Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International Second Quarter 2019 Earnings Call. [Operator Instructions]. Please note this call is being recorded. I would now like to turn the conference call over to Mr. Oscar Oliveros, Investor Relations Director for Choice Hotels. Mr. Oliveros, the floor is yours, sir.

Thank you, operator, and welcome, everyone. 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 the 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 second quarter 2019 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations Section.This morning, Patrick Pacious, our President and Chief Executive Officer, will provide an overview of our second quarter 2019 operating results. Dominic Dragisich, our Chief Financial Officer, will then review our second quarter 2019 financial performance and provide an update on expectations for 2019. Following their remarks, we'll be happy to take your questions.With that, I'll turn the call over to Pat.

Thank you, Oscar. Good morning, everyone, and thank you for joining our second quarter 2019 earnings call. We are very pleased with the substantial progress we are making in our strategy to strengthen our mid-scale brands, particularly Comfort Inn, grow our presence in the upscale segment and increase both business travel and midweek revenue delivery to our hotel. With our strong second quarter performance and positive outlook for the remainder of the year, we are once again increasing our full year guidance for both adjusted EBITDA and adjusted diluted earnings per share.In the second quarter, we made significant progress in our Comfort Inn brand-wide renovation program. 2/3 of the hotels in the program scheduled to complete their renovations by the end of this year have already done so, and the post-renovation performance of these hotels is paying off.Comfort hotels that completed their renovations by the end of the first quarter of 2019 outperformed the segment's RevPAR in the second quarter by 60 basis points. This reinvestment in the brand is also having a positive impact on unit growth.During the first half of 2019, openings for new Comfort hotels across the country increased approximately 10%, and new Comfort franchise agreement awarded increased 49% over the same prior year period. We also continued our expansion in the upscale segment. Our Cambria and Ascend brands grew their domestic room count by 16%. And Cambria's RevPAR grew 2.2%, outpacing the industry by 110 basis points and the upscale chain scale by over 260 basis points.And we continue to improve the value proposition for our franchisees, helping them maximize their profitability. In the second quarter of 2019, our system-wide proprietary contribution to our hotel increased by 200 basis points to over 60%. And business travel grew as we captured more room night from corporate account…

Thanks, Pat, and good morning, everyone. We are excited to report our second quarter results, which built up our strong first quarter performance. Our key growth metrics continued to improve as we leverage the power of our franchise business model and drive financial results. Specifically, the second quarter was highlighted by an 8% increase in total revenues, a 6.5% increase in adjusted EBITDA and a 120 basis point increase of our adjusted operating margin to nearly 66.%.The combination of strong revenue growth and disciplined cost management resulted in a 7% increase in our adjusted diluted earnings per share exceeding our expectations. Our adjusted diluted earnings per share performance exceeded the top end of our guidance by $0.04 per share. Based on these strong results and our forecast for the remainder of the year, we are again increasing our outlook for full year adjusted EBITDA and adjusted diluted earnings per share.It's important to reinforce that franchisee profitability continues to be at the core of our effort. Strong franchise operations results provide multiple levers to drive top line revenue growth. These include increasing RevPAR, extending the number of franchised hotels in our system, improving the pricing of our franchise contracts and continuing to expand our procurement services with more value-added programs to our platform of over 7,000 hotels and other travel partners. Overall, the combination of these levers resulted in a 5% increase in second quarter revenues, excluding marketing and reservation system fees for $145.2 million. Domestic royalties represent nearly 70% of these revenues and increased 3% to nearly $101 million, highlighted by the net addition of 116 hotels to our domestic system and a 10 basis point increase in our effective royalty rate. Let me dive into our revenue levers beginning with RevPAR.Our domestic system-wide RevPAR result for the second quarter…

[Operator Instructions]. And the first question we have will come from Shaun Kelley of Bank of America.

Maybe just to start, Dom. Since you finished on a little bit of color around those 4 Cambria hotels. Can you just talk a little bit more exactly about -- I understand it's probably very specific and opportunistic, but is the financial impact here, are you guys going to extend some amount to purchase the delta and the numbers that you gave, so roughly $150 million to buy out the JV partners? And then what's the long-term intention here. Are you planning on ultimately trying to find like a long-term home for these owned assets?

Yes, Shaun, let me start with, it was really an opportunity for us to redeem the equity stake that we didn't own in four of those Cambrias in strategic high-barrier-to-entry market. They're also hotels that are still ramping. So from the standpoint of looking at the future of those hotels and what they're going to be worth once they got to a fully ramped performance level, we saw this as an opportunity for us to not only make an investment strategically, but also, in the long term, have a nice financial return as well. Dom, address the financial piece to it.

Yes, Shaun, it's part of that $725 million that we have authorized for the brand. The $160 million delta you see, the $393 million in the Cambria capital outlays going up to the $550 million number does include that $160 million, so you hit the nail in the head there. And I think as Pat mentioned, really, the opportunity that we saw here, plus from a financial returns perspective, we do anticipate to recycle that capital to find a long-term home. But the hotels are still ramping in a way that the joint venture was also structured. It -- 1/3 of the right to buy out that interest at a structure that will provide a really nice financial return for us, so we see this as the return capital when we ultimately recycle it as well as the return on capital.

Great. Second question is just on unit growth. It looks like you trimmed the high end of that expectation for this year. So could you give us a little more color on what you're seeing on the development side that might have led to that, at least on the domestic side? And then probably more importantly, what's the outlook for 2020 as you kind of think about net unit growth and both attrition as well as potential additions from your pipeline?

I think what we're seeing here is that you're seeing a pipeline is growing significantly. The pipeline growth though was occurring more in our new construction brands, which as, you know, takes a little bit longer than, obviously, the conversion brands do. The other key piece to this is we're going to continue to do incremental strategic terminations to keep our brands fresh. Owners today have the wherewithal to invest back in their assets. And so in a lot of our brands right now, we have significant amount of investments going back into the hotels. And for those owners that aren't willing to do that, we can either shift them down in our brand portfolio, if that makes sense, and we have an open available market. But if they're not willing to make those investments, then we are exercising our rights to strategically exit them from the brand to keep the brands relevant for the long term.

Shaun, and the only thing I would add to that, just if you take a look at our international growth and you blend both the domestic and the international growth, the overall unit growth comes in closer to about 2.5%. The 2% is still well within the range of our previously reported guidance, but the factors that Pat mentioned as well as the fact that we've got these new construction hotels that typically take a little bit longer open, the revenue intensity of these units are going to be significantly higher as we enter 2020 and beyond. And 2020, we're obviously not issuing unit growth guidance, but we do expect to see unit growth accelerate as the impact of the Comfort transformation, obviously, continue to whittle away. I think the other thing that provides a significant optimism is when you take a look on the opening forecast. In particular, you're talking somewhere in that call, it, 8% range. So we're seeing both our pipeline grow and you're seeing an acceleration in terms of our open units for the year. And so to Pat's point, the reason why you're seeing the muted growth this year is really on the termination side that are very strategic to the portfolio.

And next we have David Katz with Jefferies.

Can you talk about the extended-stay segment just a bit. I think it's an area that you've talked about fair amount in its growth and whether there's any possibility that you might consider bolstering that growth with further acquisitions since WoodSpring is going so well?

Yes, we're, as we mentioned before, we're pretty bullish on the segment as a whole, particularly the economy segment of the extended-stay set of brands. I think when you look at where WoodSpring is today, we expect to have about 270 of those opened by the end of the year and then another 30 by the end of 2020, so that brand's growing at a significant pace. We're just seeing a lot of demand from both developers and consumers for that product in markets across the country, and it's had a spillover effect as we've mentioned in both our MainStay and our Suburban brand. Do we see additional branding opportunity there? We do, and that could come either in the form of an acquisition or potentially a new brand launch. So we do see other white space in the extended-stay segment that we don't play in today. But I think given the strengthening of our own capabilities to deliver that type of consumer and to drive the return on investment for that type of developer, we do see additional opportunity in that for the long term.

Got it. And with respect to just new construction, I want to make sure I'm sort of capturing all the commentary the right way. Should we take away that the construction cycle may be stretching out just a little bit? Is there any trend to be derived from that and that might be impacting the prospects for net unit growth, going forward?

You're referring to the amount of time between a contract execution and when a hotel opens around new construction?

Yes.

I think what we are seeing, and we look at the sort of months that it's taking, we're seeing that creep up little bit. A lot of that has to do with entitlements and just sort of the access to labor today. There are some weather impacts that have impacted this year as well. One thing I will note is our new construction pipeline, particularly out in California, has increased significantly. It's an area in the country, where relative to our competitors and the industry, we're underpenetrated, and it is an area where we have had significant pipeline growth. So that is impacting us as well. The West Coast, in general, is just little bit more challenging from a development timeline from executed contract to open a hotel.

And next we have Robin Farley of UBS.

Got two questions. One is, can you quantify -- you mentioned, it was I guess termination rates that's making unit growth for the year a little bit lower. What reasonable rate do you expect in 2019 versus average, if you can quantify that? And then I have a question after that.

I think the best data point that you have, going forward, from a involuntary termination, so terminations that we basically execute, is typically right around 4% or so. And so when I mentioned that we're talking about an 8% openings growth rate year-over-year, you're implying probably another 2% on the strategic termination side of the house, which gets you to that 2% domestic unit growth. It had about a 50 basis point impact on the overall unit growth figures, so the 2% would actually have been increased to about 2.5%. And again, we expect that to accelerate into 2020.

Okay. Great. That's helpful. And then just the math on the JV that you're acquiring for the $160 million. In the release, you talked about bringing the $3 million to $5 million for the remainder of the year into the EBITDA line. And so to annualize that, I guess, we could sort of double that. But am I right in thinking also that only half of that is really new to your bottom line and that of half of it's on your JV line? And if that math is right, the $160 million is quite a significant multiple right? I mean I don't know if it's 15 or 20x half of the EBITDA that's actually new to your bottom line. I wonder if you could just talk -- give some color around such I multiple. I know you've mentioned the properties are ramping, but maybe if you help quantify how much they'll be ramping?

So I think the $3 million to $5 million, when you take a look at just doubling that from a full year impact perspective, probably a little conservative. But we think probably closer to the high end of that from a full year perspective. When you take a look at that multiple, I think just doing the headline math, you're absolutely correct, probably higher multiple. But again, it really is about the ramp of those hotels in particular. And so we do anticipate generating a much higher EBITDA into2020 and beyond at which time we would explore the potential disposition of those assets to another franchisee.

And so what multiple -- I guess, when you think about where the EBITDA can get to, do you think that you're paying -- in other words, what you're paying now at multiple future cash flow? If there's a way to help us think about how you arrived at this sort of, I don't know 20x or whatever, but...

I think we're paying a very fair price for where our multiple is today as a company. Frankly, a little bit lower than that.

And next we have Thomas Allen of Morgan Stanley.

So just a, I'd say, a broader question. How are you viewing the broader lodging demand currently?

I think if you look at the health of the consumer, consumer confidence is at a record high, unemployment at a record low. If we look at the broader occupancy and demand trends, we expect them to hold up for the remainder of the year. That's baked into our RevPAR guidance. We do expect our rate to actually accelerate, given the sort of headwind that the Move to Modern renovations have created in the first half of the year. We expect, as I mentioned in the last call, that, that will turn into a tailwind. And so I think we look at where the demand trends are, they're fairly positive, I mean especially on a historic basis. But even as we look into the second half of the year, we're expecting to be similar in the first half.

I guess just following up on that. I mean if I think about the other lodging companies, they've all cut their RevPAR guidance this quarter and have a little bit softer commentary than they've had for the past few quarters. I mean, why do you think you're bucking the trend?

I think there's really three factors, in particular. Obviously, Move to Modern is the biggest factor when you take a look at how the Comfort portfolio is doing, those that have renovated versus those that have not, will be a very material tailwind for us in the back half of the year, so I think that's #1. I think the second is just the revenue intensity of the hotels that I mentioned in terms of the unit growth. The mix is starting to skew much more upper mid-scale as well as upscale when you take a look at the open properties, which would certainly lift the RevPAR. And then, certainly, an easier comp as well in the back half of the year, combined with what Pat had mentioned, just macroeconomic trends in terms of who our consumer is, all of those really appear to be favorable for us in the back half of the year and entering 2020.

Next we have Jared Shojaian of Wolfe Research.

I'm trying to frame the 60 basis point RevPAR index gain a little bit better. Can you maybe help me understand what the absolute RevPAR index level is for those hotels that have undergone the renovations versus the Comfort hotels that have not undergone renovations. And I appreciate that you might not have the exact numbers, but maybe just kind of directionally speaking.

Yes, Jared, the number, directionally, is positive. I think when you look at RevPAR index, particularly when our hotels index against what's in their competitive local market, that number moves around a little bit. We can probably get back to you on more of the sort of focus concept against the other brands in the upper mid-scale segment. But it's generally positive, and we've seen RevPAR index lift for the hotels that have gone through the renovations more so than the ones that have yet to do it.

Yes, Jared, when you take a look at the exhibits and the press release, I think your best data points, when you take a look at the Comfort Inn line item, the overall portfolio itself was down about 60 basis points or so. So you're talking about 120 basis points swing, but it's actually even more than 120 basis points because those hotels that have completed renovations are also in that number. So if you see that trend extend into the back half of the year, we expect to sustain, call it, that 60 basis points or so RevPAR index lift in the second half of the year.

Got it. Okay. And I guess I asked because I'm a little surprised that the renovations would have only yielded about 60 basis points of RevPAR share gains, and I also appreciate that it is early and I know you're pretty bullish on the longer-term outlook here. But particularly in an environment where it feels like brands are already gaining some share, I mean, can you maybe speak to that a little bit? And is this part of the reason why it seems like you might be assuming a little bit of a step-up in fourth quarter RevPAR? I mean is that the assumption that these renovated Comfort hotels are going to continue to gain steam here on the RevPAR index share gains?

Yes, I think your initial point is probably the one that has the biggest impact, which is it takes a while for those hotels once the renovation is completed to build their base of business back from when they've had rooms out of commission. They go and win back corporate accounts that they may have had prior to renovations, those types of things. So that 60 basis points, those hotels that finished the renovation basically before the end of March. So they've only had 3 months' worth of performance that we've measured against. What we have seen is those that have done the renovations prior to them a bit more sort of post-renovation period with which we're able to measure, those hotels are performing higher. The other is, as they've added the new signage, we're going to, probably in the next call, give you a sense of what the new signage is adding. But that's another positive lift on both RevPAR and RevPAR index for those hotels.

Okay, and then just one more for me. Are there any brands in your portfolio that you think may need a similar refresh initiative, like what Comfort has undergone? And I asked because it feels like we've been talking about sort of these strategic terminations for quite some time now. And maybe this is a broader question, but what is the right longer-term involuntary termination rate? So I get the 1% voluntary rate. What do you think the right longer-term involuntary rate is?

Yes, it's probably 3% to 4%. We don't have another brand that would go through the type of, call it, investment that we made in Comfort. If you remember, we exited a significant number of hotels as part of that, and the dollar amount that went back into those hotels was significant. The Quality Inn is our next largest brand. That's the brand that as we mentioned on the last call is undergoing strategic terminations, but it's nowhere near the type of cleanup that we needed to do on the Comfort brand. And the investment in the Quality brand on a relative per key basis for owners is much smaller than what we required at the Comfort in the Move to Modern renovation.

[Operator Instructions]. Next we have Dan Wasiolek of Morningstar.

So I just wanted to dive in a little bit on the effective royalty rate, clearly trending higher. Wondering if you can maybe provide some clarity what's driving that. Is that mostly mix, or is that combination of mix and pricing power as your brand strength -- branded platform continue to strengthen?

Yes, I think it's primarily mix. A lot of it is new construction, a lot of it is the brands that we don't do discounting on in any significant way. And so that's impacting the sort of pipeline aspects of it. The discounting that was done during the last downturn has been burning off as well, which has helped us. And as we've indicated on prior calls, that number is expected to moderate as both those trends either flatten out or don't continue to accelerate, if you will. So I think what we've guided to over the last couple of quarters has been strong effective royalty rate, but the growth in the effective royalty rate will moderate, over time.

Okay, very good. And then if I could just ask for a reminder. You guys talked a little bit about some business initiatives to try to drive that. What is your mix of business? I recall that you guys have a decent exposure off highway.

1/3 business, 2/3 leisure. But when you think about where the portfolio is heading, just with Cambria and Comfort, et cetera, we do expect that mix on the business side of the house to increase over the course of the next several years.

We're showing no further questions at this time. We'll go ahead and conclude our question-and-answer session. I would now like to turn the conference back call back to Mr. Patrick Pacious for any closing remarks. Sir?

Thank you, Operator. Thank you, all, for joining us today. I hope you have a great rest of your summer, and we will talk to you in the fall.

And we thank you, Sir, also and to the rest of the management team for your time today. Again, the conference call is now ended. At this time, you may disconnect your lines. Thank you, again, everyone. Take care and have a great day.