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?