Ladies and gentlemen, thank you for standing by. Welcome to the Choice Hotels International’s Second Quarter 2022 Earnings Call. At this time, I will turn the conference call over to Allie Summers, Investor Relations Director for Choice Hotels. Ma’am, please begin.

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. 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 2022 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. Following Pat and Dom’s remarks, we will be glad to take your questions. And with that, I will turn the call over to Pat.

Thanks, Allie and good morning everyone. We appreciate your taking the time to join us. The second quarter was a truly remarkable one for our company. We once again outperformed the industry in RevPAR growth, accelerated our capital recycling progress and announced the most significant acquisition in our company’s history. In June, we announced the acquisition of Radisson Hotels Americas. Today, I am pleased to share that we remain on track to close the transaction this month. This transformative acquisition of Radisson Hotels Americas’ 9 brands is expected to significantly accelerate Choice’s long-term asset-light strategy of growing our business in higher revenue travel segments and locations. We strongly believe that this transaction will enable us to achieve our dual goals of delivering greater return on investment for franchise owners while growing the newly acquired brands to drive meaningful value creation for our shareholders. As we look forward to closing, we expect the acquisition to create a number of compelling value drivers. First, the acquisition will add over 67,000 rooms that will be RevPAR accretive to our existing platform due to Radisson Hotels Americas strength in the upscale and upper mid-scale segments, and their hotels locations in higher RevPAR markets. In 2019, the average RevPAR for this portfolio was 38% higher than the average for Choice’s existing system. We also believe our superior business delivery platform, once combined with these brands, will provide additional revenue upside for these franchisees and our shareholders. Next, the acquisition will improve the return on investment for franchise owners who we expect will benefit from the enhanced business delivery capabilities of the combined companies, including our award-winning loyalty program, proprietary tools and emerging technologies designed to drive owner performance and reduce their cost of hotel ownership. Choice has a deep familiarity with the Radisson Hotels Americas…

Thanks Pat and good morning, everyone. I’m very pleased to be with you today to report our impressive second quarter financial performance. Specifically, I will provide additional insights on our second quarter results, share expectations for what lies ahead and update you on our liquidity profile and capital allocation approach. Throughout my remarks today, I’ll be making financial performance comparisons to 2021. However, for RevPAR growth, I will continue to benchmark to 2019. For RevPAR comparisons to 2021 please refer to our press release. I also would like to note that our forward-looking guidance does not include any positive impact from the pending Radisson Hotels Americas acquisition. For the second quarter 2022 compared to the same period of 2021, total revenues, excluding marketing and reservation system fees were $178.6 million, a 25% increase despite a slight increase in our adjusted SG&A expenses, primarily due to the resumption of our annual convention in the second quarter, our adjusted EBITDA grew 16% to $129.6 million. This strong adjusted EBITDA growth was driven by impressive RevPAR performance, continued effective royalty rate growth and disciplined cost management. And as a result, our adjusted earnings per share were $1.43 for the second quarter, an increase of 17% versus the same period of 2021. I’d like to now turn to our 3 key revenue levers beginning with RevPAR. Our domestic RevPAR increased 13% for the second quarter, with our average daily rate growing by nearly 14% compared to the same quarter of 2019. This RevPAR growth also represents an acceleration of the gains achieved in the first quarter of this year. As you will remember from our prior calls, our brand strategy is focused on driving growth across the higher value and more revenue intense upscale, extended-stay and mid-scale segments. Our investments in these strategic segments…

Our first question today comes from Michael Bellisario from Baird. Please go ahead with your question.

Thanks. Good morning, everyone.

Good morning.

The first question on Radisson, there is going to be a different ownership group for the international portfolio. Can you just provide some details kind of on that dual ownership structure? Who is going to own what? And then really kind of more importantly, how do you manage that relationship in the brand consistency globally?

Sure. So if you look at this acquisition, we talked in the prepared remarks, obviously, about the strategic benefits of it. We are acquiring the brands and the operating business, the intellectual property, everything outright in the Americas. So it is a full ownership of Choice Hotels for the brands in the Americas region. It’s really the result of a year-long strategic conversation that we had with the sellers. They looked at our ability to aggressively grow in the upscale segment and our key strength in upper mid-scale. And they said, Choice is the right company for us to grow with in this part of the world. We’ve got the right network of owners. We’ve got the right business delivery engine. And we got the right balance sheet, frankly, to spur our future growth for the brands. What we are going to do with them is we have established what we call a brand council that will share best practices, ensure that the brands remain in the segments and the consistency that they had created globally. So there is a working relationship we will have with them to ensure that these nine brands have a standard around the globe that makes sense. But it also means we have the flexibility in the Americas markets to grow these brands. If you travel across the world and you stay in the same brand, the expectations in Asia and the expectations in Europe with regard to room size and amenities differ by brands. And a lot of that is driven by what the consumer wants and what makes sense for the developer to build. Obviously, in Europe, you’re real estate constrained more so than you are here in the Americas. So that’s really the relationship that we will have with the Radisson Hotel Group based over in Brussels, who manages the brands for the rest of the world.

Got it. That’s helpful. And then just on the WoodSpring deletions you mentioned. Can you quantify how many hotels or rooms? And then what will the foregone fees be?

So the – it’s a little bit in flux. The total number that they own today is 111. They have indicated to us that the bulk of those will depart in September. There may be a handful that depart at a later date. But by and large, I would expect in the medium term that all 111 will exit the system. The way when we acquired the brand, we saw this as a potential exit scenari, given you have a single owner with that number of hotels. So the liquidated damages associated with a really representative of 5 years of fees, royalty fees that is, that will be paid to Choice upon the exit. So once we have clarity in September and October around the actual number that are leaving, we will be able to probably report in our November call, the actual payment to Choice, assuming everything stays on track with that exit scenario, Michael.

Got it. Thank you. And then just last one quickly for me, just on July trends, plus 14%, I think, last year, July was plus 15%. Can you just talk about the mix of rate and occupancy in July? And kind of what you’re seeing across markets and across segments so far in the third quarter?

Yes. What you’ve seen actually in Q2 has continued into July, Michael. So essentially, your occupancy for all intents and purposes is just down a notch, almost flat. In Q2, obviously, occupancy was down by about 30 basis points with ADRs up almost 14%. You’ve seen that trend continue into July, probably a little bit heavier on non-ADR, maybe down just a slight notch on occupancy. But the reality is when we didn’t provide formal Q3 RevPAR guidance. But when you take a look at what we’re seeing in Q3, we expect that 13% to continue on – 13% that you saw in Q2 continuing on into Q3 as well.

That’s helpful. Thank you.

Our next question comes from Dany Asad from Bank of America. Please go ahead with your question.

Hi, good morning, Pat and Dom. I’m just going to continue on that last train of thought there. So assuming rates continue, can you help us unpack like that outlook, that RevPAR outlook for the balance of the year? What could also – like what could make it go better? What can make this outlook potentially look conservative and what can go right?

Yes. I think – I mean what we’re seeing as we’ve kind of got a month under our belt here in Q3 RevPAR is, it’s likely to be similar to Q2, so probably around 13%. What could make it better is really the return of the business transient travel and the strength of group, which we’ve seen build quarter-over-quarter. And this return to office, which I think we’re starting to see really start to pick up here, particularly as companies, I think, are beginning to kind of get back to normal and start looking at an economy that is maybe a little bit different than what we’ve been experiencing a year ago when we saw sort of all this kind of economic growth. I think you are seeing a little bit of economic slowdown. So businesses are coming back and they are sending their sales forces out to say, hey, we need to we need to get back on the game here. So I do think if we see more of that business travel, business transient return, which is the trend we’re seeing, that could be a nice motivator on the upside from a RevPAR perspective. So those are probably the things that we’re looking at as we get into Q3 and Q4, would be really does that business traveler return or continue the trends that we’re seeing with the sort of quarter-over-quarter increase in that demand.

Got it. And then as we – closer and closer on or like we’re ahead of ‘19 levels, but we are a fully recovered kind of industry. Are you seeing any evidence of like that return of seasonality for the leisure traveler either whether it’s in the form of weakness in shoulder seasons or spending across any segment or anything like that?

We’re not, Dany. And in fact, these longer-term trends of remote work, I mean just looking at our Sunday night business, that is categorized as a weekday. Historically, weekend was Friday, Saturday. We’re continuing to see occupancy and rate gains on that Sunday night shoulder of the week, more so than Thursday, but Thursday is also picking up. So I do think this remote work trend is here to stay for us. It may not be as strong as it was in the early days of the pandemic, but I don’t think it’s going to go back to everybody working in the office 5 days a week. I think the flexibility of certain parts of the workforce is going to continue to allow people to travel and extend that weekend stay through Sunday night and check out on Monday morning. So I think that trend is going to continue. It will be interesting to see sort of the seasonality of the month as we get back to whatever the new normal looks like. But again, as I’ve said on prior calls, retirements are triple what they were pre-pandemic. So you just have more people who are not working and who have the wherewithal to travel in the U.S. in particular. And so that aspect of demand, these retired boomers who are – have good, healthy household balance sheets, they are living longer, they are in better health. That’s a nice runway of growth for us from a demand perspective, particularly for our brands, particularly for leisure travel and for particularly travel outside of the busy summer season.

Got it. And one more, if I can sneak one more in, for the WoodSpring conversions or like reflags, liquidated damages of that size, I know it might be a little bit early, but have you potentially earmarked them for anything in particular, whether it’s key money or buybacks or kind of – are they already being earmarked for anything in your capital plans?

So I would – I mean when we look at the WoodSpring growth, this is a brand that is in demand. We don’t do discounting for this brand. And so when I look at the opportunity, we’re essentially being given a 5-year runway to replace these markets. And as I said in my prepared remarks, this is a brand that is in demand. The operating model, particularly for the new prototype, which we’ve been building really since 2015 and later, drives exceptional returns for these owners. So we will be obviously spending a lot of time focused on these markets to make sure we get the right hotel in the right location with the right owner. As far as our use of that capital, it would probably be better for us to talk about it in Q3 once we have a better sense of what the final financials will look like. I don’t know, Dom, do you have...

Yes, Dany. I mean the only thing I would say is you mentioned specifically if we were going to earmark the funds for anything. And the reality is with some of the great capital recycling that we’ve seen in Q2 continue into Q3, obviously, with the sale of our Nashville asset, you also see this 5 years or actually, it’s a little bit more than 5 years of LDs coming in. The reality is even post acquisition of Radisson Americas, our leverage level on a gross basis is still going to be at about 2.5x. So even to get to that bottom end of that 3 to 4x target leverage ratio, you’re going to have to put about $250 million to $300 million of debt on this business. And so we’re not living in a capital-constrained environment right now. So there is really no need to earmark it specifically.

Got it. Thank you very much.

Thank you.

And our next question comes from Robin Farley from UBS. Please go ahead with your question.

Great. Thanks. I wonder if you can talk a little bit about – I know your pipeline is more conversions than new construction. But some other companies have commented on the fact your record signings haven’t led to record shovels in the ground in terms of getting those projects underway. So can you give any color on that? Thanks.

Yes. So broadly speaking, when you look at the – just the composition of the pipeline, Robin, the reality is about a little over 25% of that is conversions. Obviously, conversions move through the pipeline a lot more quickly. You could open a conversion property anywhere from a month or 2 to up to 6 months or so. And so we’re not seeing as many just in terms of the opening cycle. We’re not seeing those delayed on the conversion side of the house. Obviously, the environment that we’re living in today with cost rising and whatnot, you are seeing a little bit more pressure on the new construction side of the house. So yes, you are seeing some of those new construction projects, permitting and things like that getting pushed out. Maybe what was 2 years could extend out to a 3-year timing on the new construction side. But broadly speaking, we’re not expecting a major impact on the net unit growth algorithm just because of how many conversions we typically open on a year-to-year basis.

Great. That’s helpful. And then just also as a follow-up question. I was curious about the comments about Radisson. I think Pat made the comment that Choice has the right balance sheet for that acquisition? And I’m curious, does that imply that you’d be sort of using your balance sheet to grow those brands, maybe more than kind of what you have done for your existing brands? Thanks.

Yes, Robin. I mean, the exciting thing is we’ve effectively repositioned the company into these higher earnings growth segments. So if you think about our core business, extended stay and upscale. Dom talked and I talked a lot about – if you look back in the last 18 months, every unit we brought in, the system is producing twice the revenue of everything that’s leaving the system. So we’re really repositioning ourselves up into these higher revenue intense segments. The nice thing about our balance sheet is, it gives us the flexibility. If we want to push beyond where the Radisson core is, if we want to do upper upscale, and use our balance sheet in a way that helps us grow brands, we’re doing that today successfully with Cambria. We’re doing that today successfully with Everhome. When you do these brand launches, putting your balance sheet to work and putting some skin in the game, particularly in an asset-light model is a very effective way of convincing owners that you’re in this for the long-term, which we are. So that balance sheet capacity that we have gives us the opportunity to incent growth in some of these brands that are emerging. So that’s really the reference I’m making there. Plus the capacity that we had to do this acquisition without having to go out and get financing speaks to the power of the cash flow generating engine that we have in our current business, the effective stewardship of our balance sheet over the years with regard to leverage levels and share repurchases and dividends and the like. So I think that sort of discipline to keep your powder dry strategy that we’ve had really paid off in this situation to be able to do an acquisition of this size and then literally be back below our target levels with regard to debt to EBITDA. So that’s really the nice thing about our business. And as I said, it gives us the flexibility as we close this transaction think about growth in new segments having the ability to use our capital to do that will give us, again, one more growth engine lever to pull if we need it.

Okay. Great. Thanks very much.

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

Hi, good morning, everyone.

Good morning.

My first question, post the acquisition of Radisson, can you give us an update on domestically what you’re geographic exposure will look like? Historically, you’ve been more concentrated in the Southeast. How will that change post acquisition?

Yes. Patrick, it will give us more presence on the West Coast and in the Upper Midwest. Those are two areas where the current Radisson portfolio is strongest. And to your point, we are – we over-indexed in the Southeast and in that sort of Texas across into the Southwest as well. But we were underpenetrated in particular, really on the West Coast and the Upper Midwest. So it gives us a nice geographic strength. And then as we said, we will be doing direct franchising again in Canada. In our current Canadian portfolio. It’s a 50-50 joint venture. So we will have more units and more growth opportunity in Canada as well as the Caribbean and the rest of Latin America. So it’s a nice geographic fit in areas that we feel we have a lot to bring to the table. And certainly, the sellers felt the same way. So I think it’s going to be a nice geographic complementary aspect to the business going forward.

Okay, thank you. And then a little bit more of a technical question here. So SG&A in the quarter was up 27% year-over-year. Obviously, that’s probably going to change post the acquisition. But what’s – including the acquisition, what’s a fair run rate to think about the SG&A line for the rest of the year and going into next year? Thank you.

Yes. Really, the bump was the return of our annual convention, which we did in May, but I’ll pass it to Dom.

So broadly speaking, when you take a look at just – you’re comparing apples and oranges a little bit, Patrick. So you’re up at those levels that you highlighted. But when you take a look, I think the better comp is probably against the 2019. We’re actually down by about 8% versus 2019. And so long story short on that, we talked about previously that we would be cutting our SG&A anywhere from 10% to 15%. So we’re still in that range when you layer in the things that we talked about before, which was really our SG&A growing kind of in that mid- to high single digits range on an apples-to-apples basis. I think post acquisition, obviously, when you take a look at just what a lot of the investors and analysts are putting 70% to 80% margin on the Radisson business as well and that’s what a lot of folks are forecasting. It really is a business that looks and feels a lot like our business today. And so historically speaking, our SG&A has grown by anywhere from low to mid-single digits on an annual basis. Now again, we’re focusing on the growth of this business. So maybe you could see some elevated SG&A to spur growth in the short-term. But broadly speaking, you expect to continue to see margins expand in the mid to long-term, and you expect to grow at that historical, call it, low single digits to mid-single digit range.

Okay, fair enough. Thank you for the color.

Thank you.

And our next question comes from Eric Field from Jefferies. Please go ahead with your question.

Thanks, good morning. I’m on here for David Katz. Just curious for an update on latest growth strategy for Canada, I am curious about how maybe synergies with Radisson can change your strategy or how that might affect you?

Specifically, about Canada, Eric?

About Cambria, I was wondering if like higher revenue intensity or moving upscale would strengthen that brand or maybe shift your focus to our way?

Yes. It’s a nice network effect of additional corporate accounts that are in the Radisson Americas business from a business travel perspective. The loyalty program members that we will be adding which is 10 million members that will be added to our 53. Those skew business travelers, those skew higher income, so from the standpoint of the combined business delivery engine, it’s only going to accelerate the opportunity and the value proposition that we have for both Cambria and the Ascend Hotel Collection. If you remember, Cambria is a limited service hotel. Radisson, the Radisson Green Sign is a full-service hotel, so much more meeting space, F&B and the like. So the two brands will coexist nicely. But the Cambria brand is really focused on that kind of local feel and the – as we call it, the casually tailored business traveler. So that consumer is a different consumer than what you see in the Radisson core brand. But the business delivery capabilities, the corporate accounts, the higher income, all of that is going to help feed the growth that we are already seeing in Cambria, and I think it will be a nice accelerant for both Cambria and Ascend.

Understood. Thanks.

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

Good morning, guys. Thanks for taking the question. So just going back to the WoodSpring deletions. Just wondering if – is it ballpark that these deleted units represent maybe around 2% of fees year-to-date? Just trying to get a sense of that? And then one question maybe kind of on the long-term unit growth opportunity. Any kind of guidance or color on how to kind of think of net unit growth a couple of years from now, is 3% still kind of in the realm of possibility? Thank you.

Sure. So that estimate is about right, the 2% from a fees perspective on the exit. With regard to unit growth, if you look at what we are – what our strategy is already achieving, which is every unit coming in is worth twice every unit that’s leaving over the past 1.5 years. If you look at our pipeline, which three quarters of that is Comfort Inn, WoodSpring, Cambria, it’s our upscale brands and our extended stay brands. We do expect that if your revenue weight our unit growth that you’re already at that kind of 3%, 3.5%. So every deletion is really half of what everything that is coming in. So when you look at the unit growth and you actually revenue weight it, which is what we do to sort of look at what our earnings power is going to be in the coming years, we’re effectively already there. The addition of the Radisson brands, again, RevPAR accretive, higher RevPAR, higher royalty, higher segments. Again, that sort of unit growth, I think you really need to take a look at how you’re – where these units are coming in and where the units are leaving the business because if you just look at the net unit growth number, it doesn’t really reflect the earnings power that we’re creating by repositioning the company up into these higher RevPAR segments.

Okay. That’s helpful and clear. Thank you.

And ladies and gentlemen, I’m showing no additional questions at this time, I’d like to turn the floor back over to Pat Pacious for any closing remarks.

Great. Well, thank you, operator, and thank all of you for your time this morning. I hope you enjoy the rest of your summer, and we will talk to you all again in the fall. Have a great rest of your day.

Ladies and gentlemen, with that, we will conclude today’s conference call. We do thank you for joining. You may now disconnect your lines.