Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International Fourth Quarter and Full Year 2019 Earnings Conference Call [Operator Instructions]. Please note, this call is being recorded. I would now like to turn the conference over to Allie Summers, Investor Relations Director for Choice Hotels.

Thank you, operator. And welcome again, everyone. It’s my honor to joining for the first time as Investor Relations Director. I look forward to meeting and working with all of you.Before we begin, we would like to remind you that during this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results. Actual results may differ materially from those indicated in forward-looking statements, and you should consult the company's Form 10-K and other SEC filings for information about important risk factors affecting the company that you should consider.These forward-looking statements speak as of today's date, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of the fourth quarter and full-year 2019 earnings press release, which is posted on our Web site at choicehotels.com, under the Investor Relations section.This morning, Pat Pacious, our President and Chief Executive Officer, will provide an overview of our 2019 operating results. Dom Dragisich, our Chief Financial Officer, will then review our fourth quarter and full year 2019 financial performance and provide an update on expectations for 2019. Following their remarks, we'll be glad to take your questions.And with that, I'll turn the call over to Pat.

Good morning, everyone. And thanks for joining our fourth quarter and full-year 2019 earnings call. I'd like to welcome Allie to the team and I know that she will be a great resource for all of you. We're pleased to report positive results for the fourth quarter and 2019 as a whole. This morning, we announced strong financial performance, reflecting the following results for full year 2019 as compared to the prior full-year period.We grew adjusted earnings per share by 11%, exceeding the top end of our previous guidance by $0.05 per share. And, we grew adjusted EBITDA 7% and that's the top end of our previous full year guidance. 2019 was a year of investment; investment in brands for the customer of tomorrow; investments that are improving the value proposition for our franchise owners; and investments in our platform that continues to provide our guests with new travel options and our franchise owners with new services they value.2020 will also be an investment year as we continue our strategy of positioning the company to grow in more revenue intense segments and locations. To be more specific, we are strengthening our existing brand and building new ones to appeal to the customer of tomorrow in the upscale, midscale and extended stay segment. We have also been intentional about the geographic market we are targeting to grow our brands across these three keys segments.Stated timely, our focus is on the revenue intensity of each hotel, those currently in our system and for the new hotels we are attracting in the upscale, midscale and extended stay segments, both domestically and internationally. And we've had great success executing this strategy last year. For full-year 2019 versus the prior full year period, we drove substantial growth across the higher value and more revenue intense…

Thanks, Pat, and good morning, everyone. We are very pleased to close out another year of strong financial performance on a high note. The resiliency of our business model continues to position us well financially and allows us to continually invest in the business for the long term, grow earnings and return capital to shareholders. What we have accomplished in 2019 and our investment plan in 2020 is not just for the next 12 months, but rather the next decade and beyond.For full year 2019, a combination of solid revenue growth, disciplined cost management and revenue focused investments resulted in 7% increase in our full year adjusted EBITDA, achieving the top end of our previous full year guidance. Thanks to our strong operational performance, combined with the implementation of tax strategies to reduce our effective income tax rate, we exceeded the top end of our full year 2019 adjusted earnings per share guidance by $0.5 per share, representing an 11% increase over the prior full year period to $4.32. Total revenues for full year 2019 reached $1.1 billion and grew by 7% over the prior year.Let's now take a closer look at our fourth quarter results. For the fourth quarter 2019 as compared to the same period of 2018, total revenues excluding marketing and reservation system fees, grew by 10% to $130.2 million and adjusted EBITDA increased 6% to $81 million. Fourth quarter 2019 adjusted earnings per share were $0.92, a 5% increase over the prior year quarter and exceeded the top end of our previous guidance by $0.06 per share.Our financial performance continues to be driven by the resilience of our franchise business model and growth across higher value segments, geographies and brands. These results are proof that our long-term strategy is paying off and positions us well for…

We’ll now begin the question-and-answer session [Operator instructions]. First question comes from Shaun Kelley, Bank of America. Please go ahead.

Thank you for the detail in the release and in the prepared remarks. For Pat or Dom, I was wondering if you guys could maybe give us a little bit more color on the net unit growth guidance. So as we think about the numbers that you provided here, 1.5% to 2% is probably a little bit on the low end of what we were thinking, especially as you continue to move on. Are you expecting any sort of elevated level of either terminations or voluntary kind of system cleanup in that number? And then overall, just the base effect, I think you actually came in within Q4 with also very high. So is any of that just timing as it shifts between maybe 4Q and 1Q that will be helpful?

Dom can speak to the timing. I think broadly what we're seeing is, as we mentioned in our remarks. We're developing hotels in higher RevPAR market and higher RevPAR segment. So as a result, we're doing a lot more new constructions hotels and we're developing in markets where entitlements and the costs of labor to actually get hotels built is actually probably more expensive, takes a little bit longer. So we're seeing a little bit more of a delay in the amount of time it's taking new hotels once they start construction to actually open, but that's reflective of the fact that we're pushing more into the upscale segment. And where we're doing a lot more of our Comfort’s are in markets where higher RevPAR markets usually translate to a little bit more time to get it through entitlement and actually get the project open.

And then just in terms of the numbers, Shaun, I mean overall generally in line with where we thought we could be, just to ground everybody. Every six hotels or so, it's about 10 basis points. So just having a little bit of shift from Q4 into Q1, which we did shift could impact those numbers, 10 basis points or 20 basis points either way. I think what we're really optimistic about is when you take a look at those more revenue intense segments, obviously a little softer in the economy segment just based on what we're seeing just in terms of conversion activity there, continuing to keep that portfolio relevant by cleaning some of the lower performing units out of there. But when you take a look at those stronger segments, we were at 3.1% this year. We expect to actually increase that in terms of growth rates in 2020. So that's obviously going to be a big tailwind for us as we think about 2021. And those numbers actually are even when you think about Comfort declining moderately in 2019. We expect Comfort to actually return to growth in 2020 albeit moderate growth and then further accelerate back to historical averages in 2021 and beyond.

And one follow up if I could quickly, which would be, I think Dom in your prepared remarks you mentioned a little bit about tax strategies or some items there. I think the tax rate did move around a decent amount and that impacted both the EPS growth we saw in ‘19 and then also probably has a material impact on the guidance for ‘20 just in terms of cadence. Could you give any -- just a little bit more color either. Are there strategies, things that can continue and therefore maybe the guidance is conservative but hard to predict? Or is there sort of a meaner version back to low 20s the right place to be from here?

I think the key is, Shaun, we actually do not guide to any of those discreet items, which typically are a bit of a tailwind for us in terms of a better tax rate for the full year. So when you take a look at obviously 2019, we are at 19.7%. We’re guiding to 22.5% but that does not include any of those discrete items. So we do definitely see more opportunity in the tax rate in 2020. We are also in the process of implementing a new tax structure. So you're going to see a little bit of noise in the Q1 numbers. You're probably going to see a pretty significant benefit in the reported but from an economic perspective those benefits are going to be amortized over an eight year period. So 22.5% is the best guess that we have right now. Obviously, we see some additional benefits that we could see in terms of the discrete items.

Next question comes from Thomas Allen, Morgan Stanley. Please go ahead.

Just following up on one of the earlier questions. Now that you're focusing much more on the higher RevPAR hotels. How should we think about your long-term unit growth targets? Thank you.

So Shaun, I think if you look at the growth rates that we're seeing, particularly in the upscale segment with both Cambria and Ascend, the Ascend collection is existing hotel. So we're seeing a significant amount of growth in that brand right now, and those are hotels that literally can get open in as short as a day or three months. So sort of you've got a tale of two brands in the upscale segment. When you look at Comfort, our Comfort brand, in particular has shifted to much more of a heavier mix on new construction. So as Dom mentioned, we do expect begin to grow that brand again in 2020 with getting back to sort of a historical norm closer to 3% growth as we get to 2021 and beyond. So when you look at those two segments in particular, it's a changing story.Extend stay become for us both a new construction story with WoodSpring and now Everhome. What's interesting about that brand is you can get a WoodSpring built in about 12 months. So the short timeframe and the markets where those are going into, the ability to grow that brand more rapidly is a big difference there from mid-scale. And then what's also happened in our extended stay brands is we're starting to attract particularly MainStay and Suburban, we're getting more conversion brands, conversion hotels into those brands. So it's really three different stories, each one has a different growth trajectory. But from a unit growth perspective, overall, we do look at that sort of call it 2% at the midpoint is what we're expecting to see in 2020.

So when you remove Comfort specifically and when you remove some of the other noise, when you take a look at just again those mid-scale and above segments as 3.1% removing Comfort out of there, you're actually closer to about 4% just given the decline that you saw, just given the Comfort transformation, so we are pretty much right at our historical averages in terms of our key focus brands. Our historical average has been somewhere between 3% and 4% and in the long-term, we expect to get back to those rates.

And just on RevPAR growth, your guide. Can you give some qualitative comments around that down 2 to flat? And then Hilton on their call last week talked about seeing some recent strength in bookings. Have you seen anything similar? Thank you.

So on our guidance, I mean I think the overall industry continues to stop and you're getting a situation right now where supply that's coming in is it’s being demand. For us in particular, we look at the two areas where we are over penetrated from an inventory perspective. Those oil and gas markets in the southeast in particular, those are expected not to perform as well as what you might see in the Mountain States or on the West coast. So it is a performance mix perspective. What’s great news for us as we look at where our pipeline is, we do have a greater opportunity in our pipeline to open hotels in those markets where we're currently under penetrated?

When you take a look at just 2020, January came in probably close to negative, call it mid 50 basis points or so. We are trending more positively in February. And so again some of those tailwinds that we expect, just in terms of the strength of consumer, obviously, moved to market being a bit of a tailwind, slightly better comps, you could see some improvements over the first quarter. However, still our best guess right now is in line with that negative 2 to flat.

Next question comes from Robin Farley, UBS. Please go ahead.

I've got a question related to your unit growth expectations. I'm wondering if part of the miss in 2019 was were removal prior than you're expecting, and just looking at Comfort brand you expected to return to net unit growth in 2020. Is that because -- was there sort of a deadline with your franchisees where they would have had to exit the system by 2019 if they didn't make certain assessments? Or I guess just trying to get a feel for why that Comfort will start to trend up in 2020? Thanks.

Robin, broadly speaking, we did continue to take some strategic terminations out of the quality and brand and those were planned. I think where we saw higher terminations is actually in the economy segment where Econo Lodge and Rodeway are brands in that part of the portfolio. And that's a larger percentage when you think about it as a segment is we have a lot of economy hotels. So that's kind of a key driver on that front. I think on Comfort, what we are seeing as I mentioned is it is just more of a shift towards new construction, which is taking a little bit longer for us to see that unit growth show up. So as we look at out and number of hotels that are actually beginning construction, getting their footers forward, we feel really good about the guidance we’re giving on Comfort moving forward.

So really it's not that removal will slowdown, it’s just that the new construction will come online for Comfort?

The terminations out of Comfort have been pretty steady around our historical average over the last two years.

And then also on your royalty rate guidance, I think last quarter you had said you expected it to be kind of high single digits for this year. And now the low end of the range is at 4 basis points. Just wondering if you could give us some color on what's happening with royalty rates? Thanks.

So we talked about it moderating a little bit, just given the fact that two years ago we did raise the rack rates for particular brands and then the additional six, and so just a lot of it is dependent obviously on the relicensing and renewal environment as well. We've seen a record number of [relics] and renewals in 2019. And so that sets a new royalty rate for those contracts whenever the contracts are transitioned to a new owner. So right now we're guiding to 4 to 8 basis point, obviously, the midpoint of that is 6. We still do see a path depending on what the transaction environment looks like in 2020 to achieve that top end of that guidance. But for the time being, 4 to 8 is a pretty fair range.

Next question comes from Anthony Powell, Barclays. Please go ahead.

Are you seeing more franchisees that owned your competitors’ brands in the upscale segment, looked to Cambria for growth and that you have seen a change in how the lenders look at Cambria in terms of loan to value or rates as the brand grows?

Yes, I think from the standpoint of lenders being aware of and starting to understand the value prop of Cambria that has improved over the last couple of years as the brand itself has grown, we pushed into higher RevPAR markets and the brand is performing. The question around do our owners own other brand, absolutely. And I do think it is something that we've talked about on prior calls that since we don't have other upscale brands, we really have a clean palette from the standpoint of open markets for that brand and that really resonates with developers who like a particular market, but are boxed out from other competitor brands. So Cambria has become a nice option for those owners. So we do have owners that own Cambria, as well as competitors in the same segment.

And onto capital allocation, there was -- I know you want to focus on growing the business more, but there was a pretty big year-over-year decline in share buybacks. Can you just revisit kind of overall buy back velocity and how that may look in 2020?

Well, I think first and foremost, we are committed to returning to that 3 to 4 times that's really our target leverage ratio. Repurchase activity obviously dependent on a variety of different factors, one of which is our Cambria investments that we're making. And when you take a look at what happened in 2019, obviously, with the assets that we ended up purchasing the equity and as well as some other potential inorganic opportunities, we thought it was prudent to keep the powder dry a little bit. But again, I think it's becoming clearer and clearer that with the 725 million that we have allocated to Cambria, we still do have tremendous amount of capacity on our balance sheet and can certainly continue to raise the dividend like we did this year, obviously return additional capital to shareholders in the form of buybacks as well. We did also increase the authorization to $4 million. We had that conversation with the board late last year. And so we have the ability to purchase up to another 3.9 million shares as of today.

Just to follow up on that answer, you talked about inorganic opportunities and you talked about the revenue intensity of the portfolio. Are there opportunities for you to maybe buy into even higher RevPAR categories to cover up scale? And could you maybe trim some of your economy brands throughout the sales this year?

Well, just to take the second part. We don't have any assets in the economy segment [Multiple Speakers]…

Brand sales…

No, I mean, we look at our economy brand as an opportunity for owners to get to know us, to start out with us. A lot of our very successful Comfort owners today began with us with Econo Lodge back four decades ago, so that's a great opportunity for us to attract new capital and new owners to our business. It's also a place where with owners have an asset and they don't want to put money into it, favor quality and they want money into it, it gives us an opportunity in the portfolio to keep them in the system. So I think it's a necessary piece of who we are and it's a great piece of earnings for us.Speaking more broadly on the first part of your question, I think when you look at opportunities for us that are out there, we have holes in our portfolio today. If you think about upscale, extended day, you think about an upper upscale brand where we don't have opportunity, those maybe opportunities for us at some point to do something on the acquisition front. And so from time to time, we do consider those things, because to Dom's point, we may want to keep our powder dry if something like that becomes available.

Next question is from David Katz, Jeffries. Please go ahead.

So two questions. One is, can you remind us, when we're looking at your balance sheet, the 582 million that's out, that's spread over a few different buckets. Can you remind us where that is? And in the past, I think you have talked about some capital that has come back or that you recycled in the quarter of the year. Can you remind us of those?

So when you take a look at the 582 million, call it about just out the 15% or so key money, so about 80 million, a little more than 70 million is in the form of joint ventures where we have an equity partner. We have loans out of about, call it 130 million or so and the remainder is the owned assets, we talked about that, so the owned assets are a part of that 725 million authorization as well. On a recurring basis, we've been at about 75 million of disbursements and then about 40 million is what we actually brought back this year. This year we actually increased the disbursement slightly, it’s about 100 million that we outlaid and 40 million was recycled.

The 75 million of disbursements, that’s on an annualized basis roughly?

Correct. Yes, that’s right.

And then secondarily, I seem to remember and I did go back and look at some of your prior commentary where there was some expectation of unit growth acceleration. And it seems as though it's been hovering around that 2% level. What's changed or have things changed over the past couple quarters that maybe stretching some of that up?

Yes, I think as we’ve mentioned, we're doing more new construction, that's one piece of it. In the economy segment where we still have a significant number of hotels, we are seeing more sort of flattish growth, more of the owners in that segment that may come in. If you look at our Rodeway brand, that's a brand where they can sign a franchise agreement has a one year out. So they come in and it works for them they'll stick with us if not, they may move on. So the more exciting growth that we look for is really in the midscale and above segments in upscale and in extended day.And as we mentioned in our remarks, that's where 2019 we had over 3% growth. To Dom's point, Comfort, which we've been turning around pulled that out of the number, it's actually 4% growth. So it’s the historical growth of our brands beyond the economy segment is where it needs to be. We’ve strategically been turning Comfort around that's done basically, so you're going to see Comfort return to growth. And then the exciting opportunities we have for both upscale and extended stay I think are going to be key drivers of growth going forward.

Next question comes from Patrick Scholes, SunTrust. Please go ahead.

Two of your closest competitors who have reported earnings, InterCon and Wyndham, both gave some type of quantification of the corona virus on either the RevPAR or their earnings. I haven’t heard it brought up at all this conference call. Are we to assume that it's very minimal worst case scenario for your folks?

Patrick, I would call it less than minimal. If you look at our portfolio, we have 7,000 hotels, seven of which are in China. Those hotels have been temporarily closed as has happened with many of our competition. And is what's going on in the country. But when you look at it from a revenue perspective on our base, it’s 0.02% of our revenue. So from the standpoint of in market impact, it is very, very small. I think when you look at inbound Chinese travel to the U. S. and our portfolio, again, we don't have heavy concentration in those gateway cities, and a lot of our international inbound travel comes from markets other than China. So we're not looking at an impact on the U. S. business today. Broadly speaking, it remains to be seen how this will evolve overtime. So we do remain open to potentially looking at what an impact could be. But just broadly speaking as we look at its impact on our business, it is very, very small.

[Operator Instructions] Our next question comes from Smedes Rose, Citigroup. Citigroup. Please go ahead.

I just wanted to ask you something about your positioning in the extended stay space. You mentioned in your opening remarks that you continue to see demand significantly ahead of supply in that space. And I was just wondering if you could just provide a little more kind of color around why you think that kind of persistent imbalance has kind of been the case there, just because we don't usually think that that’s sort of existing so much in the hotel space in general, supply and demand, supply is usually keeping up with demand. So what's kind of your thoughts there and your decision to introduce another brand into that segment?

I think if you look at the 2019 supply and demand, you have about 20% of the rooms sold in 2019 were for stays of longer than seven nights, and only 9% of the current inventory is purpose built for extended stay. So there is a fact where consumers are probably staying longer in transient hotels when they prefer to be in an extended stay hotel. So that's the first factor. The second around Everhome is we've got eight decades of experience in the mid scale segment, and we have a fantastic operating model on the extended stay side of the house. So bringing the two together for a brand launch like Everhome was the right thing for us to do. We've worked with our current extended stay owners on the prototype to help design it to be a low cost to build option, and also a low cost to operate for the mid-scale segment.When you think about the segment itself, the average product age there is 15 years or older. So it was time to bring a new brand to the space and we get a lot of consumer research around what consumers in that segment want. They want to be able to customize the space. They want to have me space, if you will. And so there is a lot of things in the brand that allow the customer to move the furniture around, to move the shelving around and its really designed to drive that type of a consumer into a product that's more purpose built for them. And so we're pretty excited by the initial reaction we've gotten from our developers, and we've already broken ground on the first one and we expect to open it next year.

And then on Everhome, what would you, without land, what are kind of the per key construction costs?

About $85,000 per key…

Last question comes from Jared Shojaian, Wolfe Research. Please go ahead.

Can you just tell us what you're expecting for the owned hotel’s EBITDA contribution in 2020? Third quarter adjusted looks like it was negative, but fourth quarter positive. How do we think about this line? And how much is it contributing to 2020 versus 2019? Thank you.

Jared, you said from an EBITDA perspective, just to make sure I can clarify…

Correct…

So from an equity perspective, obviously there's a range midpoint somewhere call it about $15 million or so in the owned assets, and that contribution in 2020. In 2019, it was about $6 million or so.

And then on SG&A, what kind of growth is embedded in the guide for 2020? It looks like 2019 came in a little bit lighter than the guide. Can you talk about what drove that so late in the year and how you think about 2020?

So when you take a look at SG&A on a full year perspective, in 2019 it was flat. Now on an apples-to-apples basis, it wasn't flat because if you remember back in midyear, we actually sold a small SaaS based company that was supporting our vacation rental unit. So about $5 million of SG&A attributed for that particular entity is not included in those numbers, so apples-to-apples SG&A probably grew closer to 1% to 2% or so. Obviously, with the softer RevPAR environment, we've been able to prudently manage the cost a little bit better than we had expected. And frankly, a lot of the investments that we're making in 2019, we were able to deliver at a lower cost.Now there was some timing differences between '19 and '20. As we talked about on the call, 2020 is expected to be an investment year. We're expecting to increase our SG&A pretty materially. Embedded in the numbers is about 6% increase year-over-year from '19 into '20. And so between that and obviously the surpluses and deficit on the system fund side of the house, we do expect to continue to make investments in these revenue intense areas in 2020 but that’s all are obviously embedded in that guidance that you see.

And one more if I may. Dom, you called out some of the challenges in the fourth quarter RevPAR. But can you drill down a little bit further just to your RevPAR index in the quarter? How that looks specifically the comp set, how it's been trending? And then if you could give us year-over-year change in the absolute level, that would be helpful. Thank you.

So when you take a look at the RevPAR in Q4 specifically, obviously, a negative 2.1. Pat mentioned it but there was a lot of weakness in the oil and gas market. When you take a look at just the impact to our portfolio that was about 60 basis points, so that took us to 1.5. And then there's a tougher hurricane comps that were lapsing in Q4 of 2018 in the southeast with another call it 50 or so basis points. So from an index perspective, if you just normalize for those two specific items, overall portfolio was pretty similar to our comp set, actually probably about 50 basis points or so better than the comp set if you normalize for those two specific areas. And then on the Comfort side of the house, we talked about specifically those move to modern Comfort’s are continuing to outperform the industry, this quarter it was about 40 basis points or so. So we expect to see that trend continue in 2020, either at or slightly better than the midpoint of the industry guidance.

Just one more quick one hopefully. Cambria RevPAR was down 6% in the quarter. I guess I would have thought that as this brand continues to ramp up, maybe you get a little bit of tailwind to RevPAR. Is that not you've historically seen? Any color you can shed on why RevPAR was down too much at Cambria.

So the RevPAR is actually not a same store RevPAR. When you take a look at same store RevPAR, it was actually up by 0.1 so it's about 70 basis points better than the comp set. The reality is almost half of the portfolio, just given how new it is, it’s 50 hotels, 24 those hotels are still in ramp. So when you take a look at it just from an overall portfolio perspective, it’s dragged it down. But same store again is positive 0.1, which we’re very excited about just given where it is from an RPI perspective.

This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Pat Pacious for any closing remarks. Please go ahead.

Thank you everybody for your time this morning. We'll talk to you again in May when we announce our first quarter results. Have a great day.

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