Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's First Quarter 2020 Earnings Call. [Operator Instructions].I will now turn the conference over to Allie Summers, Investor Relations Director of Choice Hotels. Please go ahead.

Good morning, and thank you for joining us today. Before we begin, we would like to remind you that during this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results. Actual results may differ materially from those indicated in forward-looking statements, and you should consult the company's Form 10-K and other SEC filings for information about important risk factors affecting the company that you should consider. These forward-looking statements speak as of today's date, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances.You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of the first quarter 2020 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section. We would like to acknowledge that this is a challenging time for the hospitality industry, including Choice Hotels, and refer everyone to the earnings release we issued this morning and the 10-Q we'll file later today for important details about how COVID-19 has impacted and may continue to impact Choice.Instead of reiterating the information here, Pat Pacious, our President and Chief Executive Officer; and Dom Dragisich, our Chief Financial Officer, will primarily focus during this call on a few items we believe are of strategic importance and differentiate us from our competitors. They will be joined in the room by Scott Oaksmith, Senior Vice President, Real Estate and Finance. Following Pat and Don's remarks, we'll be happy to take your questions.And with that, I'll turn the call over to Pat.

Thanks, Allie, and good morning, everyone. We appreciate you taking the time to join us and hope you and your families are well. Before we begin, I first want to express my gratitude to those on the frontlines who have been working tirelessly to keep all of us safe through this crisis. I'd like to also recognize the dedication of our franchise owners and their staff, who've been caring for essential travelers during this trying time. They are truly remarkable. On behalf of all of us at Choice Hotels, thank you.While the current situation has no true precedent, Choice is uniquely positioned to outperform its peers as it has in past economic downturns, a trend that is once again bearing out. It is the strength of our well-known brands that drives the performance of our company in both rising and declining demand environments.Our hotels outperformed the competition in the first quarter on several fronts. System-wide occupancy rates were higher than the overall industry, especially for our extended-stay brands. This contributed to a domestic system-wide RevPAR growth rate that outperformed the overall industry by 430 basis points.Additionally, our brands RevPAR outperformed the primary chain scale segments in which we compete as reported by STR. These trends have continued throughout the worst weeks of the pandemic into the second quarter. For the past 8 weeks, our brands have consistently achieved RevPAR share gains versus the competition. And as shown in Exhibit 7 of our press release, occupancy rates have been climbing since early April. And even this past week, occupancy continued to grow over the previous week. We attribute this outperformance to our long-term strategy of growing the right brands in the right segments and in the right locations.Our mid-scale brands represent 2/3 of our total domestic portfolio, a segment that outperformed…

Good morning, everyone. I'd like to echo Pat's sentiment and thank the incredible Choice associates for their continued contributions to our company. Choice continues to benefit from its resilient, primarily asset-light franchise-focused business model, which has historically provided a stable earnings stream, low capital expenditure requirements and significant free cash flow.Today, in addition to delving a bit deeper into our first quarter performance, I will provide more insights around our liquidity profile, cost management efforts and approach to capital allocation. I'll close by sharing our thoughts on the outlook for the road ahead.For the first quarter 2020, total revenues, excluding marketing and reservation system fees were $107.8 million. Adjusted EBITDA totaled $69.2 million, representing an adjusted EBITDA margin of 64% and adjusted earnings per share were $0.76 per share.Our domestic RevPAR for the first quarter declined 15% compared to the same period of the prior year due to the COVID-19 crisis and its subsequent impact on the travel industry. Through February, domestic system-wide RevPAR trended at the high end of our previously provided guidance. However, in March, domestic system-wide RevPAR declined 37% year-over-year as occupancy levels fell below 50% for the month. The most pronounced occupancy softening occurred over the last week of the month, averaging 29%. While domestic system-wide RevPAR declined 60% year-over-year in April, we observed consistent daily occupancy improvement in the last 2 weeks of the month with continued outperformance versus our competition.Rising occupancy trends continued into May with average occupancy rates of 34% and reached 39% mid-last week, the highest since mid-March when the crisis began. Despite the challenging environment, our brands have continued to perform ahead of the primary chain scale segments in which we compete.In terms of our first quarter unit and room growth performance, we increased the number of domestic hotels by 1.2%…

[Operator Instructions]. Our first question comes from Shaun Kelley with Bank of America.

So Dom, you made an interesting comment about the royalty rate, and that's a little bit unique as you guys have seen pretty strong growth in that metric throughout the last couple of years. Can you talk us -- talk to us about how you would expect that to perform not just in '20 but maybe just kind of throughout a cycle or how it performed last cycle? If I recall correctly, it tends to be somewhat kind of market condition. And I'm not saying it's specific to Choice that you do give some rebates or discounts on initial franchisees and things like that to accelerate unit growth after some of the development activity slows down. So just cyclically, can you remind us of some of the behavior there?

Absolutely. So if you think about it and if you go back to the prepared comments, Shaun, I think it's clear that based on what we have in the pipeline today, those agreements that have already been signed based on what we're seeing from a pricing perspective, the value prop, et cetera, we would expect to see continued growth in that effective royalty rate through 2020. Obviously, I wouldn't expect to see a 10 basis point increase going forward. We talked about that earlier this year that we would see it moderating back to, call it, those low to mid-single digits. Now in an environment where development activity slows a little bit, you tend to see some discounting. So you might see some pressure on that effective royalty rate in the out years. But obviously, we can't give formal guidance right now on what we think that effective royalty rate is going to be 2021 and beyond.

Great. And then my other question would be and this goes back to, I think, some of Pat's comments in the prepared remarks, but the -- I believe you said that 10% of your hotels are in the fee deferral program. So thank you for quantifying that. Could you give us a little bit more color on what that program either consists of? Or what it looks like, specifically what fees are available for deferral? And does this impact, I think -- most importantly, does this impact the royalty rate? Or it could be -- is it some subcomponent of other components of the overall system fees?

Sure. So broadly speaking, Shaun, what we did is a lot of our fixed fees were things that we took a discount on offering to our franchisees, so things like revenue management and the like. With regard to the franchise fees and the marketing fees, those are the ones that we included in that tailored program. And we looked at this in more of a strategic nature. 60% of the portfolio is performing above 25% occupancy. So not everybody needed relief. And so what we wanted to do is approach this in a more strategic fashion.So it is more -- when we say tailored, we are doing more of a -- rather than programmatic, we're doing more of a targeted type of deferral program. And so if those fees, it could be a mix of franchise or marketing or system fees. So it can impact both. And then what we've also done differently is we've given our franchisees a longer period of time to pay it back. Again, the focus here was on their liquidity needs in the near term. And also, we needed to be thinking about what happens if we have a more jagged recovery and we have another downturn in the fourth quarter and the like. So we wanted to be thinking more long term, and we want to be more strategic with a real focus on the franchisees' cash position.Just one other item I would answer on your prior question to Dom. We're entering this downturn with a different set of brands than we had the last time. So we don't discount on WoodSpring. We have the Ascend Collection, which is, if you look at where our royalty rate was on that brand back 10 years ago versus where it is today, that's increased. And then we've also raised the royalty rate -- rack rate on all of our brands over the last three years. So from an overall sort of comparing it apples-to-apples, it's really different because the brand portfolio is different and the value of our brands is in higher demand during this downturn than we had in the prior downturn.

Yes, Shaun. And just to address your question on the effective royalty rate, you would not expect to see an impact on either revenue or effective royalty rates, given the fact that these are deferrals and not necessarily waivers on that -- on the royalty fee. A lot of the deferral comes on the marketing and reservation fees. And so it's fairly immaterial when you take a look at it overall, and there may be, call it, anywhere from a $10 million to $20 million net working capital drag that you see, but we do expect to see those fees being collected over the next 1, 2, 3 years or so. And so fairly immaterial in the overall grand scheme of things, but no impact whatsoever that we expect on the effective royalty rate or royalty revenues.

Our next question comes from Michael Bellisario with Baird.

Just thinking out a little bit, I guess, the big picture question is, when can you go on offense? And I guess I'm asking it from both a strategic perspective but also in the context of any restrictions that are in place because of your new term loan in your credit agreement that might limit your ability to invest in the near term? How should we think about both of those aspects of going on offense?

Yes. I think on offense, I mean this is, as we've said over multiple calls, this is a business model that can play in both cycles, both the uprising demand and also lowering demand because of our construction portfolio as well as our conversion portfolio. We don't have to shift a number of our brands or all new construction. A number of other brands are all conversions. So it's a continued sort of, I would think of it as about 2 lungs, 1 on the left, 1 on the right, and they both keep the entire entity moving during different periods. So I think from that standpoint, we're -- we've always been growing -- I mean, our quality in brand last year, I think, was the highest growth brand in the mid-scale segment. So -- and that's a 100% conversion. At the same time, we were building a significant portfolio of new construction Comforts in our portfolio as well. So it's a market or a portfolio rather that approaches the market in both sides because you do have owners that are more interested in new construction and you have others that are interested in conversions, even during the good times. And the same thing is true on the downside is just that conversions will probably be a much larger contributor to our unit growth over the next couple of years as we recover from COVID-19.

Okay. And then just in terms of the balance sheet and the question on the term loan, Michael, I mean at the end of the day, we did this under a fully precautionary lens. It's not because we had to, but frankly, it gave us a little more liquidity. Overall, it was fairly cheap, when you take a look at when you compare our term loan versus what others have seen across the industry. And it really had -- and you mentioned the covenants. The term loan had similar covenants that we have today on our credit facility with an option to extend by a year. So it could give us certainly the 2 years of liquidity. And so given the fact that, I mean, at the end of the day, we have not had to ask for any sort of covenant relief. And so we feel like we're in a very strong position from a balance sheet perspective to go on the offensive immediately, maybe if you think about where we're positioned as well from that regard. Net debt is still sitting at about 2.5x. So we feel really good about our leverage position.

Got it. That's helpful. And then just one follow-up from the prior question, maybe in that $10 million to $20 million net working capital drive that you referenced. Any other cash inflows, outflows that might impact the balance sheet, at least in the near term? Or anything else that could be offsetting the recurring operating cash flows that are coming in every month?

Well, when you think about the standard CapEx for the company, it's anywhere between, call it, $30 million and $35 million a year. When you take a look at -- and I mentioned it in my prepared remarks, we reduced our SG&A by about 25%. That's actually net of some of the severance and other restructuring charges that we would take. It's closer to almost 30%, if you net those out, if you don't include those severance charges. From a capital perspective, call it, that $35 million or so, we were also able to reduce our CapEx forecast for the year by a little more than 20% as well. So we expect to see that from a maintenance capital perspective drop below 30%. Everything else is really, for all intents and purposes, it's discretionary. So we have the ability to monitor the environment, where we are. And we talked about in the prepared remarks being very prudent and disciplined in terms of how we deploy that capital against either obviously internal strategic opportunities or returning that capital to shareholders in the long term, and we'll certainly continue to be prudent in doing so prior to disbursing any of that capital.

Our next question comes from Robin Farley with UBS.

I wonder if you could talk about the potential for whether you have interest in acquiring more extended-stay brands. It seems to be obviously a big strength here in the portfolio. You've made acquisitions in the past. Or do you feel like the brands you have are enough to capture that potential growth in demand?

Thanks, Robin. We've talked in the past about, clearly, there's white space in our portfolio for an upscale extended-stay brand. So there may be an opportunity to do something in that space. I mean we're really excited about the performance of WoodSpring, mainstay and suburban, particularly over the last 8 weeks. And the introduction of Everhome in January, it's really tailor-made for this type of environment. And so that's a brand that brings our expertise in the mid-scale segment and the extended-stay segment together in something that is purpose-built for the extended-stay business. It's -- we've done the analysis. Last year, it was, I think, 20% of the room nights in the U.S. Our first ever night stays are above, but only 9% of the supply is actually purpose-built for that. And there's a big opportunity, we believe, in the mid-scale segment for something that is new and fresh and allows guests to really tailor the workspace and living space in the accommodation. So we're really bullish on Everhome. We think it will be an opportunity for us to grow even during this downturn as we have during prior downturns.

So then -- I'm sorry, not necessarily interested in anything on the acquisition front and extended stay?

Not at this point. I mean, we look at everything that comes along. And as I've said in the past, it's really got to pass 2 litmus tests. One, can Choice Hotels improve the ROI of the asset owner? And two, can I grow the brand to benefit our shareholders? And if something were available, we would look at it. It's those same to litmus test that we always look at. And I think if you look at our acquisition of WoodSpring, it followed that path perfectly. So that's how I would sort of answer the M&A question.

Our next question comes from Jared Shojaian with Wolfe Research.

So it's probably way too early to see any evidence of foreclosures. But can you just talk about your expectations around that idea? And can you talk about what that process looks like in terms of what fees are paid to you during the transition and how we should think about the brand remaining intact?

Are you talking about hotels that might not make it through this downturn? Jared, is that your...

That's correct. Yes.

Okay.

So the way that I would think about it -- go ahead.

No. Go ahead, Dom.

The way that I would think about it, Jared, it's really the profile of our franchisee. So on average, our franchisee owns fewer than 2 hotels. It's primarily financed with equity. And so it's not our possibility to see higher than 50% equity that's injected into these assets. So the foreclosure risk in our portfolio is very low. Even during the Great Recession, we saw very few foreclosures in the portfolio. So feel like we're in a very strong position overall from that regard. Obviously, we would continue to work with our franchisees to avoid something like that. But overall, we're not seeing that. That's immaterial risk to our portfolio.

Okay. And then I think you said 2/3 leisure travel, so implying roughly the other 1/3 is business travel. Can you just talk about that type of business traveler? And maybe how that differs from like some of the more full-service-oriented brands? And are these people usually traveling by air to get to your properties? Can you just help us understand that dynamic a little bit better?

Yes. Jared, it's more -- it's certainly more drive-to. We have -- I think it's only about 5% of the portfolio that's actually in an airport market. But even in those markets, you've got airline crews and cargo airline crews that stay in those hotels. When we say transportation, a lot of that is truckers, railroad business, logistics people are everybody from trainers and IT support professionals, those types of folks. We have a high level of business travel from traveling nurses in the health care space and also education services. So all of those, actually, when you look at what's happening in the jobs report, those segments actually had fewer job losses than others. Obviously, the hospitality space was one of the largest contributors. But as far as our core customer on the business travel side in that 1/3, they are the people that keep the country moving. And so they've been staying at our hotels over the last 8 weeks. We do expect them to continue to stay with us, but that's really the lion's share what makes up that 1/3 of business travelers.

Okay. That's helpful. And just one more quick one, if I may. Do you have your cash burn number for the month of April? And is there any sense you can give us in terms of this RevPAR environment how to be thinking about sort of your monthly burn, if there's even a burn at all?

Yes. Let me just -- I'll give you a headline, and then Dom can fill it in. I mean we've looked at -- if we had a zero revenue environment, we have enough cash to get us through really two years of operating without doing additional changes to the structure. In this revenue environment, we're looking at three years of ability to move at this pace. So the cash position liquidity is in a strong place. Dom, do you want to add to that?

Yes, Jared. The way I would think about it is your cash expenses, obviously, with no revenue coming in the door somewhere in the ballpark of that $30 million figure, which is where if you take the $725 million of capacity and divide it by that, it gets you to, call it, close to that 24-month period. So actually slightly a little bit higher than 24 months. If you assume that the trends that you've seen in the last, call it, 1 month to 1.5 months in a very low occupancy environment continued through the 3 years or so, which obviously, we don't expect either of those things to happen, the draconian no revenue environment or even continuing to see what you're seeing today, that's probably more like a net $20 million or so per month, which is putting you out to that three year period of time. And so obviously, in the last week or so, we've seen those occupancy levels rise by 200, 300, 400, 500 basis points. So that would only further reduce that $20 million of cash burn.

Our next question comes from Thomas Allen with Morgan Stanley.

Thanks for the positive commentary on the occupancy improvements you're seeing. Any color on how pricing is trending? And any expectations for how pricing is going to trend in the future?

Yes. In the whole sort of slide since the beginning of March, with REVPAR, it's been about 2/3 of that has been an occupancy decline and about 1/3 of it was rate so which has been really positive to see is that our franchisees have not tried to chase demand that wasn't out there by lowering rate. And that's going to be really important as recovery has started to occur. So Thomas, it's really been about 2/3 occ, 1/3 rate in the mix of RevPAR as we've seen over the last 8 weeks.

Okay. Helpful. And then can you just help us think through kind of what the labor expenses for one of your typical franchisees and like how flexible it is when properties are closed and then when they're kind of in this kind of demand environment?

Sure. Yes. Obviously, it depends on the segment you're in. You've got a WoodSpring hotel that could have 5 full-time equivalents all the way up to a Comfort Inn that has, call it, 25 to a Cambria that might have slightly more than that. So a lot of that depends on -- and our owners flex their housekeeping staff, and their salesforce is based on the seasonality that they see in their markets. So it's a moving target, and they're used to flexing depending on changing demand environments.One point, I mean one of the lowest demand periods in the hotel sector is that sort of in our -- where we are is that week between Christmas and New Year's. And that's normally probably like the lowest occupancy in a hotel's year, but so they're used to sort of having to set themselves up for that. They weren't used to being surprised by the middle of March, all this happening at one time. So their ability to flex payroll is pretty significant. The PPP loans and EIDL loans are helping them sort of get through this 8-week window that they have when you get one of those loans. So there is -- there are options out there at the federal level and also at the state level for relief programs that are helping owners hang on to their workforce. And that's been really important because they don't know when demand is going to return, and they want their staff back to be able to meet demand when it does return. But that just give you a general sense of sort of how many people work at the hotels and what the owners' flexibility is with regard to labor.

Our next question comes from David Katz with Jefferies.

I wanted to just go back to development efforts and I recognize it's an issue that we've discussed in the past about Cambria development, in particular, where you put some capital out. I think you usually give us an update on what that balance is. Can you talk a bit about what's in there and where that capital stands today?

Sure, David. So thanks for the question. It's very similar to what we talked about last quarter at the 10,000-foot view. Right now, the net capital outstanding sits at just north of -- it's right around $580 million. So you did see a slight increase in that. One of the things I will say, similar to what I said last time is, a good portion of that are the owned assets. So the portfolio that we took down last year, about 50% of that $581 million sits in the owned assets, call it, 15-or-so percent is key money, a little over 10% JV and the remainder are mezz loans. One of the things that I would say, David, is we feel really good about where the Cambria brand is. 50 hotels that are currently open, 25 that are going vertical at this point in time, another 60 to 70 or so in the pipeline over and above that.So this is one of those areas, and that's what I was talking about in my earlier comments, where $30 million is our -- more of our consistent CapEx run rate. Everything else is really discretionary. So if we feel that there is a solid Cambria project out there that we want to deploy capital against, we can certainly do that. But this is one of those levers that we can flex up and down during this environment. It gives us the flexibility to do that. The portfolio overall is -- it's got that runway for scale. We talked always about 75 to 100. You see that just what's open and what's in the pipe or under construction today. So again, we can certainly flex that up and down, and I just wanted to make sure that you understood that full $580 million.

Yes. Good to hear. And if I can follow-up quickly on a number of companies have talked about a breakeven occupancy level. In your case, I assume it would apply both at the hotel level. And then I suppose, corporately, the better question is really where earnings neutral is based on the changes that you've made so far?

Yes, David. If you had to look at it on a system-wide basis, it's probably around 30% occupancy. Obviously, that changes depending on an economy hotel versus a Cambria. But we look at it system-wide, our largest brands, Comfort, Quality, Econo Lodge, you're really talking about an occupancy level of about 30% breakeven. Now that's inclusive of the debt service. So you also have -- we have hotels that the owners have paid off the mortgage. So again, back to my point about a tailored approach here, every owner is in a different place, depending on what they paid for their land, what their mortgage is and the like. But 30% is about breakeven for that sort of mid- scale segment. It's a little bit higher as you move up, obviously, into the Cambria segment. But that's where we've really been running the last several weeks with regard to system-wide occupancy.

Our next question comes from Anthony Powell with Barclays.

You just mentioned that you had 60 Cambria hotels in the pipeline. Are those fully financed? And how do you see this event changing the hotel financing market over the long run? Do you expect to see more equity required or cash reserves required? And how does that impact your strategy?

So just to give you a breakdown, there's 50 that are open. There are 25 that are going vertical. So obviously, the ones that are going vertical are financed, and there's 60-plus additional in the pipeline, of which a portion are obviously financed. And so overall, what we saw pre-COVID was somewhere where you saw the LTCs reducing from, call it, 75% down to 65% or so. And certainly, we've seen a little more hesitancy in some of the lenders lending the money in this environment. Obviously, we would have to reevaluate once we get on the tail end of this. But overall, like I said, just what the 25 that we have that are going vertical today, we're feeling very comfortable. In terms of what we think the future LTC is going to be, little too early to tell right now given the fact that most of those are financed at this point. But out of the 60, we still feel really good about those that are under construction.

Got it. And you talked about revenue intensity a lot in the past couple of years. How do you keep pushing that revenue intensity up as you seek more conversions in this environment? Do you want to convert high-end properties in any kind of chain scale? Or what's the approach there?

Yes. I think it's really looking at those segments and locations where the higher revenue opportunities are for us as a company. And I think those are still going to be there. I think from the standpoint of continuing to push new construction Comforts into markets where there is a higher RevPAR opportunity, that's what's in our pipeline now. And a significant amount of that is under construction at Comfort, WoodSpring. I mean there's a lot of opportunity that we still see by having our hotels in these higher revenue-intensive locations. And then also the segments that they're in also will, over time, I think, improve the revenue intensity on the average across the entire portfolio because of that approach.

[Operator Instructions]. At this time, there are no additional questions. I would like to turn the conference back over to Pat Pacious for any closing remarks.

Thank you, Operator. Thanks again for your time this morning. These are undoubtedly challenging times, but there are opportunities going forward into the second quarter as well. We see several reasons our franchisees are better positioned than those to capture demand as the economic conditions approve. So I hope you all will stay safe and healthy, and we'll talk to you again this summer. Take care.

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