Choice Hotels International, Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Choice Hotels International's fourth quarter and full year 2020 earnings call. At this time, all lines are in a listen-only mode. I'd like to turn the conference call over to Ali Summers, Investor Relations Director for Choice Hotels.

Good morning, and thank you for joining us today. Before we begin, we'd like to remind you that during this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results. Actual results may differ materially from those indicated in forward-looking statements, and you should consult the company's forms 10Q, 10K, 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 impact of the COVID-19 pandemic on our future performance. These forward-looking statements speak as of today's date, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our fourth quarter and full year 2020 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section. This morning, Pat Pacius, our President and Chief Executive Officer, and Don Dragozic, our Chief Financial Officer, will speak to our fourth quarter and full year operating results and financial performance. They will 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, Allie, and good morning, everyone. We appreciate your taking the time to join us and hope you are all well. This week we lost a leader who had a major impact on our industry and on the lives of many who call the travel industry their home. On behalf of all of us at Choice Hotels, I'd like to express our deepest condolences to Arne Sorensen's family and to the many people across our industry who were inspired by his personal and professional leadership. We will all miss him. As we look back, 2020 was a year unlike any other, a year that challenged leaders and companies around the globe, and Choice Hotels was no exception. But it was the collective response, dedication, and resilience of our franchise owners, their hotel staff, and Choice associates that made all the difference for our company and franchise system. I would like to thank them again for everything they've done for our guests and the communities they've impacted. During a year of significant challenges brought upon the industry by the pandemic, Choice Hotels achieved a number of key milestones that demonstrate our long-term strategy of growing our presence in more revenue-intense segments and locations is working. 2020 was the year that our flagship comfort brand returned to unit growth after its successful transformation. increasing its domestic system size by 2%. As we celebrate Comfort's 40th anniversary this year, the success of the brand is proof positive that we invest for the long term. And as you can see by both unit growth and impressive rev part performance, those investments are paying off and position the brand for growth into the future. 2020 was also the year our extended stay segment rapidly expanded by 44 units to nearly 450 domestic hotels. And the domestic pipeline for that segment alone reached over 315 hotels. The segment now represents nearly 8% of our total domestic portfolio and strong developer interest reaffirms that our strategic commitment and continued investments in this highly cycle resilient segment are driving a competitive advantage. And finally, 2020 was a year of continued growth for our upscale portfolio, highlighted by an 8% growth of Cambria Hotels. The brand now has a pipeline of nearly 80 hotels and is expected to accelerate its unit growth in 2021. Consumer confidence in our upscale products drove the brand's outperformance versus their local competitors, and is a proof point to current and prospective owners of Choice Hotels' value proposition in the upscale segment. The results we achieved confirm our strategic focus to grow in these segments, which will further fuel the long-term revenue intensity of our system. I'm also pleased to report that we have continued to drive RevPAR results that significantly outperformed the industry in the fourth quarter and 2020 as a whole. Our domestic system-wide year-over-year RevPAR change surpassed the industry by nearly 17 percentage points for the full year, declining 30.7% from 2019. Since the onset of the pandemic in mid-March, our performance has achieved sequential quarter-over-quarter improvement with our fourth quarter domestic system-wide RevPAR declining 25.1% from the same quarter of 2019. Our results continue to outpace the overall industry and our chain scale segments. In fact, our outperformance expanded in the fourth quarter. In 2020, Choice Hotels grew RevPar faster than our local competitors, increasing RevPar index by over five percentage points through notable lifts in weekday and weekend REVPAR index. Our REVPAR index growth strengthened in the fourth quarter of 2020 and continued to improve through year end. Throughout 2020, we also continued to grow our effective royalty rate, a reflection of the improving value proposition we deliver to our franchise owners. Our success is highlighted by Choice Hotels' key differentiators, including the strength of our proven and well-distributed brands, our customer profile, and the continued resilience of leisure travel demand, our powerful reservations delivery system and loyalty program, and our franchise-focused business model. These four attributes, along with our relative outperformance versus the industry, reaffirmed our confidence in our strategies. Therefore, in the fourth quarter, we decided to accelerate certain strategic investments in our product portfolio and value proposition capabilities to position the company for continued success in the future. Consumer and developer demand for our products encouraged us to invest in new prototype development and brand initiatives in our key strategic segments. We also advanced our pricing optimization and merchandising capabilities to further enable our owners to reach their target customers and effectively drive top line revenue to their hotels. Turning to 2021, we expect our momentum to continue into the first quarter, allowing Choice Hotels to further outperform the industry in the current environment. We recognize that a high degree of uncertainty remains and our company, like the hotel industry overall, continues to be significantly affected by the pandemic. Nevertheless, we are observing positive signs that give us confidence for 2021 and beyond. First, given the vaccine rollout, we believe consumers are beginning to feel more optimistic about future travel prospects. In fact, we've observed that our customers are beginning to plan their travel further in advance. as noted by improvements in our 31-day-plus bookings since November. Furthermore, we expect the trend of Americans vacationing domestically and taking road trips will continue. With 95% of our domestic hotels located outside of dense urban centers and over 80% of our portfolio in the U.S., our hotels are uniquely positioned to welcome travelers as they hit the open road. stimulus checks from the December federal relief package, the prospect of additional government aid this year, and high household savings point to a continued recovery for our small business owners and middle-class consumers, our core customers. Finally, and as discussed on our last call, we believe that long-term consumer trends, such as remote work and virtual learning, will likely continue to provide Americans flexibility in where and when they travel for leisure. We feel confident that our core strengths, combined with the tactics we deployed in response to the pandemic, have positioned us well to continue to capture and increase our share of travel demand over the long term. Our long-term strategy of growing the right brands in the right segments in the right locations while enhancing our distribution capabilities, continues to pay off. In the fourth quarter, we generated significant quarter over quarter growth in our proprietary revenue contribution mix, which drove our full year results to match our prior year's strong performance. More specifically, our website contribution increased by 150 basis points, ending the year with the three strongest months in 2020. while our loyalty program increased its contribution by 280 basis points quarter over quarter. In addition, we continue to benefit from our most loyal customers, Choice Privileges Diamond Elite members, who contributed an even higher percentage of overall revenue for full year 2020 as compared to the prior year. These results have helped drive REVPAR index share gains of over 600 basis points in the fourth quarter versus our local competitors, up significantly across all location types, as reported by STR. For the past 46 consecutive weeks through mid-February, we've observed significant REVPAR share gains against the competition, giving us further optimism about our future revenue trajectories. I'll now provide a brief update on our key brand segments. Our mid-scale brands represent two-thirds of our domestic portfolio, nearly half of the franchise agreements executed last year, and over half of the total domestic pipeline. All of our select service mid-scale brands achieve year-over-year REVPAR index gains, driven by occupancy and average daily rate index gains, versus their local competitors through the fourth quarter and full year. We're especially pleased with the performance of our comfort portfolio, where our efforts to transform the brand have led to REVPAR index gains versus its local competitors of nearly nine percentage points and a REVPAR change that was over 10 percentage points more favorable than the upper mid-scale change scale in the fourth quarter. At the same time, We continue to add new construction hotels to the comfort pipeline and attract high-quality franchise conversion agreements to the brand that will fuel revenue-intense growth in the near term. And finally, Clarion Point, a relatively new conversion brand extension to our Clarion portfolio, ended the year by opening the doors of its 25th hotel in the U.S., a four-fold increase of its portfolio since the prior year. The brand now has over 50 domestic hotels open or in the pipeline. Moving on to our extended stay segment, where we nearly quadrupled the size of the portfolio during the last five years. Once again, our purpose-built brands tailored for long-term guests outperformed the competition in this cycle-resilient segment. Our WoodSpring Suites brand achieved an average occupancy rate of 72% for full year 2020 and experienced year-over-year RevPar growth of 2% in the month of December, a truly remarkable achievement given the current environment. The brand's pipeline continues to expand and reached 150 domestic hotels at the end of 2020. At the same time, our suburban extended stay brand experienced year-over-year occupancy gains in the fourth quarter, and an over 40% increase in franchise agreements activity for the full year. Our mainstay suites, mid-scale extended stay brand captured more than 20 percentage points in rev part index gains versus its local competitors, both in the fourth quarter and full year. And developer interest is growing. Most recently we signed and onboarded the largest multi-unit transaction in mainstays history. 15 units, which significantly increased the brand's presence in the segment. Last year alone, the brand's portfolio expanded to 90 domestic hotels open and over 20% increase year over year, and its pipeline has swelled to more than 140 domestic properties. For full year 2020, Choice Hotels awarded nearly 110 extended stay franchise agreements, validating our strategic focus on the segment for both new construction and conversion opportunities. Given these results, we remain optimistic about the growth potential of our extended stay portfolio. I'd now like to turn to our upscale portfolio whose choicehotels.com contribution increased by nearly 500 basis points year over year in the fourth quarter and marked the strongest quarterly revenue share in 2020. Our upscale Cambria Hotels brand continues its ongoing momentum, growing its portfolio size by 8% and its pipeline to nearly 80 domestic hotels, 19 of which were already under construction at year end. Developer interest in the brand remains high, with 16 franchise agreements executed for the full year, including one-third of those awarded in the fourth quarter. Thanks to being affiliated with our system, the Cambria brand continued to benefit from leisure travel demand, achieving RevPar share gains versus local competitors of nearly 22 percentage points in the fourth quarter. The Ascend Hotel Collection continues to lead the industry as the first and largest soft brand. With nearly 300 hotels open around the globe, Ascend Hotels outperformed the upscale segment in year-over-year fourth quarter RevPar change by over 20 percentage points. The brand also achieved RevPar index gains of nearly 13 percentage points against its local competitors for the full year, further enhancing the brand's attractiveness to developers looking for a smart conversion opportunity. Choice Hotels brands remain in demand despite the challenging environment, aided by our strong value proposition and continued outperformance. Developers continue to choose our brands as they seek to improve their operations and boost the long-term value of their hotels. For full year 2020, we awarded 427 new domestic franchise agreements, of which over 70% were for conversion hotels. Demand continued to accelerate throughout the year with over one quarter of the total agreements executed in the month of December. In the fourth quarter alone, we executed 195 domestic agreements of which over 70% were for conversions. Additionally, our developers remain optimistic about the long-term fundamentals of the lodging industry. In fact, nearly 30% of total domestic franchise agreements we awarded in 2020 were for new construction contracts. Our emerging markets development team, which is dedicated to driving diverse ownership of choice franchised hotels among underrepresented minority owners, awarded two dozen franchise contracts in 2020, including the largest minority owned multi-unit franchise agreement in the program's history. We also recently announced the creation of the Choice Hotels Owners African American Alliance, further underscoring our commitment to strengthen representation, support, and advocacy for Black and African American hoteliers. This builds on our long commitment to diversity in the hospitality industry generally, including, among others, the strong representation of South Asian and Indian American hoteliers in our system. These results and critical initiatives are major drivers for our optimism in the years ahead. We're also committed to enhancing our value proposition by growing our platform business. We recently announced the further expansion of our attractive upscale platform with the addition of 22 Penn National Gaming Casino Resort properties, representing nearly 7,000 rooms joining our Ascend Hotel collections. This strategic agreement will offer more than 47 million Choice Privileges members the opportunity to earn and redeem points at these Penn properties by booking their stay directly on choicehotels.com. Our focus remains centered on franchisee profitability through reducing the cost of ownership at the hotel level and driving top-line outperformance versus competitors. Our franchisees are at the core of everything we do, and we are committed to helping them along the road to economic recovery. Throughout 2020, we conducted 49,000 individual consultations with hotel owners and operators that helped our franchisees remain open and continue serving guests. We've also rolled out offerings like grab-and-go breakfast, housekeeping on demand, and contactless check-in that further lowered franchisees' total cost of ownership while ensuring appropriate safety precautions for our owners, hotel staff, and guests. We are particularly pleased that legislation we advocated for became law in December, providing additional relief and stimulus to small businesses like our franchisees. Specifically, we supported the establishment of a second draw loan program for existing Paycheck Protection Program borrowers that were hit hard by the pandemic. the extension and improvement of the program itself, and increased flexibility for lenders. We will continue to advocate with the new Congress and administration for additional relief measures aimed at assisting small businesses and providing targeted help for the travel industry. In closing, I'm confident that these trying times have made us even more resilient and agile as a company. Looking beyond the crisis, I'm convinced we will emerge even stronger over the long term. Our long-term view, resilient business model, proven brands, and strong balance sheet will help us to further capitalize on growth opportunities in 2021 and beyond. With that, I'll hand it over to our CFO, Dom.

Thanks, Pat, and hello, everyone. I hope that you and your families are all well and healthy. Today, I'd like to provide additional color around our fourth quarter and full year results and share updates regarding our balance sheet, liquidity, and approach to capital allocation. I'll close with our thoughts on the outlook for the road ahead. Taking a closer look at our results, for full year 2020, total revenues excluding marketing and reservation system fees were $371.5 million. $88 million of which was generated in the fourth quarter, and adjusted EBITDA totaled $241.1 million, $54.7 million of which was generated in the fourth quarter. And our adjusted EBITDA margin for full year 2020 was 65%. As a result, our adjusted earnings per share were $2.22 and 51 cents for full year 2020 and the fourth quarter, respectively. Let me now dive into our three key revenue levers, beginning with RevPAR. Our domestic system-wide RevPAR outperformed the overall industry by nearly 17 percentage points for the full year, declining 30.7% from the prior year. Our fourth quarter 2020 domestic system-wide RevPAR surpassed the industry by nearly 26 percentage points, declined 25.1% from the same period of the prior year and improved by 370 basis points from the third quarter. In addition, our results exceeded the primary chain scale segments in which we compete, as reported by STR, by over 5 percentage points for full year 2020 and nearly 8 percentage points for the fourth quarter. We've long focused our brand strategy on driving growth across the higher value and more revenue-intense upscale, extended stay, and mid-scale segments, and the investments we've made are paying off. In the fourth quarter, these strategic segments helped us achieve material year-over-year RevPar outperformance against our respective industry chain scales and drove gains versus our local competitors. Specifically, our upscale portfolio increased relative to its local competitive set by over 12 percentage points. Our extended stay portfolio outperformed the industry's rev par change by an impressive 49 percentage points and grew versus its local competitive sets by 14 percentage points. And finally, the rev par change for our mid-scale and upper mid-scale portfolio exceeded these segments by 10 percentage points. For full year 2020, all of our select service brands achieved significant RevPAR index gains versus their local competitors, with each of our upscale and extended stay brands experiencing share gains of more than 10 percentage points. In fact, we were able to increase our overall RevPAR index against local competitors by over 600 basis points in the fourth quarter through notable lifts in both continued occupancy gains and our franchisees' ability to maintain rate integrity. More specifically, our average daily rate index increased 2.4 percentage points thanks to our experienced revenue managers who have been counseling our franchisees on the best use of tools to maximize their pricing strategies and providing sophisticated market intelligence and strategic channel management. We expect that our recent investments in these capabilities will further enhance revenue management for our franchisees. Despite the unprecedented circumstances, we experienced positive unit and room growth year over year. Across our more revenue-intense brands in the upscale, extended stay, and mid-scale segments, we observed stronger unit growth, increasing the number of hotels by 1.8% year over year. we expect our unit growth rate of these key segments to accelerate beyond 2020's growth rate. We're especially pleased to report that following the completion of its brand transformation, the Comfort brand family returned to growth in 2020, increasing the number of domestic units by 2% year over year. The brand reached over 260 hotels in its domestic pipeline, one quarter of which are hotels awaiting conversions. which we believe will fuel the brand's growth in the near term. Demand for our conversion brands has only increased aided by our strong value proposition and recent outperformance. In fact, the number of our conversion agreements executed and opened in 2020 was more favorable than we previously projected when accounting for the impact of the pandemic. And additionally, we awarded a higher number of conversion agreements in the month of December than previously expected. These trends give us further optimism for continued growth in 2021 and beyond. Our royalty rate remains a significant source of our revenue growth, which is driven by the attractive value proposition we provide to our franchisees, their continued desire to be affiliated with our proven brands, and our pipelines. The company's domestic effective royalty rate increased seven basis points year over year to 4.98% in the fourth quarter and grew eight basis points for full year 2020 compared to the prior year. We expect to maintain the historical growth trajectory of this lever in 2021 as owners seek Choice Hotels' proven capabilities of delivering strong top line revenues to their hotels while helping them maximize return on investment. I'd now like to turn to our balance sheet and our capital allocation strategy. Throughout 2020, we transformed our cost structure, exercised prudent discipline around capital allocation, and effectively allocated resources to drive top line outperformance, all of which allowed us to improve our cash position and further bolster our liquidity. We successfully navigated the impact of the pandemic without having to renegotiate debt covenants. We refinanced a portion of debt to extend our debt maturity profile and capitalized on favorable credit markets to significantly reduce the effective cost of our borrowings. In fact, we reduced our net debt by approximately $50 million during the fourth quarter and are pleased to report cash flow from operations of over $115 million for 2020, over $45 million of which was generated in the fourth quarter alone, despite the historically lower seasonal demand environment. Our cash and liquidity profile continued to be strong. At the end of last year, the company had approximately $835 million in cash and available borrowing capacity through its revolving credit facility. Our strong results relative to the industry and the chain scales in which we compete since the onset of the pandemic, as well as our adjusted SG&A cost savings of 21% realized throughout 2020, gave us confidence to make certain investments in the fourth quarter to position the company for success in 2021 and beyond. We will maintain our disciplined approach to managing operating expenses while investing for the long term in capitalizing on opportunities as travel demand recovers. Our capital allocation philosophy remains unchanged, meaning we will continue to be disciplined stewards of capital and take steps that we believe maximize value for our shareholders. Voice's primary objective has always been to increase organic growth by strategically investing back into the business. In particular, our capacity and strong cash flows will allow us to strategically invest in capabilities to further strengthen our presence in more revenue-intense segments, enhance our franchisee value proposition, and drive top-line revenue through value-added programs and services we offer to our franchisees, guests, and other travel partners. We put a premium on balance sheet flexibility, and we expect to continue to utilize our strong leverage position to invest in these growth opportunities. Based on our demonstrated track record of success in our organic growth, we believe these internal investments will drive attractive returns for years to come. We will continue to monitor the environment and evaluate capital returns to shareholders in the context of other investment opportunities, our leverage levels, market conditions, and our overall capital allocation strategy. Before opening up for questions, I'd like to offer some thoughts on what lies ahead. The ultimate and precise impact of the pandemic on our business for 2021 and beyond remains largely unknown, as is the exact trajectory of our industry's recovery. While we are not issuing formal guidance today, we currently expect to see a sequential quarter-over-quarter improvement in rev par change in the first quarter 2021 versus both 2020 and 2019. Our view is based on the following. First, we are observing continued resilience of leisure demand, especially in drive-to locations, and the company continues to experience stronger year-over-year rev part change performance versus the industry and the chain scales in which we compete. Second, despite entering a historically lower demand season, we are pleased that our first quarter domestic rev part change has continued the pattern of sequential quarterly improvement through mid-February. In fact, our year-to-date 2021 RevPAR has declined by approximately 18% from the same period of 2020. Finally, to date, we have seen little correlation between the rising COVID-19 cases in the fourth quarter and RevPAR change trajectory for our company. This, along with optimism and consumer sentiment reflected by our 31-day-plus booking trends, even before vaccines are widely distributed, signals that consumers' desire to travel is climbing. We will continue to evaluate the impact of COVID-19 across the business and will provide further updates in May during our next earnings call. In closing, we remain optimistic that Choice Hotels is well positioned to succeed in 2021 and beyond and are confident in how we are managing the company for the long term. We continue to benefit from our resilient, primarily asset-light franchise-focused business model, which has historically delivered stable returns throughout economic cycles and provided a degree of cushion for market risks. While we are not immune to the pressures faced by the industry, we believe that our long-term view, disciplined capital allocation strategy, and strong balance sheet will allow us to continue to capitalize on opportunities during the recovery and drive outsized returns for years to come. At this time, Pat and I would be happy to answer any questions. Operator?

Ladies and gentlemen, at this time we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speaker phone, we do ask that you please pick up the handset before pressing the numbers to ensure the best sound quality. Once again, that is star and then one to ask a question. And our first question today comes from Michael Bellisario from Baird. Please go ahead with your question.

Hello, everyone.

I'm Michael. Hey, Michael.

First question from me, can you maybe expand on the accelerated investments that you made during the fourth quarter? What were those exactly? How much you spent and then maybe how much more spend is left there?

Sure. So let me just put it into a couple of categories and put it into some context as well. You know, I think as we look back on 2020, our first half of the year was really spent kind of readjusting our cost structure for a lower demand environment. A lot of those decisions we made, you know, really by the July timeframe. As we got further into the year and got closer to the fourth quarter, we began to see sort of how the recovery was likely to take shape. And we also began to get a lot more confident around the resiliency of our business model, the performance of our brands, particularly what we were seeing on new conversions. And so we decided to accelerate a number of things. I would put them into maybe four categories. The first is new brand prototypes, so again, reinvesting back into the future of our product portfolio. Second is around our pricing and merchandising capabilities, so our revenue optimization tools, which we'll be discussing here probably in the next month or so during our rollout of that capability. Third would be continued investments in our key segments that have outsized growth in front of them, I would point especially to the extended stay segment and the upscale segment. And then fourth is, you know, we onboarded a new travel partner in Penn National, which is an exciting opportunity for us. So really investing in all four of those key areas is where those investments came in the fourth quarter.

Yeah, Michael, and when you quantify those impacts, I mean, the reality is when you take a look at quarter four adjusted SG&A costs, We were down about 17% for full year. We were down about 21% versus a prior guide of around 25%. So that's really the puts and takes for full year 2020 as well as Q4. I think when you look ahead, I think the follow-up question is going to be, you know, what do we expect in terms of run rate savings from an SG&A perspective? And the reality is we said, We were looking at about 15% or so. Last quarter, we talked about that we would evaluate that in the context of the demand environment. So I would say somewhere in that 10% to 15% range is certainly still within reach, and we would be able to flex up or flex back based on where we are on the REVPAR environment. So the reality is we still will maintain that margin that you're seeing this year, and we expect to see that margin continue to grow for years to come.

Got it. That's very helpful. And then just one more – In the new agreements that you're signing, what are franchisees asking for or what terms are you being more flexible on as you're signing up new deals today?

I think it depends on what brand category you're talking about. For our brands that are in significant demand, Comfort, Woodspring, some of our other extended stay products, We're attracting developers who are interested in joining those clubs, if you will. So there's not a lot of change with regard to any discounting or the like. I think in the more what we call our foundation brand category, quality, economized roadway, those are brands that have continued to also have continued sort of pricing power. with regard to effective royalty rate. And I think all of it's reflected in that seven-point increase in the effective royalty rate overall. So we're not having to do a lot of concessions, if you will, on a year-over-year basis with regard to what's in the agreements to win new contracts.

Got it.

Thank you. Thank you.

Our next question comes from David Katz from Jefferies.

Please go ahead with your question.

Hi, good morning, everyone. Good to hear everyone's voices. I wanted to talk about the overall franchisee landscape and just get your thoughts on what their overall financial health is. I know that it's a large population, but what changes you may have structurally made to help them how much of that endures and just an update around all of that would be really helpful.

Sure. So I think if you, the long-term trend that we've been focused on for our franchisees is lowering their total cost of ownership. This is something we've been engaged in for a long period of time prior to the pandemic. We accelerated a number of things that helped them reduce the total cost of running their hotels. The cost of breakfast, we have a much more flexible grab and grow breakfast option. Housekeeping on demand has created an opportunity for guests to opt out of daily housekeeping. Contactless check-in is allowing them to lower the labor they have at the front desk. So there's a variety of programs that we're doing that apply to all of the brands. Within each brand category, David, there's also things that we have underway to continue to drive down the total cost of ownership for those owners. Second, I would say the relief that was available, we believe about 85% of our portfolio took a PPP or EIDL loan back in the first draw in the second and third quarter. We think with the second draw that's been released in the late December legislation, that that's likely to be somewhere around 40% to 50% at this point have either indicated they're going to apply So they're getting the needed relief that they need to bridge to where we need to get to on a recovery perspective. And then finally, I would point to the fact that our brands are outperforming. If we look at how many of our hotels are operating at sort of that 30% occupancy level, it's very similar to a year ago. So it's not a situation, and that means that they're used to operating in those low-demand environments. I would say, by and large, our franchisee health is in a very positive place relative to what's going on around them. And certainly with the optimism around vaccine rollout, the optimism around what we're seeing with 30-day-plus bookings and the consumer sentiment that we would expect to see once the pandemic begins to get behind us, our franchisees see that as well. And so there is, for them, a light at the end of the tunnel where six months ago that wasn't the case. So I think there's just a sense of optimism around that as well. But as we said in the call, we're not out of the woods yet. There are a lot of owners who are still planning through these difficult times. And so it's something we're very focused on. And that's, again, why in that long-term focus of driving down the cost of ownership for our brands, That's something that's going to continue to be a strategic focus of ours in the post-pandemic era as well.

And the only thing I would add is it's really showing up in the metrics as well. When you take a look at our collections rates in particular, feeling very strong, feeling very optimistic about where that's trending. We have about 96% of our franchisees who are actually paying today. And so that number continues to increase month over month. 100% of our system is open and operating today. And so everything that Pat just mentioned and some of the flexibility that we were able to provide to our franchisees through PIPs and other items really showing up in the results themselves.

Perfect. Thank you very much.

Thank you. Our next question comes from Danny Assad from Bank of America. Please go ahead with your question.

Hi. Good morning, everybody. Morning, Danny. So your signings in Q4, how does that brand mix look like relative to your existing base? I'm just trying to get a sense for, you know, like the incremental developer interest in your brands.

Well, it's skewed more, um, conversion, obviously. So it, uh, it, it, it, it trends more towards our, our, our more higher, um, uh, conversion brand. So, you know, quality Econolodge roadway, um, comfort in as well. We do, um, you know, what we, we call more higher end conversions for that brand. Um, but as we also stated, you know, um, if you look at the performance of the extended stay segment, the WoodSpring brand as well as Cambria, which are all both new construction brands. Those did well as well on a relative basis. So I wouldn't – to me, we do look at that to see if there's any trends there. But we feel really good about both the new construction contracts that we did as well as the conversion contracts we did across the portfolio. Yep.

And just add a little bit of a, you know, just in terms of the percentage breakouts, you know, Pat mentioned extended stay and that was really a shining star for us, you know, more than 25% of the new signings for the year actually came in the form of that extended stay product. We talked about the resurgence of comfort following the transformation. Frankly, we feel very good about where our comfort contracts came out as well. Obviously, in those focused brands, mid-scale, extended stay, and upscale is where we're feeling the strongest in terms of those new signings.

Great. And then just for my follow-up, can you maybe just help us understand or just get a little bit smarter about what drives brand solutions as a business segment? I guess, is it possible that Brand Solutions, you know, looking ahead is going to just underperform RevPar if, you know, franchisees are pulling back or limiting services and offerings?

So I think you're referring to our procurement services business?

Procurement services, correct.

Yeah. Sure. Yeah, that is a volume-driven business. So as the hotels fill up, owners need, you know, sheets and towels and soaps and shampoos and the like. So it's significant business. piece of that is volume driven. If there's fewer people eating the breakfast, there's a lower amount of product that flows through that. So that's a key driver for us. There's some other revenue items that flow into that as well around brand programs. So if you think about Comfort Inn, where we've been doing a signage program for the new logo, that's another category of items that as a result of the pandemic, probably slowed, you know, relative to our expectations. So there's some brand programs that also drive some of the revenue opportunity in that. And as you think about the pandemic's impact on, you know, if you've seen the aerial shot of the Port of Long Beach, but the supply chain disruption that came as a result of COVID is having an impact on getting product into the country and You know, that's FF&E, that's, you know, breakfast items and shampoos as well. So those are the items that we look at that had a key impact on our procurement services business back in 2020.

Yeah, Danny, and financially speaking, when we were pre-pandemic, we had talked about the outperformance of that procurement services revenue, and we expected to see that, but in the long term, probably closer to approximating your rev par growth, just given the fact that it is It's very much occupancy related. The good news is this year, you know, those revenues were only down about 26% versus the enterprise-wide revenue, which is a little closer to the REVPAR stat for the full year, just over 30% or so. So from that perspective, we were able to fill in some of the gaps in terms of that revenue stream, and we expect to see this bounce back in 2021 as well. Got it.

Thank you very much.

Thank you.

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

Great, thanks. Just thinking about your unit growth for this year, I didn't hear, I don't think you guided to that specifically, but should we think about the reduction in signed agreements as, you know, potentially meeting you know, lower unit growth this year if it was kind of flat in 2020 and agreements are down? Or do you think that conversions will sort of pick up in the year? I guess, you know, how do you expect unit growth to come in? Thanks.

Yeah, I think, Robin, that's the key is the shift to more conversion of a mix as far as the number of contracts and the success rate of opening those and the speed that will open. means they flow through our pipeline much more rapidly. So we feel really good about the, you know, we exceeded what we thought we would do in the fourth quarter with regard to new agreements. And, yeah, I feel good about the conversion mix of that and the opportunity it has to drive unit growth. I also, if you look at our extended safe segment, particularly wood spring, um, that is a brand that when you, when you look at the amount of time, those new construction contracts take to, uh, to get, uh, signed and then open, um, that's one of our shortest timeframes. Um, and so seeing the growth in that brand in particular, as well as the other brands in our extended space segment, um, I think also we'll, we'll be adding to our unit growth, um, you know, in 2021 on a go forward basis. Yeah, Robin, the only thing I would add.

Go ahead. Sorry, Robin.

Oh, good. I was just saying, so meaning that you do expect positive, you know, growth in 21. I just, it sounded like that's how you were kind of concluding. But I didn't want to cut you off. Go ahead. I'm sorry.

No, it's related to that, Robin. So, you know, we aren't giving formal guidance overall. But I think one of the things that I would reiterate is when you take a look at the growth of those key revenue segments, what I talked about in the prepared remarks is something that we are, you know, comfortable guiding to, which is the fact that that growth we expect to accelerate significantly. into 2021. So those revenue intense segments grew at about 1.8%. We expect to see a pickup in that in 2021. overall you know the economy segment you're seeing very similar trends across the industry and that's been the uh the segment that has just a little bit more pressure from a termination perspective that's just the nature of those contracts being less sticky and you expect to see those trends continue as well but again just where we're focused as a company and just where our the vast majority of our revenue sits in that mid-scale extended stay and upscale segment we feel very comfortable about the fact that that unit growth is expected to accelerate in 2021.

Okay, great. Thanks. And just one quick follow-up. Just similarly on royalty rate, it sounded like during your prepared remarks that there was a comment about sort of expecting that seven basis point increase, like expecting that to increase in 21. Did you mean increase more than seven basis points or just increase something over 2020 levels? I don't know if I quite understood what your comment meant in the prepared remarks. Thanks.

Sure. Happy to clarify that, Robin. So eight basis points for full year 2020, seven basis points in Q4. We expect in 2021 and beyond for that to be slightly more in line with historical growth, which is the mid single digits. Frankly, we did outperform what our original expectation was for 2020. So we're optimistic that we can continue to drive price of these contracts and get closer to those rack rates. So again, I think the best modeling assumption is your mid single digits growth, which is in line with historicals.

Thanks very much. Thanks.

Thank you.

Our next question comes from Dory Keston from Wells Fargo. Please go ahead with your question.

Thanks, and good afternoon. You said that 96% of your franchisees are paying their full fees today. What was it at the trough?

So what I can tell you is last quarter, or excuse me, about two months ago, it was closer to 93%, 94% of our franchisees were paying Even in the trough, we were collecting anywhere between 75 and 80% of our collections overall. And so we are seeing that continue to increase month over month. So again, I want to be very clear, they're not necessarily paying their full fees, but our collections are trending very much in the right direction and well over that 80% mark, 96% of which are paying some form of their franchise fees.

Okay. I guess, what would you need to see in the business that would lead you to return to paying a dividend or share purchases?

Sure. So, you know, we've been very clear. Our strategy really starts with investing back in our own business. And as we mentioned, we've been making investments, particularly in the fourth quarter, around our brand prototypes and our merchandising and pricing capabilities and the like second we you know we want to seek potential acquisition opportunities and when you go through a period of disruption as we're going through that may create some opportunities so that would be our second use of capital and then as we've done in the past if there is excess capital we would return that to to shareholders and so we'll be monitoring sort of the pace of the recovery to make those you know sort of decisions around what we might do with regard to our returning capital. But that's kind of the hierarchy of decision-making that we do. And as I mentioned, we're already doing the first one, which is investing back in the business.

And how would you describe external growth opportunities that you've seen to date?

Well, I think as we've said in the past, when you go through something like this, nobody can underwrite an asset or a company. until they get clarity around what the future holds. So I do think it will take a little bit of time for sellers to go through that process and arrive at sort of what they think the post-pandemic world will look like. And I think that will provide more clarity around opportunities that may be out there. If you look at our portfolio, there certainly continues to be white space in our portfolio that could make sense. for either a tuck-in acquisition or a new brand opportunity. So we do have a lot of growth potential off of this franchising platform that I think provides us opportunities. And as we kind of get beyond the – or get, I guess, further into what the post-pandemic recovery is going to look like, that will help owners decide if selling at the right price makes sense for them, and then we can evaluate those opportunities as they come along.

Okay, thank you.

Our next question comes from Omer Sander from JP Morgan. Please go ahead with your question.

Hey, Pat and Dom. Appreciate you taking the question. Just one for you. Just one question on the conversion. Where are most of these conversions coming from? Is it predominantly independent or competitor brands? And I guess just for context, how did that trend over the course of the pandemic and maybe before then?

Yeah, the majority of our conversions actually come from competitor brands. And so obviously, the further up in the chain scale you get, the more likely you are to convert from independent to brand. So our Ascend Hotel Collection, for example, primarily independent boutique hotels that want to affiliate with a strong distribution channel. So the vast majority of our Ascends are coming from independent, but those are conversions. Now, the further down you get in the chain scale, the more likely you are to actually convert from a slightly weaker brand who wants to be affiliated with a stronger system that can drive more traffic, can reduce that total cost of ownership at the hotel level. So let's call it the majority of which kind of at that quality econologic roadway are converting from brands. Overall, regionally speaking, a lot of our conversions are also coming from the south, given the fact that the south was able to really withstand some of the impacts of the pandemic as well. So again, just based on some of the things that we talked about before with 72% of our development agreements in quarter four coming from conversions, we feel very optimistic about the fact that we can continue to maintain that trend heading into 2021.

And it's why we highlighted the Red Part Index share gains, which are really outstanding. And those are things that owners who are looking to convert, be it from another brand into a choice brand or from an independent hotel into one of our brands, they really want to – I mean, they're expecting something from a brand, and that something should be outperformance. And so we're really encouraged by the Red Part Index share gains that all of our select service brands made in 2020 and what was the worst environment that – that hoteliers have seen. So again, that is another proof point of our value proposition to owners. And again, I think that's something that we believe is going to be a real optimistic driver of future development for our brands.

Thanks so much.

Thank you. And once again, if you would like to ask a question, please press star and 1. To withdraw yourself from the question queue, you may press star and 2. Our next question is a follow-up from Danny Assad from Bank of America. Please go ahead with your follow-up.

Hey, guys. Sorry, just a quick clarification question. Dom, when you mentioned the company's expecting sequential quarter-over-quarter REF PAR improvement in Q1 2021 versus 2020 and 2019, just to be clear, is the expectation here that Q1 2021 REF PAR is going to be higher than the first quarter of 2019 in dollars?

No, the change in REVPAR, we expect to continue to improve in quarter one versus the 25 one that you saw in quarter four. And so I just want to be very clear on that. We don't expect to see actually growth versus 2020 or 2019. We do expect to see the improvements. And frankly, when you take a look at January and February, you know, we were down, you know, 18% year to date, you know, through call it mid-February. What I would say is March tends to be a higher demand month for us, and so when you take a look at a tough comp in 2019 specifically in March, that's going to be a little bit tougher, but we still expect for the overall quarter that we would still be better than that down 25-1. Understood. Thank you. Thank you.

And ladies and gentlemen, at this time and showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

Thank you, operator, and thanks, everyone, for your time. As you heard today, Choice Hotels achieved some key milestones in 2020 and drove results that significantly outperformed the industry. And our recent investments we've made, I believe, are going to position us well to capitalize on growth opportunities in 2021 and beyond. So I hope you all stay safe and healthy, and we'll talk to you all again in May. Have a great afternoon.