Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International Third Quarter 2021 Earnings Call. At this time, all lines are in a listen-only mode. I will now turn the conference over to Allie Summers.

Before we begin, we'd like to remind you that during this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results. Actual results may differ materially from those indicated in forward-looking statements, and you should consult the company's Forms 10-Q, 10-K and other SEC filings for information about important 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 our first 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 third quarter operating results and financial performance. They will be joined by Scott Oaksmith, Senior Vice President, Real Estate and Finance. Following Pat and Dom's remarks, we'll be glad to take your questions. And with that, I'll turn the call over to Pat.

Thanks, Allie, and good morning, everyone. We appreciate you taking the time to join us. I'm pleased to report that Choice Hotels continued to deliver strong RevPAR growth in the third quarter that once again significantly outperformed the industry. We also continue to gain share across all segments in which we compete. As a result of these performance trends, we expect to surpass 2019 RevPAR and adjusted EBITDA levels for full year 2021. By continuing to implement our long-term strategy, we have positioned Choice Hotels to further benefit from post-pandemic trends that favor leisure travel, limited service hotels and longer stays. Additionally, our business traveler demand has returned to levels similar to the third quarter of 2019. The third quarter was exceptional, our strongest quarter of the year. Our RevPAR increased 11.4% compared to the third quarter of 2019, surpassing our prior quarterly RevPAR guidance. In fact, RevPAR has now exceeded 2019 levels for five consecutive months, with trends continuing into the fourth quarter. For over 1.5 years, we've maintained significantly higher RevPAR index share gains against the competition compared to 2019. We continued this trend in the third quarter, increasing RevPAR index versus our local competitors by nearly four percentage points as compared to 2019, reflecting continued growth in both weekday and weekend RevPAR index as reported by STR. Choice's ability to continue to gain share even as the broader industry recovers, demonstrates that our strategic investments are paying off and gives us further confidence in our future revenue trajectory. Because of our strategic investments, both before and during the pandemic, we are in a stronger position today to capitalize on outsized growth opportunities over the long term, which we expect will create value and drive our performance to new levels. What's most impressive is that we continue to…

Thanks, Pat, and good morning, everyone. I hope you and your families are all well. Today, I'd like to provide some additional insights on our third quarter results, update you on our liquidity profile and capital allocation and share our thoughts on the outlook for what lies ahead. As we discussed in the previous quarter, we are comparing our financial performance and RevPAR results to 2019, which we believe offers a more meaningful basis for analyzing trends as the prior year's quarterly results were significantly impacted by the pandemic. For comparisons to 2020, please refer to today's earnings press release. For third quarter 2021 as compared to the same period of 2019, total revenues, excluding marketing and reservation system fees, were $166.5 million, an 8% increase. Adjusted EBITDA rose 18% and to $133.2 million, driven by improving RevPAR performance, revenue intense unit growth and strong effective royalty rate growth, coupled with continued cost discipline. Our adjusted EBITDA margin expanded to 80%, a rise of seven percentage points. And as a result, our adjusted earnings per share were $1.51 in for the third quarter, an increase of 10% versus 2019. Let's now turn to our three key revenue levers beginning with royalty rate. Our effective royalty rate remains a significant source of our revenue growth. The company's domestic effective royalty rate increased by eight basis points year-over-year to approximately 5% compared to the third quarter of 2020. This performance reflects the continued strengthening of the value proposition we provide to our franchise owners, their continued interest in being affiliated with our proven brands and the promising prospects in our pipeline. It also provides further validation of our long-term past, current and future investments on behalf of our franchisees. We expect to maintain the current growth trajectory of this lever for full…

The first question comes from the line of Dany Asad with Bank of America. Please go ahead.

Hey, good morning everybody. Maybe this question is for Pat, but it may be too early to talk about next year, but at least directionally or at a high level, can you maybe tell us how you're thinking about demand and rate dynamics and how that's going to play out into 2022?

Sure. So I think the interesting thing about rate and RevPAR in general has not only been the sort of outperformance that we've seen -- But we're really seeing a 1-2 punch here with both rate and occupancy gains above what the average chain scale is doing and what the overall industry is doing. So if you look at rate our revenue management tool and our revenue management consultants are really helping our franchisees drive higher rate, and we believe that's going to be a sustainable gain that we're going to see last for the longer term here. So pushing well into next year as your question sort of is trying to get at. And I think the same thing is true on the other side with occupancy, our ability to sort of drive the right merchandising and promotion strategy for the right customer at the right time of the year for the right day of week is really a new capability that we've invested in over the last several years, and it's really helped our hotels do well not only during the pandemic, but during the recovery. So if I look at Q4 and I look into Q1 and Q2 of next year, we do believe those are going to continue to provide us with outsized opportunities. When I look at really the upcoming holidays, I think we've continually outperformed every holiday going back to Memorial Day. So that expectation that we have on sort of outperformance on the holidays, we've really been surprised each time. What's really driving a lot of this is the rate aspect of this, which I mentioned. But if I look at college football, I look at fall foliage, I look at some of the areas where we expected demand, we have been surprised…

That's really helpful. Thank you. And maybe just one like clarification follow-up. The revenue management tool and the initiatives that you're rolling out, how long do you envision that to last into 2022 that tailwind?

Well, I think it's a permanent change for us. I think in the past, some of our hotels were leaving money on the table with regard to rate. This tool is providing them with an ability to change their pricing, and it runs dynamic pricing multiple times a day. And in an environment like we're in right now, you've got inflation going on, you've got a lot of surprise, hey, this state is lifting the restriction or this event is not going to happen. And the ability to forecast, there's a lot more volatility, I guess, in the forecast for our owners. And this tool is really helping them adjust to those market trends in real time. So this is a permanent capability for our hotels going forward. And I think it's going to be -- again, I think it's a key driver as to why our RevPAR index gains have been driven so much higher, and I would expect that to be sustainable for the long term.

And Dany, one thing to note is that we have 5,000 hotels that are currently live today. So there's also a tailwind. We expect by the end of the year for all of our hotels to be live. So we would expect to see an uplift associated with the remaining rollout as well.

Thank you.

The next question comes from the line of Robin Farley with UBS. Please go ahead.

Oh, great. Thanks. I know you commented a little bit about distribution. I wonder if you could quantify any change in kind of OTA channel versus 2019? Thanks.

Yes. I think it's been a sort of -- it's really improved, I would say, from the standpoint of our business delivery has improved relative to what we call nonproprietary channels. So our proprietary delivery through our reservation system, our mobile app, and our global sales force continued to be strong. And I think what's really key when you look back at prior recoveries, where the third-party providers took share, that didn't happen at this time. And I think a lot of that is not only Choice Hotels, but the industry as a whole has gotten smarter about not putting distressed inventory out and trying to chase occupancy that wasn't there. So we haven't seen any change other than the continued trajectory of our proprietary channels getting stronger. That's business through our loyalty program and business through our website and our mobile apps.

Interesting to some of the larger hotel companies who granted to have more of a SKU to business travel than Choice does, did see more OTA distribution because of the mix, right, because of shifting more to leisure from business travel. So even for Choice, even though you're already more focused on leisure travel, you didn't see some of the business travel mix reduction kind of leading to higher OTA?

So I think in a broader term, when you look at it over the long term, we have not. I think in Q3, where you do see normally that business traveler come back once the summer ends, it does normally shift. But when I look at our Q3 of 2021 versus what we would normally see in Q3 of 2019 the patterns didn't change. And I think that's a reflection of the fact that we are a strong leisure, so are the OTAs. And so we're used to sort of that competitive environment with regard to customer capture and then ultimately, business delivery.

Okay. Thanks. And then just one quick clarification on the rate recommendation system. When did that start rolling out.

We really started rolling out at the beginning of the summer and essentially got to 5,000 hotels here on the platform in September. And again, it was a key sort of investment that we've made. This isn't something we dreamed up six months ago. This was an investment we began as the pandemic was actually beginning, we began the work on it and the work got completed. And as I said in my remarks, it really got rolled out at a critical juncture when vaccination rates in the U.S. started to decline, and we really started to see that sort of, as we mentioned, the five consecutive months of return to 2019 levels or exceeding 2019 levels. And so that the rollout really occurred here at just the right time for the strong summer demand period that we traditionally have.

Thank you very much.

Next question comes from the line of Patrick Schulz with Baird. Please go ahead.

Hey, good morning Pat and Dom. A couple of questions here. Obviously, you have a very enviable balance sheet. Can I just get your latest thoughts on your going-forward preferences for share repurchases versus dividends?

Yes. So overall, what I would say is our capital allocation strategy continues to remain the same. Obviously, we talk first and foremost about reinvesting in the business like we always have. We're going to continue to evaluate M&A opportunities. Our balance sheet is in the best place it could possibly be in, frankly. When you take a look at the net leverage of 1.8 times, I would say we're certainly under levered. So returning capital to shareholders is going to continue to be a priority. Obviously, we returned the dividend back to prepandemic levels. We were the first hotel company to do that. So we'll continue to pay that ordinary dividend. But make no mistake, I think share repurchases will continue to be a part of that capital allocation hierarchy in the future. With $1 billion of cash and available capacity on the balance sheet today, I think we're going to have the opportunity to pull every lever. Obviously, we wanted to see what that recovery trajectory looked like prior to going very aggressive on the share repurchases. So what you see is year-to-date, we're about $10 million in terms of share repurchases. So we will continue to evaluate in the context of, obviously, the overall investment opportunities, both organically as well as the M&A landscape.

Okay. Thank you. And then shifting gears here. It looks like in the quarter, you had what I would call an adjusted net gain on the marketing and reservation line of about $10 million. How should we think about those marketing and reservation revenues and expenses and net gains or losses going forward? Thank you.

The reality is when we present our adjusted numbers, the good news is that gain is not included in that adjusted EBITDA figure. So I think that's a really important thing to note. So we're not getting the benefit of the gain on the marketing. The reality is that marketing in the rest fund has to break even over the life of the fund itself. And so we essentially normalize for any gains or losses in that fund on a quarterly basis. What you typically see is Q1 and Q4, you typically see that fund running a deficit. It's just a lower demand months of the year, the six months out of the year. When you take a look at Q2 and Q3, in particular, we typically would run a surplus. So over the long term, obviously, you would see breakevens over the full year, you would get pretty close to breakeven, frankly. But in quarter, you can see certainly surpluses and deficits that we take out of that adjusted EBITDA figure. So when you look at that, it's an apples-to-apples comp.

Thank you. I'm good thank you.

Your next question comes from Michael Bellisario with Baird. Please go ahead.

Thanks. Good morning everyone. Just first question, I want to go back to the revenue management technology that you've been talking about. Are there any numbers that you guys can provide? I mean I'm thinking specifically the maybe ADR delta for hotels using the technology versus hotels not using it because it sounds like not every hotel is on the platform yet? Just trying to quantify the technology-specific lift that you guys saw during the quarter? And maybe what that might mean for numbers going forward as you guys get fully rolled out?

Yes. I want to be clear on what's on the platform today and what's to come. We are working on for the future, our extended-stay brands for our revenue management capability. There really isn't anything out there today for those brands that looks like what we're using today for a transient brand. So that 10 percent of our portfolio is not on this platform yet. That is coming in a future phase. But I think if you look at the thing we look at is not necessarily the delta, I mean, obviously, that shows up in our average daily rate index gains that we've seen. What I'm most pleased by is the adoption of the recommendation by our franchisees. And that's in the sort of mid-90 percent of the recommendations that come across from the algorithm and from the recommendations, our franchisees are accepting that today. And that's what I mean by a step function change compared to the prior tool that we had. There's just a greater belief that this is market specific. It is up to date. It's in real time. And also -- the fact that our owners can do it from anywhere on their phone, they can monitor what's happening at their hotel, what's happening in their market because they're not always on site. Those are all key drivers, I think, as to why this has become more effective. And if I look at our trends even into October, in October, we saw a RevPAR gain of about 10.5 percent I think it was 10.6 percent compared to 2019 levels. So when you look at that final rollout, I think the last hotel of the 5,000 was probably went live in the early part of September. So we really are seeing that sort of continued outperformance in a month, that's traditionally softer than what we would normally see in our summer months. So that's -- those are some of the key items I would point to around the revenue management tool that are driving the outperformance.

Got it. That's helpful. Thank you. And then just in a couple of other questions on the customer. I want to focus back but specifically on loyalty contribution. Is there any updated percentage figure that you can provide? And then maybe more broadly on the same topic, the new customers that you mentioned that are coming to your hotels, do you know where they were staying before? What's the profile of that new customer look like that you're capturing more of today?

So I think on the loyalty contribution, we're similar to where we were at pre-pandemic levels. sort of that 40 percent contribution levels of four every 10. We're excited by the sort of future growth opportunities in loyalty. Given some of the newer customers, as we mentioned. I think a lot of the newer customers that we're seeing are younger customers, which is really good for us given our sort of traditional customers more that sort of baby boomer demographic today, that makes up the bulk. We're seeing, as we would expect, a pickup in Gen X, we're seeing a pickup in millennials, and we're even starting to see incrementally some Gen Z customers in our hotels. So that's a real positive. As I keep talking about, our goal here is to build the brands for the guests of tomorrow. And so we're constantly looking. If you look at the refresh of the Comfort brand and the new prototype there, a lot of that was designed to appeal to that type of consumer. Our Cambria option for leisure markets and secondary markets again is going to go after a guest that skews a little younger and higher income. So we are pretty excited about sort of the trends we're seeing in the sort of post-pandemic recovery about the types of consumers that are showing up in our hotels that we had not seen before.

Yes. The only thing I would add on that one, Michael, is the $4 out of every $10 loyalty, it's a portfolio average. Obviously, the further up the chain scale you go, the heavier loyalty contribution there is. So obviously, with our Comfort product, our Cambria product, you see a much higher percentage of loyalty contribution when you shift down to the economy segment, it's much lower. Obviously, a. It's a lower loyalty contribution. The other really impressive stat that we have is when you take a look back at 2019, we actually are seeing the percentage coming from CPLE, our most loyal customers actually increasing by almost 300 basis points versus 2019. So we're continuing to see that loyal customer return. So obviously, it's a really good trend that we're continuing to see. And then just in terms of where we're actually stealing share, when you take a look at every segment, we've actually seen RPI index gains or RevPAR index gains across every segment. And so the reality is you're continuing to see local share gains. So that's comparing like-for-like properties in like locations. So feeling very good about not only driving that new customer traffic, but also taking share from very similarly placed properties.

Understood. Very helpful. Thanks. Operator 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, for your time this morning. I hope you all stay safe and healthy, and we will talk to you all again in the New Year. Have a great rest of your day.

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