Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International Second Quarter 2021 Earnings Call . I will now turn the conference over to Allie Summers, Investor Relations Director for Choice Hotels.

Good morning, and thank you for joining us today. Before we begin, we would like to remind you that during this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results. Actual results may differ materially from those indicated in forward-looking statements, and you should consult the company's Forms 10-Q, 10-K and other SEC filings for information about important risk factors affecting the company, that you should consider. Moreover, we'd like to acknowledge that there continues to be 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 second quarter 2021 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section. This morning, Pat Pacious, our President and Chief Executive Officer; and Dom Dragisich, our Chief Financial Officer, will speak to our second quarter operating results and financial performance. He'll be joined by Scott Oaksmith, Senior Vice President, Real Estate and Finance. Following Pat and Dom's remarks, we'll be glad to take your questions. And with that, I'll turn the call over to Pat.

Thanks, Allie, and good morning, everyone. We appreciate you taking your time to join us. I'm pleased to report that Choice Hotels has continued to deliver strong results that once again significantly outperformed the industry and gained share across all segments in which we compete. Our June and July RevPAR results exceeded 2019 levels by approximately 5% and 15%, respectively. A truly remarkable achievement. For almost 1.5 years, we've maintained significant RevPAR index share gains against the competition as compared to 2019. In fact, this quarter, we increased RevPAR index versus our local competitors by nearly 5 percentage points as compared to 2019, through notable lift in both week day and weekend RevPAR index as reported by STR. Retaining these elevated competitive share gains even as the broader industry recovers illustrates that our strategic investments are working and gives us further optimism about our future revenue trajectory. Our goal is not simply to return to our 2019 performance levels but rather to capitalize on current and future investments to fuel our long-term growth and drive our performance to new levels. As previously discussed, we were very intentional in our approach to investing prior to the pandemic to drive growth across the more revenue-intense hotel segments. While we reduced our overall spend in 2020 due to the pandemic, we continue to invest in key strategic areas. More importantly, in today's stronger demand environment, we see an outsized opportunity to continue or even accelerate strategic investments to capture a greater share of travel demand. What gives us optimism is that the bold investments we've continued to make are paying off. These include launching and enhancing brands in each of our strategic segments, namely expanding our upscale positioning, strengthening our mid-scale leadership role and rapidly growing our extended-stay portfolio. We're also improving our…

Thanks, Pat, and good morning, everyone. I hope you and your families are all well. Today, I'd like to provide additional insights around our second quarter results, update you on our liquidity profile and capital allocation and share our thoughts on the outlook for the road ahead. Throughout my remarks today, I'll provide financial performance and RevPAR comparisons to 2019, which we believe are more meaningful in analyzing trends as the prior year's quarter results were significantly impacted by the pandemic. For comparison to 2020, please refer to our press release. For second quarter 2021 as compared to the same period of 2019, total revenues, excluding marketing and reservation system fees, were $142.4 million. Adjusted EBITDA increased 9% to $111.8 million, driven by improving RevPAR performance and continued cost discipline. Our adjusted EBITDA margin expanded to 79%, an 8% increase. And as a result, our adjusted earnings per share were $1.22 for the second quarter, a 3% increase versus the same period of 2019. Let's now take a closer look at our three key revenue levers beginning with royalty rate. The continued increases in our effective 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 pipeline. The company's domestic effective royalty rate once again exceeded 5% for the second consecutive quarter, growing 7 basis points for the second quarter 2021 compared to the same period of 2020, a reflection of the continued strengthening of the value proposition we provide to our franchise owners. We expect to maintain the historical growth trajectory of this lever for full year 2021 as owners seek Choice Hotels' proven capabilities of delivering strong top line revenues to their hotels…

Our first question comes from Dany Asad with Bank of America.

So I just wanted to start off by just asking a question on -- first, you were talking about how effectively, the Choice portfolio has been gaining so much share, right? And it's pretty significant. So can you just help us kind of see like the bigger -- those big gains. Are they in certain chain scales? Are they driven by certain markets? And how sustainable do you think that is?

Dany, it's coming from -- I mean, it's a very broad-based pickup across all of our brands across all of our regions. When we look at the consumer base, our guests that are 65 and older, that traveler is already back to 2019 levels. We're also seeing a younger traveler, a traveler that skews more female as well. And so it's really -- there isn't a single brand or a single region that's sort of driving this. It's really broad-based. And we look at this really in a variety of ways as to why that's happening. As I mentioned, our merchandising and promotion tools and our pricing tools, that we've really invested in over the last several years, are a significant driver of that. It's really helping us find those customers that are out there. And we did this all last year as well when demand was low. So those are the things that we see that are driving it. And secondly, the investments we made in our brands, Comfort in particular, we're seeing a lot of pickup in the quality and the Comfort brand, in particular. And the investments we made on refreshing that brand, again are helping. Finally, if you look at it pre-pandemic, we were cleaning up Comfort. So there were a lot more rooms out of commission as that brand was going through the renovation. So again, that's giving us additional optimism for a bigger size of the share that we're going to take as we move forward.

Dany, just quantitatively speaking, that 5 percentage points of RPI gain that we achieved in the second quarter, we actually report that on a local basis. So it's like-for-like products within like-for-like markets. And so when you take a look -- and in the prepared remarks, we talked about, every one of our select service brands had material RPI gains. So we are seeing it across the entire portfolio. And again, it averages out to about that 5 percentage points.

And Dom, just you ended your prepared comments with talking about EBITDA approaching 2019 levels even with incremental investments in the back half of this year. So can you just unpack that a little bit. First, in terms of the cadence of these investments? And first of all, is it going to be in corporate expense? And then what are these types of investment? Is it like on new brands? Is it on technology? Are you adding more people on your development teams or kind of what's driving that?

So when you take a look at it, obviously, the EBITDA outperformance was driven by both significant strength on the top line. Obviously, we're continuing to see those outsized RevPAR results. So when you take a look at Q3, we had guided in Q3 that RevPAR will continue to grow, I'd call it, the mid- to high single digits versus 2019. So when you take a look at year-to-date, you're starting to get within your 2019 RevPAR level. So we expect to see that strength in RevPAR to continue. Obviously, we expect to see it moderate potentially a little bit in the back half of the year as you get into Q4, et cetera. We're not expecting to see these 15 percentage points of RevPAR gains versus -- or RevPAR outperformance versus 2019 as we enter Q4 and some of that leisure travel begins to moderate somewhat. So obviously, we do expect to see continued strength in the top line. From an SG&A perspective, we had guided previously that the SG&A savings were going to be somewhere in that the ballpark normalized at that 10% to 15%. When you take a look at where we were in Q2, it was right around 10% down apples-to-apples. That includes, obviously, things like a merit increase and whatnot. So we're certainly on an apples-to-apples basis within that guidance that we previously reported as well. So the reality is we're in a much stronger demand environment now. And so when we're looking at the back half of the year, much like we did even during the pandemic, we're going to continue to invest. And we're certainly willing to sacrifice a little bit of margin if it ultimately leads to outsized growth in those outsized share gains. So when you think about those investments, certainly continuing to invest in brand growth opportunities, continuing to improve the value proposition as it pertains to revenue management tools and those types of things and then continuing to make the corporate functions more efficient. And if it means some capital investments that are required to do that, we would certainly be willing to make those investments. But ultimately, when you think about just the corporate margin, you would still continue to see it in those pre-pandemic levels. I know this company has always operated at about 70% margin or so. We were 79% margin this year -- or this quarter. And the reason for that is the higher demand period coupled with some of those SG&A investments.

Our next question comes from Robin Farley with UBS.

I just wanted to make sure I understand the dynamics of your EBITDA, such a strong 9% versus Q2 of '19 and then the EPS up 3%. And the difference had to do with marketing and system revenues or something. I wonder if you could just clarify whether that -- is that just a timing issue? Or what made the sort of the lower EPS growth relative to the great EBITDA growth?

So when we report the adjusted EBITDA and the adjusted EPS, excluding that marketing and reservation. Obviously, we can run surpluses and deficits. So just for comparable purposes, much like several of our competitors do, we adjust that out of the numbers. So it is a corporate EBITDA when we're quoting the significant outperformance. And again, Robin, what I would tell you is the significant EBITDA when you have a RevPAR that's coming in, in line with those 2019 levels, down 1% for the quarter, coupled with the 10% to 15% SG&A reduction that we had committed to, we're operating at a higher margin, and we're a more efficient business today than we were back in 2019. And so again, as we continue to look ahead into the Q3, and you see those outsized RevPAR gains versus 2019, we're continuing to see that margin flow through. Now obviously, on the EPS side, that flows through to the bottom line. Taxes may have been slightly up versus where we had expected. And the reason for that is our taxable income was significantly up as well for the quarter.

But in general, what kind of flow-through do you expect from EBITDA to the EPS line? In other words, was there -- you mentioned taxes slightly up. Is there anything else about the quarter that was unusual that wouldn't create that same dynamic in forward periods?

No, I mean, the reality is it's a pretty normalized and pretty clean quarter, and we would expect to see the same flow-through from EBITDA to EPS in the future.

Next question comes from Dori Kesten with Wells Fargo.

If you think about your trend in new signings, openings, renewals, when would you expect your pipeline to return to year-over-year growth versus its current contraction?

Dori, when we look at our pipeline, I mean, obviously, right now, with the increase in the conversion contracts we're doing, the velocity of those conversions move into our pipeline increases. So the average conversion stays in our pipeline anywhere from three to six months. If you look at Q2, we had about 8% -- or 14% rather, of our openings in were actually sold and open within the quarter. So they never even show up even in a quarter-over-quarter view. The other thing that we do on a normal basis is to look at the pipeline and remove those contracts where the developers are not planning to move forward. And we do that so that our sales team can have the opportunity to go out and fill those markets to fuel our long-term growth. I mean as you look at what we have been doing as the pandemic started, a little over 1.5 years ago and what we've been doing since then, we have been taking out contracts that when we talk to the developers, they are no longer planning to move forward. I would expect that's probably going to reverse itself by Q4 as owners sort of begin to reengage with their lenders and get their projects financed and start moving forward again. So that's a little bit of the assumption that we're looking at. But a lot of it depends on hotel financing coming back, which we are seeing, particularly in our extended stay segment. Just broadly speaking, when you look at our pipeline, about 50% of that pipe is a conversion hotel, a hotel under construction or one that is an advanced planning of -- stages of planning. So we feel really good about what we have in our pipe and that additional 50%, we closely monitor it and make sure that it's a contract that's going to move forward. At the end of the day, we're not changing our outlook on net unit growth, and we're excited by the uptick that we're seeing in application volumes for new contracts as well. So that's kind of how we think about the pipeline and how we're looking at it as it contributes to our net unit growth in the long term.

And historically, I think terminations have been about a 3% to 4% headwind to net unit growth or net rooms growth. Is there a reason to believe that this level should be lower going forward when you consider how many hotels have been refreshed and your -- you have, I guess, relatively higher-end properties coming into the system versus historically?

Well, certainly, we're finished with the Comfort cleanup. So if you look back over the last four or five years, that was a key driver of terminations. But we're back to our historical levels and feel really comfortable moving forward that we're not going to see increased terminations. The health of our franchisees right now with the PPP loans, the interest forbearance they were able to get. And those total cost of ownership savings that we're helping them with, which is lowering other areas of cost on their P&L. We see our franchisee base in a very healthy financial situation. So we would not anticipate terminations anything above historical levels.

Dori, I mean, when you take a look at where the terminations are trending today, they're trending right around that 4% mark. And the reality is when you take a closer look at the exhibits, you see that the vast majority of those terminations are actually coming from our transient economy brands. And so obviously, economy extended-stay very much red hot in terms of that unit growth, but it's really roadway and catalog in particular. And so again, this goes back to that revenue intensity story. So you're seeing it on the termination side that we're continuing to add more and more revenue-intense units, and you're losing some of the less revenue-intense units. And then even on the pipeline side, the vast majority of our pipeline is made up of those -- in those revenue-intense segments. So again, I would say close to 95% or so of the pipeline is those revenue-intense segments that we are really focused on.

Our next question comes from Michael Bellisario with Baird.

Just along those same lines, maybe can you provide some more details on the sequential decline in the system size? What came in during the quarter? What went out? And then any updated thoughts on when that net unit growth inflection might occur?

So when you take a look at the domestic unit growth, Michael, certainly very optimistic about those trends. We're continuing to see growth portfolio-wide. Excluding the economy transient segment, your rooms growth is above 3%. So certainly in line with where those historical trends were and frankly, accelerating versus where we were last year. The broader net unit growth decline was really driven in international. And a lot of that has to do with the disproportionate impact that COVID had specifically in Europe. Obviously, hotel closures were more common in Europe, especially in the portfolio that we were dealing with. We also looked at this as an opportunity to terminate some marginal or lower-performing products from the European portfolio that we felt in the long term were not necessarily going to be profitable. So a couple of multipacks with lower profitability. And so we expect to continue to see some of that trend continue into Q3 and Q4 this year internationally speaking, but then anticipate significant pickup in 2022 and beyond.

And then a bigger picture, maybe when you look at your franchisee base today, or at least maybe the incremental franchisee, are you seeing new first-time hotel owners join the Choice platform? Or are you seeing the existing franchisee base getting a little bit more concentrated? What's the makeup there of the new signings and the new franchisees coming on to the platform?

Yes. It's been interesting. Historically, we sell about 2/3 of our contracts to existing owners. I would say if we look at the last -- I know in Q2, and it's probably true in Q1 as well, we're seeing really 2/3 of new owners. And that -- some of that's being driven by the investors we're seeing now in our extended-stay segment. As I mentioned, these are more institutional capital-backed, multiunit owners. So we are seeing a higher percentage of owners, who we hadn't seen before who are developing, particularly in our extended-stay segment, which is a great opportunity for us. It means we're continuing to have our existing customers come back and build new hotels, which are also attracting a new category of franchisees, which again, I think is going to be a real tailwind for us in the future.

And those new franchisees, are they asking for anything differently? Or are their contracts structured any differently than they would have been if it were an existing franchisee joining the platform?

I mean, I think our franchise contracts are fairly market. So what we are offering our existing owners and what we're offering the new owners are fairly consistent with regard to franchise terms. A new owner that is new to the industry completely. Choice has always been a great place for people who are new to the industry to start. Our Choice University online training platform or area directors and our opening teams out in the field are used to dealing with owners new to the industry. So that's a muscle that we've had for many years, and so it's always helped new people get into the industry. And as I mentioned in the last couple of quarters, we are actually seeing that, which is a real positive.

Our next question comes from Patrick Scholes with Truist.

First off, thank you for talking at the start about changing customer habits and trends certainly as we try to figure out how -- what is changing in the world of hotels, having thoughts and information like that is very helpful. Moving on to my questions here. Certainly, your balance sheet is in -- at least by year-end will be in pre-COVID shape. How do you think about the priority of either share repurchases or dividends in light of the stock pretty much being at or near an all-time high here?

Well, I think as we've mentioned many times before, the allocation of our capital really goes to its highest and best use. And so we always start with our internal investments as Dom and I have been talking about. We've been investing prior to pandemic, and we invested through it, and we will continue to invest. We really, as I said, see some exciting opportunities in these revenue-intense segments to continue to grow our product portfolio. We're going to continue to invest in our value proposition. There's a significant amount of opportunity for us to lower the cost of running one of our hotels and help our owners set pricing and market their product more effectively as the cost of customer acquisition continues to go up as well. So those investments are going to continue. Secondly, we will look for M&A opportunities if they are out there and if they fit with our criteria around our ability to improve the unit economics for the franchisee and our ability to grow the brand for our shareholders. When it gets to dividends and share repurchases, it's really a factor of -- on share repurchases, when we see a dislocation from our view of intrinsic value, we're going to be in the market. We're not in the market in a programmatic way. We're in the market in a much more opportunistic way. And so that really is a function of how the capital markets perform and our internal view on the long-term growth of our equity. And then our dividend policy, we've returned it to our pre-COVID levels. We feel comfortable at the current dividend yield. And so that's kind of as you walk down those 4 steps how we think about our capital and how we think about returning it to shareholders as well as investing it back in the business.

The only thing I would add is we feel very good about where those leverage levels are as well. Obviously, on a gross basis, we're well within that 3 to 4x when you look at it on a net basis, just given the fact that we are sitting on a little bit of cash still, you're at 3.5x. And so the reality is when you look at each of those priorities, it's not an either or, in my opinion. I do think that you're going to have the ability to pull every one of those levers, obviously, when we continue to pay the dividend at those pre-pandemic levels. And so again, I think to Pat's point, the ability to play offense, especially in this recovery period is critical. But make no mistake, I think that returning capital back to shareholders will still continue to be a priority going forward.

Certainly, a high-class problem with having to pick and choose what to use there. I have 2 more questions. The first one is, in the press release, you talked about third quarter RevPAR growing mid- to high single digits versus 2019. Can you tell us what that comparable RevPAR number was? As I look back in the press release from two years ago, it was $59, but I don't think that is the, in fact, the comparable number to grow off of? Or do you have a ballpark number we can use?

Well, let me just broadly speak and talk about the third quarter. As we mentioned, the July was off to a very strong start in the quarter and is at plus 15%. We have to be careful, July had an extra Saturday in it, and we also had a favorable location of the 4th of July as regards to how it fell within the week. So those two elevated an already strong month. And as we look into August and September, we are going to -- we're seeing continued strength in the business. And it's a -- as you think about August and September, the calendar, impacts of that are going to have a slightly lesser impact than we saw in the first month of the quarter. I think Dom is trying to check on your number.

And the number is $55.10, Patrick. And so again, same methodology in terms of full room availability and ensuring that were actually reporting on a full room availability perspective, just given the fact that COVID did have an impact on temporary rooms out of service. We wanted to make sure that we change that methodology to be apples-to-apples. So the number is $55.

And then lastly, in the owned hotel revenue line in the quarter, obviously, up quite significantly. When I think about the drivers of that, was that because you had last -- a year ago in the quarter, quite a few of the Cambrias out of service. I just want to make sure we're thinking about the right way to model that going forward? Or was that growth due to any new hotels subsequently coming in over the past year?

No, it's really the location of the five hotels. LAX is an airport hotel. So obviously, when there was nobody flying, that one was significantly impacted. And New Orleans and Nashville and now Houston are doing quite well with the type of traveler, who is out there and what's going on in those markets. So it's really location-driven, as to why things were lower last year and why they're really strong this year.

Our next question comes from David Katz with Jefferies.

I wanted to go back to the conversions number, which I think you've discussed somewhat is strikingly large. Can you just talk about the value proposition out there? And I suppose that's a nice way of asking just how competitive it is? And how much capital people are putting into the marketplace because we certainly hear peers talking about conversion, pursuits as well? Any color there would be helpful.

I think, David, it's -- conversions are nothing new to us, and it may be new to some competitors and certain brands. So if you're going to take a new build brand and all of a sudden start with conversions, there's a significant amount of internal hurdles, I would say, you have to get over. That's not the case with the majority of our brands. Comfort Inn is about 2/3 new construction and about 1/3 conversions. And that's essentially what we saw in the quarter from the standpoint of contracts being added. And then when you look at other brands that we have, Quality, and Roadway, Clarion Pointe, these are all 100% conversion brands. And so that -- we have an engine here that runs through those performance improvement plans that are aligned with those individual brand standards. And so we know what we're looking for in the marketplace. We know how to engage with owners, particularly in a time like this when supply chains are constrained and understand what the guest values and what needs to be in a property improvement plan. So there's a lot of complexity in driving conversion into your brands, if you're not doing it on a regular basis. And so I think that's one aspect of this is during good times, we do conversions; during bad times, we do even more conversions. So it's not something we have to turn the switch on. It's an always-on process. And I think that's part of it. The second thing is, if you go back to the last downturn, Ascend wasn't where it is today. Clarion Pointe isn't where it is today. MainStay and Suburban, as Dom and I have discussed, are really accelerating from the standpoint of new contracts. So we have additional brands that 10…

David, it's really showing up in the numbers as well when you look at the first half of this year. Your conversion agreements are up 43% year-over-year, and I know that 2020 is probably not the best comp. So even when you take a look your conversion contracts are approaching 90% of 2019 levels as well, even in the environment that we're in today.

This concludes our question-and-answer session. I would like to turn the conference back over to Pat Pacious for any closing remarks.

Thank you, operator, and thanks, everyone, again, for your time this morning. I hope you all stay safe, stay healthy, and we'll talk to you again in the fall. Have a great day.

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