versus what others have seen across the industry. And it really had, and you mentioned the covenants, the term loan had similar covenants that we have today on our credit facility. with an option to extend by a year. So it could give us certainly the two years of liquidity. And so given the fact that, I mean, at the end of the day, we have not had to ask for any sort of covenant relief. And so we feel like we're in a very strong position from a balance sheet perspective to go on the offensive immediately, if you think about where we're positioned as well from that regard. Net debt is still sitting at about two and a half times. So we feel really good about our leverage position.

That's helpful. And then just one follow-up from the prior question, maybe on that $10 to $20 million networking capital drag that you referenced, any other cash inflows, outflows that might impact the balance sheet, at least in the near term, or anything else that could be offsetting the recurring operating cash flows that are coming in every month?

Well, when you think about the standard CapEx for the company, it's anywhere between call it $30 and $35 million a year. When you take a look at, and I mentioned it in my prepared remarks, we reduced our SG&A by about 25%. That's actually net of some of the severance and other restructuring charges that we would take. It's closer to almost 30% if you net those out or if you don't include those severance charges. From a capital perspective, call it that $35 million or so, we were also able to reduce our CapEx forecast for the year by a little more than 20% as well. So we expect to see that from a maintenance capital perspective drop below 30%. Everything else is really, for all intents and purposes, it's discretionary. So we have the ability to, you know, monitor the environment where we are, and we talked about the preparatory marks being very prudent and disciplined in terms of how we deploy that capital against either, obviously, internal strategic opportunities or, you know, returning that capital to shareholders in the long term, and we'll certainly continue to be prudent in doing so prior to dispersing any of that capital.

Got it. Very helpful. Thank you.

Thank you.

Our next question comes from Robin Farley with UVS. Please go ahead.

Hi. Yeah, thanks. I wonder if you could talk about the potential for, you know, whether you have interest in acquiring more extended stay brands. It seems to be obviously a big strength here in the portfolio. You've made acquisitions in the past, or do you feel like the brands you have are enough to capture, you know, that potential growth and demand? Thanks.

Thanks, Robin. We've talked in the past about clearly there's white space in our portfolio for an upscale extended stay brand, so there may be an opportunity to do something in that space. We're really excited about the performance of WoodSpring MainStay and Suburban, particularly over the last eight weeks, and the introduction of EverHome in January is really tailor-made for this type of environment. You know, that's a brand that brings our expertise in the mid-scale segment and the extended stay segment together in something that is purpose-built for the extended stay business. You know, we've done the analysis last year. It was like 20% of the room nights in the U.S. Our first seven night stays were above, but only 9% of the supply is actually purpose-built for that. And there's a big opportunity, we believe, in the mid-scale segment for something that is new and fresh and allows guests to really tailor the workspace and living space in the accommodation. So we're really bullish on EverHome. We think it will be an opportunity for us to grow even during this downturn as we have during prior downturns.

I'm sorry, I'm very misunderstood. So they're not necessarily interested in anything on the acquisition front and extended stay?

Not at this point. I mean, we look at everything that comes along, and as I've said in the past, it's really got to pass two litmus tests. One, can Choice Hotels improve the ROI of the asset owner? And two, can I grow the brand to benefit our shareholders? And, you know, if something were available, we would look at it. It's those same two litmus tests that we always look at. And I think if you look at our acquisition of Woodspring, it followed that path perfectly. So, That's how I would sort of answer the M&A question.

Okay, great. Thank you.

Our next question comes from Jared Shojian with Wolf Research. Please go ahead.

Hey, good morning, everyone. Thanks for taking my question. Morning, Jared.

Morning.

So it's probably way too early to see any evidence of foreclosures, but can you just talk about your expectations around that idea, and can you talk about what that process looks looks like in terms of what fees are paid to you during the transition and how we should think about the brand remaining intact?

Are you talking about hotels that might not make it through this downturn, Jared? That's correct. Yeah. Okay.

So the way that I would think about it, go ahead. The way that I would think about it, Jared, it's really the profile of our franchisee. So on average, our franchisee owns fewer than two hotels. It's primarily financed with equity. And so it's not out of the realm of possibility to see higher than 50% equity that's injected into these assets. So the foreclosure risk in our portfolio is very low. Even during the Great Recession, we saw very few foreclosures in the portfolio. So I feel like we're in a very strong position overall from that regard. Obviously, we would continue to work with our franchisees to avoid something like that. But overall, we're not seeing that that's a material risk to our portfolio.

Okay. Thank you. And then I think you said two-thirds leisure travel, so implying roughly the other third is business travel. Can you just talk about that type of business traveler situation? and maybe how that differs from, you know, like some of the more full-service-oriented brands. And are these people usually traveling by air to get to your properties? Can you just help us understand that dynamic a little bit better?

Yeah, Jared, it's certainly more drive-to. We have, I think it's only about 5% of the portfolio that's actually in an airport market. But even in those markets, you've got – airline crews and cargo airline crews that stay in those hotels. When we say transportation, a lot of that is truckers, railroad business, you know, logistics people are everybody from trainers and, you know, IT support professionals, those types of folks. We have a high level of business travel from traveling nurses in the healthcare space and also education services. So all of those actually, when you look at what's happening in the jobs report, those segments actually had fewer job losses than others. Obviously, the hospitality space was one of the largest contributors. But as far as our core customer on the business travel side in that one-third, they are the people that keep the country moving. And so they've been staying at our hotels over the last eight weeks. We do expect them to continue to stay with us. But that's really the lion's share, what makes up that one-third of business travelers.

Okay, that's helpful. Thank you. And just one more quick one, if I may. Do you have your cash burn number for the month of April? And, you know, is there any sense you can give us in terms of this RevPAR environment, how to be thinking about sort of your monthly burn, if there's even a burn at all?

Yeah, I'll give you a headline and then Dom can fill it in. I mean, when we've looked at if we had a zero revenue environment, we have enough cash to get us through really two years of operating without doing additional changes to the structure. In this revenue environment, we're looking at three years of ability to move at this pace. So the cash position liquidity is in a strong place. Don, do you want to add to that?

Yeah, Jared, the way that I would think about it is your cash expenses, obviously, with no revenues coming in the door, somewhere in the ballpark of that $30 million figure, which is where if you take the $725 million of capacity and divide it by that, it gets you to call it close to that 24-month period. It's actually slightly a little bit higher than 24 months. If you assume that the trends that you've seen in the last, call it, month to a month and a half in a very low occupancy environment continued through the the three years or so, which obviously we don't expect either of those things to happen, the draconian no revenue environment or even continuing to see what you're seeing today, that's probably more like a net $20 million or so per month, which is putting you out to that three-year period of time. And so obviously in the last week or so, we've seen those occupancy levels rise by 200, 300, 400, 500 basis points. So that would only further reduce that $20 million of cash burden.

Great. That's really helpful. Thank you very much.

Thank you. Our next question comes from Thomas Allen with Morgan Stanley. Please go ahead.

Hey, good morning. Thanks for the positive commentary on the occupancy improvements you're seeing. Any color on how pricing is trending and any expectations for how pricing is going to trend in the future? Thanks.

Yeah, in the whole sort of slide since the beginning of March, With REVPAR, it's been about two-thirds of that has been an occupancy decline, and about a third of it was rate, which has been really positive to see is that our franchisees have not tried to chase demand that wasn't out there by lowering rate, and that's going to be really important as recovery has started to occur. So, Thomas, it's really been about two-thirds dock, one-third rate in the mix of REVPAR, as we've seen over the last eight weeks.

Okay, helpful. And then can you just help us think through kind of what the labor expense is for one of your typical franchisees and like how flexible it is when properties are closed and then when they're kind of, you know, in this kind of demand environment?

Sure. Yeah, obviously it depends on the segment you're in. You've got a Woodspring Hotel that could have five F full-time equivalent all the way up to a Comfort Inn that has, call it 25, to a Cambria that might have slightly more than that. So a lot of that depends on, and our owners flex their housekeeping staff and their sales forces based on the seasonality that they see in their market. So it's a moving target, and they're used to flexing depending on changing demand environments. At one point, one of the lowest demand periods in the hotel sector where we are is that week between Christmas and New Year's. That's normally probably the lowest occupancy in a hotel's year. They're used to having to set themselves up for that. They weren't used to being surprised by the middle of March, all this happening at one time. Their ability to flex payroll is pretty significant. The PPP loans, And the EIDL loans are helping them sort of get through this eight-week window that they have when you get one of those loans. So there are options out there at the federal level and also at the state level for relief programs that are helping owners hang on to their workforce. And that's been really important because they don't know when demand is going to return and they want their staff back to be able to meet demand when it does return. That just gives you a general sense of sort of how many people work at the hotels and what the owner's flexibility is with regard to labor. Helpful. Thank you.

Thank you, Thomas. Our next question comes from David Katz with Jefferies. Please go ahead.

Hi. Morning. Sorry, I needed to unmute. Good to hear everyone's voice and glad to hear you're well. I wanted to just go back to the development efforts. I recognize it's an issue that we've discussed in the past about Cambria development in particular, where you put some capital out. I think you usually give us an update on what that balance is. Can you talk a bit about what's in there and where that where that capital stands today?

Sure, David. So thanks for the question. It's very similar to what we talked about last quarter at the 10,000-foot view. Right now, the net capital outstanding sits just north of, it's right around $580 million. So you did see a slight increase in that. One of the things I will say, similar to what I said last time, is A good portion of that are the owned assets. So the portfolio that we took down last year, about 50% of that 581 sits in the owned assets. Call it 15 or so percent is key money, a little over 10% is JV, and the remainder are MES loans. One of the things that I would say, David, is we feel really good about where the Cambria brand is. 50 hotels that are currently open, 25 that are going vertical at this point in time, another 60 to 70 or so in the pipeline over and above that. So this is one of those areas, and that's what I was talking about in my earlier comments, where $30 million is more of our consistent CapEx run rate. Everything else is really discretionary. So if we feel that there's a solid Cambria project out there that we want to deploy capital against, we can certainly do that. But this is one of those levers that we can flex up and down during this environment. It gives us the flexibility to do that. The portfolio overall has got that runway for scale. We talked always about 75 to 100. You see that just what's open and what's under construction today. So, again, we can certainly flex that up and down, and I just wanted to make sure that you understood that, that full 580.

Yep. Good to hear. And if I can follow up quickly on a number of the – companies have talked about a break-even occupancy level. In your case, I assume it would apply both at the hotel level and then, you know, I suppose corporately the better question is really, you know, where earnings neutral is, you know, based on the changes that you've made so far.

Yeah, David, the – If you had to look at it on a system-wide basis, it's probably around 30% occupancy. Now, obviously, that changes depending on an economy hotel versus a Cambria. But we look at it system-wide. Our largest brands, Comfort, Quality, Econolodge, you're really talking about an occupancy level of about 30% break-even. Now, that's inclusive of the debt service. So you also have, we have hotels that the owners have paid off the mortgage. So, again, back to my point about a tailored approach here, every owner is in a different place depending on what they paid for their land, what their mortgage is, and the like. But 30% is about break-even for that sort of mid-scale segment. It's a little bit higher as you move up, obviously, into the Cambria segment. But, you know, that's where we've really been running the last several weeks with regard to system-wide occupancy.

Perfect. Thank you very much. Be well. You too.

Our next question comes from Anthony Patwell with Barclays. Please go ahead.

Hi. Hello. Good morning. You just mentioned that you have 60 Cambria hotels in a pipeline. Are those fully financed? And how do you see this event changing the hotel financing market over the long run? Do you expect to see more equity required or cash reserve required? And how does that impact your strategy?

Thanks. Thanks, Anthony. So just to give you a breakdown, there's, there's 50 that are open. There are 25 that are going vertical. So obviously the ones that are going vertical are for finance and there's, you know, 60 plus additional in the pipeline of which, you know, a portion, um, are, are obviously financed. And so overall what we saw, you know, pre COVID, uh, pre COVID was somewhere where you saw the, the LTCs, um, reducing from college 75% down to 65% or so. And, and, Certainly, we've seen a little more hesitancy in some of the lenders lending the money in this environment. Obviously, we would have to reevaluate once we get on the tail end of this. But overall, like I said, just with the 25 that we have that are going vertical today, we're feeling very comfortable. In terms of what we think that future LTC is going to be, a little too early to tell right now, given the fact that most of those aren't financed at this point. But out of the 60, we still feel really good about those that are under construction.

Got it. We've talked about revenue intensity a lot the past couple of years. How do you keep pushing that revenue intensity up as you seek more conversions in this environment? Do you? only convert higher-end properties in any kind of chain scale, or what's the approach there?

Yeah, I think it's really looking at those segments and locations where the higher revenue opportunities are for us as a company. And I think those are still going to be there, I think, from the standpoint of, you know, continuing to push new construction comforts into markets where, there is a higher REVPAR opportunity. That's what's in our pipeline now, and a significant amount of that is under construction at Comfort, Wood Spring. I mean, there's a lot of opportunity that we still see by having our hotels in these higher revenue-intense locations, and then also the segments that they're in also will, over time, I think, improve the revenue intensity on the average across the entire portfolio because of that approach.

Great. Thank you.

As a reminder, if you would like to ask a question, please press star, then 1. At this time, there are no additional questions. I would like to turn the conference back over to Pat Pacius for any closing remarks.

Thank you, operator. Thanks again for your time this morning. These are undoubtedly challenging times, but there are opportunities going forward into the second quarter as well. We see several reasons our franchisees are better positioned than most to capture demand as the economic conditions improve. So I hope you all will stay safe and healthy, and we'll talk to you again this summer. Take care.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.