Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's Fourth Quarter and Full Year 2021 Earnings Call. At this time, all lines are in a listen-only mode. 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'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 it's 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. 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 fourth quarter and full year 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 fourth quarter and full year 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. 2021 was a remarkable year for Choice Hotels. A year, our RevPAR and adjusted EBITDA performance surpassed both 2019 levels and our previously reported guidance. Our full year 2021 RevPAR increased 2.2% compared to 2019. And our full year 2021 adjusted EBITDA grew 8% compared to 2019. We drove RevPAR results for full year 2021 that materially outperformed the industry and gained share across all segments in which we compete. Our fourth quarter RevPAR growth was exceptional, with RevPAR increasing 13.9% from the same quarter of 2019 and marking the strongest quarter of the year. This performance was driven by a set of deliberate actions before and during the pandemic, resulting in Choice Hotels emerging as an even stronger company than we were in 2019. Throughout 2021, our performance continued to strengthen, exceeding our 2019 RevPAR levels for the last seven months of the year. As previously reported, our economy segment led the recovery beginning in the second quarter of the year. Our upper mid-scale and mid-scale segments quickly followed, surpassing 2019 levels in the third quarter and our RevPAR growth rates have continued to improve quarter-over-quarter since the onset of the pandemic. In 2022, we expect our momentum to continue into the first quarter despite the Omicron variant. In fact, our January RevPAR results exceeded 2019 levels by approximately 12%. We are very optimistic about our runway for growth because of the long-term investments we have made and will continue to make in our business. These investments are designed to capitalize on the consumer trends that have accelerated during the pandemic, favoring leisure travel, limited-service hotels and longer length of stay. We expect these trends to continue to be strong, long-term tailwinds for our…

Thanks, Pat and good morning, everyone. I hope that you and your families are all well. Today, I'd like to provide you with additional details for our fourth quarter and full year results, updates you on our liquidity profile and capital allocation and share thoughts on our outlook for the road ahead. As we've discussed in the previous quarters, we are comparing our financial performance and RevPAR growth to 2019 which we believe offers a more meaningful basis for analyzing trends. For comparisons to 2020, please refer to today's earnings press release. For full year 2021, a combination of impressive RevPAR performance, revenue intense unit growth and strong effective royalty rate growth, coupled with disciplined cost management resulted in Choice Hotels' full year adjusted EBITDA exceeding 2019 levels. In fact, our full year adjusted EBITDA increased 8% compared to the same period of 2019 and exceeded the top end of our previous full year guidance, even with incremental investments in the fourth quarter. Our adjusted EBITDA margin for full year 2021 expanded to nearly 75%, an increase of over five percentage points compared to 2019. These figures for both our adjusted EBITDA and adjusted EBITDA margin in 2021 are new records for our company. Given these impressive results, combined with our confidence that we will continue to generate strong cash flow and our optimism in our future growth prospects, we recently increased the quarterly dividend to a level higher than pre-pandemic. This follows the previously announced reinstatement of our share repurchase program. For the fourth quarter 2021 compared to the same period of 2019, total revenues, excluding marketing and reservation system fees, were $140.2 million, an 8% increase and adjusted EBITDA grew 14% to $95.5 million. As a result, our adjusted earnings per share were $0.99 for the fourth quarter,…

Our first question comes from Robin Farley with UBS. Please go ahead.

Great, thanks. Just circling back to the comments you made on the increase in your liquidity. Can you talk about how M&A might fit into your plans?

Sure, Robin. I think as we've always discussed around our total capital allocation, M&A is one of the levers that we look at. Obviously, we're a company that has done some external acquisitions. We've also invested internally on organic growth. So we do continue to look for tuck-in acquisitions that could make sense for us. I think as we've talked about in prior calls, we do have some white space in our domestic portfolio, primarily in that upscale, extended-stay world, we don't play yet in the upper upscale world. So there are some opportunities that are out there if the right acquisition opportunity came along. And then similarly, when we look internationally, as we look for growth in markets that favor our types of brands and the franchising model. Those are the areas that, from an M&A perspective, we've historically looked at. And so it's something we'll continue to do. And if the right opportunities come along that meet our litmus test which is, can I improve the return on investment for the franchisee and can I grow the brand for the benefit of our shareholders. So those are the two key litmus tests, we generally applied to any M&A opportunities that we look at.

Okay, great. And one other question on conversions. A lot of other hotel companies, that's been your bread-and-butter for a while, a lot of other companies focusing on that in this environment. Can you -- I don't know if you have a way to quantify kind of what your market share of like all the conversions signed in 2021 was and kind of how that compares to 2019? I guess trying to get a sense of whether, I assume the pie is getting larger but is it also -- is the market share a little more competitive for that?

Yes. Let me -- I mean historically, in upmarkets our mix between the conversion and new construction deals that we do every year is about 2/3, 1/3, so we do about 2/3 conversion, 1/3 new construction. During downturns, it generally shifts to more 80% conversions. And what's really interesting and impressive, I think, for the health of our brands, Robin, is what happened last year is we had more of a normalized year. So we -- in 2020, we shifted to more of an 80% conversion, 20% new construction but in 2021, we're back to that 2/3 conversion, 1/3 new construction which is a really healthy place for us to be, given the brands that we have. Regarding are we getting our fair share of them, I would say, yes. I mean I think if I look at the quality of the conversions that we're bringing in, as we mentioned in our remarks, the entries or new entries into the system versus the exit was a 2x multiple. So the revenue intensity was twice of what exited when you look at what we brought in versus what exited. And again, that's -- a lot of that is driven by highly profitable conversions. So we're bringing in the right conversions. I don't know from the standpoint of understanding the total market share of conversions that are out there. I guess somebody would have to go and do that analysis.

Robin, the only thing I would add is when you take a look at the contracts for both full year and even in quarter four, we feel very optimistic just about the growth that we're seeing on the conversion side of the house. Broadly speaking, our contracts were up almost 25%, both for the broader portfolio as well as your conversions element. And so as the market continues to expand, we continue to capture more than our fair share, frankly, especially when you look at the domestic market. The Comfort family alone, we had a higher number of conversion openings in 2021 than we've had in the last eight years. So that's dating back to 2013. So when you take a look at our segments, mid-scale, upper mid-scale, in particular, where we see a lot of that conversion activity, we continue to take tremendous share, continuing to see this 25% growth rates versus last year. We feel very good about the prospects in the future as well. Some of that conversion activity that you're probably hearing about too, a lot of that's in the upscale space, if you think about soft brands, etcetera. And we're continuing to see pretty significant momentum with our upscale conversion brand Ascend as well. So feeling very good about where the company is positioned.

Okay, great. Thank you very much.

Thank you.

Our next question comes from Thomas Allen with Morgan Stanley. Please go ahead.

Thank you. Can you help us think about the net unit growth for 2022 and thereafter?

Sure. So Thomas, I think the best way to think about it is that revenue-intense unit growth. So what we talked about is if you exclude those AMR terminations as well as the strategic terms, we grew that revenue-intense unit growth just under 2%. What I would say is in 2022, we expect to see that revenue-intense unit growth trend continue. I think what gives us even more optimism is it's the point that Pat made in the previous question which was -- the units coming into the system are 2x as revenue intense as those units exiting the system. So when you extrapolate that to what our historical unit growth looks like, it's more like a 3%-to-4%-unit growth that we're seeing today. So you're basically saying that next year, your revenue-intense units are going to grow at 2x. We also expect to see that 2x multiplier, so to speak. We expect to see that actually increase in 2022. So again, looking at that, the contribution of revenue from those units, you're going to be well within that historical 3% to 4% range.

Yes. And Thomas, I would just say that we're -- our unit growth is accretive. That's really what we're looking to do is to add units that are more accretive from an earnings perspective over time, particularly in some of our brands that have critical mass. And it's really about optimizing the market opportunity for that hotel in that specific market. And if we have an opportunity to have a more revenue intense and royalty intense contributor to the brand and ultimately to the system. That's what we've been doing on a regular basis. It's what we did at the end of the fourth quarter with taking some strategic terminations, really because we see the opportunity for that market to drive a higher profitability hotel for us. And that's just a continuing practice that we're going to continue to do as we move forward.

Helpful. And then, just on my follow-up. Can you just help us think about initial franchise and relicensing fees, procurement services and the owned segment profitability as we think about 2022 versus 2021, certain parts of those businesses are already above 2019 levels. I think certain of catch up. So can you just help us things about each of those lines?

Yes. Thomas, let me just start and then Dom can fill in some of the detail. I mean, I think broadly speaking, when we look at both volume and the relicensing opportunities that we've had, we had a pretty robust year from that perspective. And again, I think it speaks to the value proposition that we have been improving over the years. So our franchisees when they come up on a relicensing opportunity where they sell their hotel to another franchisee gives us the opportunity to kind of reset that relationship and do it in a way that is more beneficial to the shareholders. I think as the value prop has gotten better, we're able to sort of charge higher fees. And so we're seeing that in our numbers as well. So it's been both a volume and then also a value per contract increased as we've looked at that world. I think on procurement, this is -- a lot of that business is driven by occupancy. So as we said with the last seven months of 2021, we were back to 2019 RevPAR levels. So it's really -- that's a building revenue line for us. But again, a lot of that is soaps and sheets and towels and the like that are really driven by how many guests you have in your hotels.

Yes. Just putting a finer point just in terms of the data, when you look at the relics in particular, we were about twice the volume in 2021 that we saw in 2020. So we're continuing to see those recovery trends flow through the relic line item. The one thing I would caution you is the relics are now amortized over the life of the contract, essentially the straight line due to the new revenue recognition standard. So when you model it out, you would want to grow that basically with system growth, broadly speaking. And then on the procurement services side of the house, I would say at a minimum, you would grow those in line with your loyalty revenues as well. As Pat mentioned, obviously, in line with occupancy rates. So we feel very good about that. But we're continuing to grow our services that we provide, our select vendors, etcetera. So I think that there's frankly an opportunity to grow procurement services, at least in the short to midterm, even higher than your royalty revenue.

Helpful. Thank you.

Thank you.

Our next question comes from David Katz with Jefferies. Please go ahead.

Good morning, everyone or afternoon, everyone. Thanks for taking my question. The discussion around revenue intensity is noteworthy. If we were to look at the upscale brands that you're adding, albeit they're smaller but you're adding to them. Is there any math you can help us with around what each incremental Cambria or Ascend adds or I assume the intensity of those is quite a bit greater than the system overall?

Yes, David, that's absolutely right. I think we've shared this a couple of years ago and the ratio still hold pretty constant. When you look at an upper midscale brand like a Comfort that brand alone is about 3x as revenue intense as an economy segment product. When you look at something like a Cambria, you could be upwards of 10 or more times greater on a revenue intensity basis than economy. We feel very good about, too, is an extended stay even with your economy extended stay product like WoodSpring because of the high royalty fee associated with it as well as the higher room count. WoodSpring product could be 3x the revenue intensity of a more transient economy hotel as well. So when you look at all those puts and takes, that's what we talked about is it averages out today to about 2x in terms of what's coming in versus what's churning because most of that churn is happening in those economy products. When you take a look at the press release exhibits, you'll see Econo Lodge and Roadway in particular, is where you're see the biggest pressure. So we do expect to see not only that 2x continue but we actually expect to see that 2x increase as we continue to focus on this revenue-intense strategy.

And just to be clear about the definition of the word intensity. Does that mean that, a, Cambria hypothetically generates 10x the revenue?

Yes. We look at it more from intensity value. Yes, Dave, we look at it more from a net present value back to the company. So it's a factor of the length of the contract, the effective royalty rate and the royalties that are driven. And those lengths vary by brand. And so if you have a Cambria which has a higher room count and has a higher RevPAR market and has a 20-year agreement, those are the factors that go into understanding what we believe the value that contract is for our system.

Got it. And if I can just ask one more. With respect to M&A, any boundaries you can sort of help us set in terms of size and whether you would be looking much more so upscale rather than economy level at this point. Where how would you help us think about that?

Yes. I think -- I mean our balance sheet is in a very healthy position. So the size of the opportunity, given what I believe is out there. We don't see anything that's too large for us. I think when we look at our strategy of moving in a more revenue-intense fashion, looking for things that are in more of what we categorize as those revenue-intensive type of unit growth categories. That's where our strategic thoughts go as far as accretive M&A that would be beneficial to us in the long term.

Understood. Thank you very much.

Thank you.

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

Thanks. Good afternoon, everyone.

Good afternoon, Michael.

I have a question kind of along the same lines but I want to focus on kind of the newer and higher-end brands, again but on the deals that you're signing and opening. Can you help us understand the customer makeup and how that differs for hotels, the higher-end hotels versus some of your more legacy brands? And then also, how does the franchisee and developer makeup differ for those hotels? Just kind of really trying to understand the overlap and potential synergy that exists there as you moving up the ADR curve, so to speak?

Yes. I think, Michael, when we look at the brands that we've been growing, when you look at both the Ascend Collection and Cambria, they fit nicely on top of our core upper midscale brands. And we know our customers when we've done research are staying in that upscale select service product, so there's a lot of overlap on that front. When you look at the extended stay opportunities that we've been growing with that customer segment as well is something that is currently in our current hotels today. So in our economy segment, we do have people who are staying larger length of stay in our transient economy hotels. And so with our suburban brand, our WoodSpring brand, that's a very common customer that we already had in our customer set. When you look at the franchisee makeup, it's really interesting because there's always a bit of a barbell situation going on, where our upscale investors or developers which tend to be more institutional capital are now investing in economy extended stay. And so that was always something that we had looked at when we were looking at the WoodSpring acquisition was the ability to bring institutional capital into that brand and ultimately into the segment because it's now grown significantly. So there's a nice synergy of our existing both upscale and economy-extended stay developers. When you look at our sort of bread-and-butter developers in the mid-scale segment, we're starting to see them move into Cambria. So we're starting to do more Cambria development with some of our larger Comfort Inn developers as well. So I think in both the customer side and the developer side, we're leveraging existing customer bases to grow both of those brand segments.

Got it. That's helpful. And then, just -- can you remind us where you guys are with your balance sheet investments on a net basis for Cambria? How much is left? And maybe where you earmark any of those remaining dollars, whether it's for Cambria or other brands going forward?

Yes, Michael. So broadly speaking, we have about $550 million of our investment out there. Obviously, we have authorization up to that $725 million. When you break it down, probably half of that or so is in those owned assets. And so we expect to continue to deploy a level of capital against the Cambria brand and growing the Cambria brand. Most of that in the future is coming in the form of just typical key money investments. So I think that's really critical. And then broadly speaking, I think you could see some elevated key money in growing in those strategic segments. If you think about, again, back to that revenue-intensity story, you look at it on just the value that will be derived by growing that portfolio further. We do expect to use our balance sheet from a key money perspective. You saw maybe slightly elevated key money from '21 to '20 which is to be expected, just given the fact that we are in a recovery environment but it was only about a $6 million increase year-over-year. So we would expect to see those trends continuing into the future.

Thank you.

Thank you.

Our next question comes from Patrick Scholes with Truist. Please go ahead.

Hi. Good afternoon, everyone.

Good afternoon, Patrick.

You know, when I think about the hotels from AMR wrapping out, I guess I was concurrent with the sale to Hyatt. Do you see that as a onetime thing given that they probably get their franchise contracts had the option to exit out? Or could there be more, I guess, in the material amount down the road? Can you give some broad color on that.

Yes, Patrick, that was really a onetime event. I mean those hotels joined the Ascend Collection literally a month before the pandemic hit and then they were acquired in the fourth quarter of this year. So they never really were able to be much of a revenue contributor to us. And so the exit was really around being acquired by another hotel company. So I would think about it this way. we know there's an opportunity there to send our guests into more of an inclusive product. And there are other owners out there that it would make sense for us to work with in the future. So we do think there's an opportunity for us in probably the medium term here to find a similar type relationship going forward.

Yes, Patrick. One thing I would want to add, just to clarify, broadly speaking, is when you look at the international unit growth as well, I mean, the reality is there's no AMRs left to terminate. So we would expect that to be an opportunity to Pat's point. But the international rooms growth, in particular, that was all impacted by AMR. So if you eliminate the terminations associated with AMR which again were onetime in nature. The rooms growth internationally would have actually been flat to slightly positive. And so I think that's a really important point that from a revenue perspective, was not generating a ton of revenue just given, again, the pandemic impacts and we expect to see that to be an opportunity going forward. .

Okay. Another question and apologies, I don't mean to dwell on the negative here. You had 41 as you said underperforming assets leave the portfolio in 4Q. What would you think of as an ongoing termination rate we should think about or sort of a net percentage loss leaving the system every year? Was that 41, would you say that was unusual? Or is that something we should sort of expect going forward?

I think, Patrick, historically, our termination rate is about 3% to 4%. We see a recovering market here. We looked at the financial performance of those hotels and what they should be doing. As I mentioned earlier in my remarks, the last seven months of the year, we were back at 2019 levels or above. So the owners were making money. So if they're, a, not paying their fees or, b, not serving their guests well, we are going to look at that. And we saw it as an opportunity to probably get a little bit ahead of the game here and open up some markets because we are seeing that robust demand for the Quality Inn brand and for some of the economy brands. That's primarily where those 41 terms came out of. And so it was more of a -- let's do these terminations now given we see the recovery of marketplace and we see the opportunity here in those specific markets to maximize the profitability of our system. So I would think about the termination rate as probably continuing to be at that 3% to 4% rate. And we just took an opportunity at the end of the fourth quarter this year to get ahead of the game on future development in those markets.

Okay. Thank you for the color; that's great .

Thank you.

Our next question comes from Daniel Adam with Loop Capital. Please go ahead.

Hi, everyone. Thanks for squeezing me in. So this might be a ridiculous question actually but the hope is that in 5 or 10 years when investors read the transcript that might seem a little bit less ridiculous. In any event, the question is, just given your exposure to drive two markets, have you at all considered what the eventual impact of self-drive vehicles might be especially with respect to your core business traveler customer?

And Dan, it's not a ridiculous question. It is something we do our long-range planning and we think about things that could be a threat to our business. I mean, I've been writing the strategic plan for this company for about 17 years and we always had in there, hey, there might be a pandemic. And people would be like, yes, that will never happen. So these things do happen and we do look out for the long term. I think when we look at that phenomenon, it is a question of if someone really going to want to sleep there, in their car. When you go to a hotel, you go for a variety of reasons. You want amenities like a shower. And I think when I look at our footprint across the country and we think about self-driving cars, is it really going to be a replacement for the hotels stay? And there's reasons why people travel to markets it's to be there as well. It's not just always to be the stop along the way. In our portfolio, if I look at our extended stay business and I look at our upscale business and I look at our upper mid-scale hotels, a lot of them are in the locations that people are going to. We talked about this during the pandemic, about how many of our hotels are sitting at a beach or sitting at a national park, at points of interest in the United States that people want to travel to. And we expect road trips, as we've said in the past, to continue to be a contributor. So this is something we've thought through but it is something that we don't see as a replacement to a hotel stay. I can look back at Airbnb. Airbnb was launched the same year as the iPhone. So it has been around a long time. And I think people have always said, well, is that going to replace the hotel business. It's an alternative version of accommodation and it has not dampened demand for the hotel space. So it is something we've looked at but it is not something that I see as a replacement for a hotel stay.

Okay, great. That's super helpful. Thank you.

Sure.

Our next question comes from Dan Wasiolek with Morningstar. Please go ahead.

Hi guys, thanks for taking the question. So two, the first one is just a clarification to an earlier question on 22-unit growth. I thought in the response that I heard a 3% to 4% potential range was -- is that accurate? And is that kind of adjusted for the revenue intensity that you're talking about? Or is that an actual unit figure? And then the second one is just durability of EBITDA margins kind of beyond this investment year. Were the 2021 EBITDA margins you saw kind of something that we can maybe see as we look out in 2023 and beyond?

So thanks for clarification and then I will certainly try to address it. From a unit perspective, what we talked about is revenue-intense unit growth. So that's the portfolio less economy would grow at approximately 2% or just below 2% which is where we were this year in terms of that portfolio ex those onetime events on the strategic term side as well as the AMR. So broadly speaking, unit growth, we expect to approximately what happened in 2021. When we talk about the 3% to 4% that was really with the multiplier. What we talk about is each unit coming in is about 2x as revenue intense. And that's from a royalty perspective as well, not only an NPV perspective but from a royalty perspective, 2x is revenue intense. So when you apply that multiplier on what's coming in, versus what's exiting, it translates to what would be about a 3%-to-4%-unit growth, historically speaking for the company. And so -- and that 2x multiplier, we expect to see that actually increase in 2022 as well. Is that helpful?

Yes, it is, definitely. And then if you could just maybe, I guess, comment on the durability of EBITDA margins longer term?

I think, Dan, it's a great question because I think when we look at our plans for 2022 and beyond, we do expect a robust top line revenue. It's really a focus on the investment opportunity that we see in our business. And so as we've mentioned, our strategies work that we're bringing in valuable units than we're terminating. Our margins are at a record level. Our effective royalty rate is an effective record level, our month of January was the best month of January we've ever had. So that's a record. We have a healthy balance sheet. So we really have the opportunity right now to leverage these strengths and invest in our brands, in our franchise, in our value proposition and then in our platform business. And the things that we look to invest in are things that leverage our scale. They are things that we believe can really grow to a significant amount of earnings. And so that margin is really something that we do look at as something that is an opportunity for us to maybe in 2022, compress that somewhat in order to invest in long-term growth. I mean that's -- we're running the business here for the long-term growth expectations of our shareholders. So making those onetime or transitory investments, where we've taken -- the way the world works today, a lot of that's on your income statement. So you do have little bit of margin compression. And that is something that we are considering doing this year given the opportunities that we have and the opportunity that we as a company have to play often here and really establish ourselves and maybe some new segments with some new customers. And that's really the way we've thought about it.

Yes. I mean at the end of the day, the record margin is really a function of the quicker top line recovery, coupled with some of those cost structure changes that we talked about previously. In 2022, you would expect to see some costs returning to the business, right? Things like T&E, meetings and events, a higher level probably of marketing, etcetera. Some of these more run rate costs that, frankly, were paused or eliminated during the pandemic years. To Pat's point, I think in the short term, we're willing to invest for outsized long-term growth. In the long term, Dan, I think it's important, just the function of the business model itself, you would expect to see margin expand in the longer term if you place the right bets. And we're very confident that we're continuing to place the right bets.

Okay, very helpful. Thank you.

Thank you.

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

Thank you, operator and thanks, everyone, again, today for your time. I hope you all stay safe and healthy and we will talk to you all again in May. Have a great rest of your afternoon.

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