Choice Hotels International, Inc.

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

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 forms 10-Q, 10-K and other SEC filings for information about important risk factors affecting the company that you should consider. Moreover, we would like to acknowledge that there continues to be significant uncertainty as to the duration and severity of the impact of the COVID-19 pandemic on our occupancy levels and future results. 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 second quarter 2020 earnings press release, which is posted on our website at choicehotels.com under the investor relations section. This morning, Pat Patience, our President and Chief Executive Officer, and Dom Dragovic, our Chief Financial Officer, will speak to our second quarter and year-to-date operating results and financial performance. They'll be joined by Scott Oaksmith, Senior Vice President, Real Estate and Finance. Following Pat and Dom's remarks, we'll be glad to take your questions. And with that, I'll turn the call over to Pat.

Thanks, Ali, and good morning, everyone. We appreciate you taking the time to join us and hope that you and your families are well and healthy. I'd like to begin by acknowledging the truly remarkable efforts throughout the first half of the year of our franchisee small business owners and their hotel staff, as well as Choice Associates around the globe. Thank you for all you've done for guests and the communities you've touched. This quarter has been marked by unprecedented events, and the velocity of change has never been greater. As you'll hear today, we outperformed the competition in the second quarter on several fronts. The year-over-year change in our domestic system-wide REVPAR of negative 49.6% outperformed the overall industry by over 20 percentage points. and exceeded the primary chain scale segments in which we compete, as reported by STR, by 7 percentage points. And as you can see in Exhibit 7 of our press release, our domestic system-wide occupancy rates surpassed the industry by an average 570 basis points per week since the onset of the pandemic in mid-March through July 25th. We're pleased that these trends continued through July. For the past 20 weeks through July 25th, we continued to observe material REVPAR share gains against the competition. In the second quarter, all of our economy, extended stay, and select service brands achieved material REVPAR index gains versus their local competitors. with the Comfort Family, Ascend Hotel Collection, and Extended Stay Portfolio, each experiencing share gains of over 10 percentage points. Domestic system-wide daily occupancy levels surpassed 60 percent last Saturday, and over half of our domestic hotels experienced occupancy levels north of 50 percent during the last week of July. At the same time, our development results provide even further cause for optimism. In the first half of the year, we awarded over 150 new domestic franchise agreements. Over 80% of the agreements were signed since the middle of March. And two-thirds of the agreements sold in the first half of the year were for conversion hotels, which are expected to open more quickly than our new construction projects. In addition, we maintained our development momentum with 33 new agreements signed in the month of July alone. This morning, I'd like to highlight three areas. First, the factors that are driving our performance against competitors and position us well for the second half of the year. Second, the close and unique partnership we have with our franchisees. And finally, our thoughts on the road ahead. There are several factors contributing to our outperformance of the industry averages in the second quarter. First is our strength in leisure travel, which has climbed in recent months, and currently represents over 80% of consumed room nights system-wide. In fact, the proportion of arrivals from our leisure guests increased by more than a third in June as compared to the levels seen in late March. We're proud of our reputation as the hotel company families turn to for vacations and road trips. Our ability to appeal to these guests has proven to be a competitive advantage since the onset of the pandemic, as leisure travel continues to lead the recovery. This summer, the more than 2,000 domestic hotels in our system near beach locations and national parks offered attractive destinations for travelers looking to practice outdoor social distancing. Contributing to our ability to appeal to leisure travelers is our geographic footprint. Our hotels are located in the right markets to capture growing demand from travelers who increasingly are choosing to drive to their destinations instead of flying. We're well positioned given that we have more than 4,000 hotels across the country located within one mile of an interstate exit. In June, one-fourth of our revenue came from customers who traveled less than 25 miles to a hotel, a sign that more guests just want to get out of the house while staying closer to home. We expect that our strong presence in drive-to locations will lead to continued outsized performance as gas prices remain low and travelers feel safest in their own cars. This provided the basis for our new multimedia ad campaign On the Road Again, the first to launch from a major hotel company since the pandemic began. Throughout the second quarter, we observed significant monthly increases in our proprietary contribution, which we believe was supported by the campaign. More specifically, from May to June, our website contribution increased by 370 basis points and our loyalty contribution increased by 460 basis points. While our hotels attract a higher proportion of leisure travelers and are not reliant on group business from meetings and conventions, we've seen both a gain in market share and a steady week-over-week increase in the volume of business traveler room nights since a low in early April. This is thanks to the profile of our core business travelers who've been on the road these past months, including first responders, medical and other essential workers, government, trucking, logistics, and construction workers. We're also capturing a larger share of consumer demand, which is the second factor contributing to our outperformance in the second quarter. Not only are we gaining new customers who are attracted by our well-known brands, and the ability to drive to our hotels. But the average number of stays per guest has also increased during the second quarter relative to 2019. We're also benefiting from our key customers. Choice Privileges Diamond Elite members spent more at our hotels in July as compared to July of last year. Our award-winning loyalty program is now 46 million members strong and enrollments continue to grow. Our long-term strategy is not just to grow brands in the right markets, but also to grow the right brands in the right segments. The focus of our strategic investments has been concentrated on the more revenue-intense mid-scale, extended stay, and upscale segments, and it's paying off. In the second quarter, we achieved a 2.3% aggregate increase in units and a 3.7% increase in rooms across these three target segments, despite the challenging environment. I'd like to briefly highlight the brand's driving success in each. First is mid-scale, the segment where our company was founded and where we are a leader. One in four mid-scale hotels in the US is a Choice Hotels brand. Our upper mid-scale and mid-scale brands represent two-thirds of our total domestic portfolio. Comfort's $2.5 billion system-wide renovation has positioned our flagship brand extremely well to weather this storm, attracting both travelers and hotel developers looking for a trusted brand to deliver proven value. This is already bearing out. In addition to the REVPAR index gains against their local competitors of 13 percentage points in the second quarter, the Comfort brand family experienced a REVPAR change that was over nine percentage points higher than the upper mid-scale change scale. Comfort hotels that completed their renovations by the end of 2019 experienced even stronger REVPAR and saw a significant advantage in REVPAR index gains of nearly 16 percentage points versus their local competitors. Comfort now represents over a quarter of our total domestic pipeline, which will fuel revenue intense growth for years to come. The next segment in which we targeted our strategic investments is extended stay, where our well-positioned brands afforded us a competitive advantage with industry-leading performance. Between the onset of the pandemic in mid-March through the end of the second quarter, our portfolio of 414 extended stay hotels grew 8% year over year and achieved average occupancy rates of 66% nearly double the industry average. Leading the way was our WoodSpring Suites brand with an average occupancy rate of 69% in the second quarter, beating the overall industry by nearly 36 percentage points. WoodSpring Suites' occupancy levels have remained above 70% since mid-May, and in the last week of July, returned to occupancy rates consistent with 2019 levels. Savvy developers looking to drive returns in practically any economic environment know that demand for extended stay lodging outpaces industry supply by 2 to 1, which contributed to the 8% year-over-year increase in our extended stay pipeline in the second quarter. We're very optimistic about the growth potential of our extended stay portfolio including our dual-brand sleep mainstay concept and our new EverHome Suites brand. As for the upscale segment, our portfolio achieved impressive year-over-year growth in the second quarter, including a 37% increase in room count, outperformance in RevPar change of over 7 percentage points versus the upscale segment, and RevPar share gains against local competitors. Contributing to our success is our proven conversion engine, which allows us to drive unit growth through down cycles. For example, the Ascend Hotel Collection was launched in 2008 during the Great Recession and is now the industry's largest soft brand with over 370 hotels around the globe. We see significant opportunity for the Ascend Hotel Collection as we recover from the crisis due to the brand's low capital requirements for entry and strong value proposition for owners driven by reduced customer acquisition costs. Our upscale Cambria Hotels brand benefits from strong leisure travel demand thanks to being affiliated with our system. The brand's developer interest remains high, and in fact, The number of contracts we awarded in the first half of the year is in line with last year's results, proof that the brand's value proposition is resonating. Ultimately, what sets Choice apart is not that we're the only lodging company with a primarily franchise-only business model. It's who our owners are. Ninety percent of our hotels qualify as small businesses. I meet regularly with these entrepreneurs, many of whom have overcome a lot to build a legacy for their families. For them, their Choice brand hotel is more than an investment. It's their livelihood. A soft year can make or break their ability to afford their child's college tuition. Therefore, their wholehearted commitment to the success of their business is unparalleled and differentiates Choice Hotel's partnership with our franchisees. Our typical franchisee is an owner-operator with one hotel financed with low overall debt levels and a flexible operating model that allows owners to scale back staffing and service levels to reduce expenses, critical elements during down cycles. Even in April, amid the worst week of the crisis in the industry, over 90% of our domestic hotels remained open, demonstrating the tenacity and resilience of our ownership base. Today, we're proud to say nearly 100% of our domestic hotels are open. In addition, we continue to see increased openings in our international portfolio, where 96% of our hotels are open and operating as of the end of July. We're proud to have earned the trust of so many small business owners by demonstrating consistently over more than eight decades in business that we treat our franchisees investment just as seriously as we do our own capital, and more recently, by providing the necessary support to help them weather this crisis. For example, we redeployed associates from across the company to help franchisee facing teams contact owners from every hotel in the system, resulting in nearly 25,000 individual consultations. We've also remained active in our advocacy efforts at the federal level to secure relief for franchise businesses as the economy reopens. We hope that the Congress will be able to vote soon on an agreement on critical economic relief and stimulus. I've met recently with the leaders in the administration and the Congress and just yesterday with Speaker Nancy Pelosi to ensure that relief for small business is front and center in their discussions. We continue to leverage our award-winning Choice University online learning platform to educate our owners on the various federal programs as they come online and share best practices around reducing their operating expenses. A few weeks ago, Choice Hotels was ranked the number one organization for excellence in learning development by the Learning 100 Awards. We're honored to have been the only lodging company on the list and surpassed companies like FedEx and the Khan Academy. In addition to a targeted and strategic fee deferral program, we sought to help further improve our owners' profitability by optimizing the operating efficiency of their hotels. While this has been one of our core focuses for years, the pandemic has further accelerated some of our efforts. For example, we've rolled out offerings like grab-and-go breakfast, housekeeping on demand, and contactless check-in that not only keep pace with rapidly changing guest expectations and enhance the safety of travelers and on-property associates, but also lower franchisees' total cost of ownership. Two key metrics tell us that we're living up to our promise as a franchisor to help small business owners be in business for themselves, but not by themselves. First, over half of the new franchise contracts awarded in the second quarter were with existing or returning owners, which means we're providing an attractive value proposition to those who know us well and those new to Choice Hotels. And second, We maintain an industry-leading voluntary franchisee retention rate of 98%, of which we are extremely proud. I'd now like to share a few words about our people and our corporate culture. At Choice Hotels, we are committed to our values, reflected in our brand promise of making every associate, partner, and guest feel welcome, wanted, and respected. Part of how we deliver on this commitment is by weaving deliberate diversity and inclusion initiatives throughout all levels of the enterprise. For over 15 years, our board of directors has had a diversity committee specifically aimed at advancing a culture that values diversity and inclusion. We also have a long history of enhancing the diversity of our ownership base by supporting minority and veteran entrepreneurs and providing best-in-class resources that hotel owners need to drive these values throughout their organizations. As the national conversation about race has unfolded, we've initiated a series of actions that brought us together as a community to have courageous conversations, listen, learn, and support one another. These efforts will be outlined in our updated ESG report this coming fall. I'm proud to say that our culture of diversity, equity, and inclusion is being recognized. We recently have been named one of the best employers for diversity by Forbes, the best place to work for LGBTQ equality by the Human Rights Campaign for the eighth consecutive year, and one of the best places to work for people with disabilities, earning a perfect score on the Disability Equality Index. I'm also deeply honored to have been named one of the best CEOs for women employees by Comparably. Before handing it off to Dom, I'd like to share a few words about the road ahead, both for our company and the industry. As for the economic and industry outlook, we are planning for the recovery to continue to be sporadic and regional. Even if an increased wave of the pandemic were to return in the fall, There are several factors we believe would mitigate the impact on our business and that we are closely monitoring. First is the duration and scope of any travel restrictions. We seem to be getting geographically narrower and localized as the pandemic wears on. Importantly, 96% of our portfolio is comprised of select service hotels that do not have bars or restaurants. which have been a particular focus of restrictions across the country. The degree to which the virus spreads will depend in part on our collective adoption of best practices around hand hygiene, social distancing, and personal protective equipment. This brings me to the second factor we're monitoring, consumer behavior. As for consumers having the means to travel, We are optimistic that additional government assistance and stimulus funding currently under debate will, once passed, help get Americans back on the road again. Our commitment to clean initiative is aimed at boosting consumer confidence to travel by building on our existing dedication to cleanliness. As part of commitment to clean, we made the decision to require guests to wear face coverings in hotel common areas as an important and simple step everyone can take to help protect the safety of guests and franchise hotel employees by slowing the transmission of COVID-19. As a member of the American Hotel and Lodging Association's Safe Stay Advisory Council, Choice Hotels stands united with the industry in adopting the guidelines outlined in the Safe Stay Guest Checklist, including the required use of face coverings in common areas. In closing, the strengths of our company outlined today are all underpinned by our disciplined management team, many of whom have experience leading the company through previous down cycles, something I've been thinking a lot about as I mark my 15th year at Choice. Our long-term view, proven brands, and compelling franchisee value proposition will help us not only emerge from the crisis in a position of strength, But we expect to continue to capture an outside share of demand while building on our partnership with our small business hotel owners. With that, I'll hand it over to our Chief Financial Officer, Dom.