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Text: They will be joined by Scott Oaksmith, Senior Vice President, Real Estate & Finance.
We're glad you could join us and hope you are all well.
Our company, like the hotel industry overall, continues to be significantly impacted by the COVID-19 pandemic, which is far from over.
The response of our franchisees, their hotel staff and Choice associates has been remarkable.
Despite the pandemic, I'm pleased to report that Choice Hotels has continued to drive results that significantly outperform the industry in the third quarter.
Systemwide domestic RevPAR outperformed the industry by nearly 20 percentage points, declining only 28.8% from the third quarter of 2019.
All of our limited service brands had significant RevPAR index gains against their local competitors.
We continued to grow our effective royalty rate, a reflection of the continuously improving value proposition to our franchisees.
And we grew our total system size, especially in our more revenue intense, upscale, mid-scale and extended-stay segments.
We attribute this success to Choice's key differentiators, including our diversified brand portfolio, the geographic footprint of our domestic system, the profile of our core customer and our franchise-focused business model.
These core strengths have positioned us well to capture the shifts in consumer demand that occurred over the last eight months.
We believe that the strategy of growing our limited service brands in the right segments and the right locations will allow us to continue to increase our share of travel demand over the long term.
And now that we're entering the ninth month of the pandemic, we are beginning to see trends emerge that are likely to have a long-term impact on the travel industry.
Let me begin with the trend of remote work and virtual learning.
The significant investment in remote access technology by businesses, schools and consumers is creating more options in where and when traditional activities take place.
In a post-pandemic world, this may afford Americans even more flexibility in their schedules to travel for leisure.
For the last several years, we've seen a trend in leisure travel demand spreading more evenly throughout the month of the year, which we attribute in part to school schedules shifting over the years as well as the increase in baby boomers retiring and having more time and disposable income to travel.
More employees can now work from anywhere with an Internet connection, while their children attend virtual schooling.
For the past two months, we saw continued leisure demand extending into weekdays.
A second trend is the increase in road trips.
which we're benefiting from with our high concentration of hotels in drive-to markets.
Consumers' appetite for road trips has only accelerated since the onset of the pandemic as Americans are showing a clear preference for trips that are closer to home.
Destinations that may have been overlooked before the onset of COVID-19 are getting fresh consideration.
With over 4,000 domestic hotels located within a mile of an interstate exit, our hotels are well positioned to serve travelers as they hit the open road.
And with over 2,000 domestic hotels near beaches and national parks, our hotels are also located in the right markets to capture growing demand from travelers who increasingly are looking to rediscover the great American outdoors.
Another emerging trend is the economic disruption brought on by the pandemic and its effect on consumers as the recovery takes place.
We believe that in uncertain times, as in previous down cycles, consumers will be looking for more moderately priced limited service hotel offerings, presenting an opportunity for our portfolio to capture this demand.
Another anticipated economic effect of the pandemic is higher relocation rates.
As people shift jobs and industries, demand for longer-term hotel stays rises, a trend we believe will benefit our brands, particularly those in the moderately priced extended-stay segment.
And finally, there are signs that consumers' risk tolerance is climbing, even before a vaccine is available.
According to a recent survey, the perception of travel safety is up, and Americans likelihood to take a domestic leisure trip and stay in a hotel during the next six months is the highest since mid-March.
As a result of these trends, we've seen a rise in our weekday occupancy quarter-over-quarter, on top of the existing base of weekend leisure demand we've historically enjoyed.
In fact, our weekday RevPAR index is up eight percentage points year-over-year in the third quarter.
Our year-over-year RevPAR change continued to improve month-over-month in the third quarter.
At this time, we remain optimistic that we will see sequential month-over-month improvements related to our year-over-year RevPAR change.
Our loyalty program has remained a key driver of our business throughout the pandemic enhancing our ability to drive franchisees top line revenue.
We particularly benefited from Choice Privileges Diamond Elite members, our best customers, who contributed an even higher percentage of overall revenue year-to-date versus last year.
We expect this bedrock of loyalty business to deliver even higher value going forward as more Americans return to travel and enrollments in our award-winning Choice Privileges loyalty program continues to climb.
Our long-term strategy of growing the right brands in the right segments in the right markets allow Choice brand hotels to continue to outperform the competition.
Throughout the third quarter, we generated significant month-over-month increases in our proprietary revenue contribution to our hotels.
More specifically, our website contribution increased by 400 basis points and our loyalty contribution increased by 120 basis points quarter-over-quarter.
This has helped drive RevPAR index share gains versus our local competitors across all location types as reported by STR.
For the past 34 weeks through October 31, we observed significant RevPAR share gains against the competition.
In the third quarter, all of our select service brands achieved material RevPAR index gains versus their local competitors, with each of our upscale and extended-stay brands experiencing share gains of over 10 percentage points.
I'll now provide a brief update on our segments.
Our upscale portfolio once again achieved impressive year-over-year growth in the third quarter, where we increased our domestic upscale room count by 33%.
The Ascend Hotel Collection is the industry's first and largest soft brand.
Now with nearly 300 hotels around the globe and fast approaching its 200th domestic location, Ascend Hotels achieved the following performance in the third quarter: RevPAR change outperformance by over 26 percentage points versus the upscale segment; RevPAR share gains against local competitors of nearly 19 percentage points; and average daily rate index gains of approximately nine percentage points.
In fact, for the past six months, Ascend has significantly outperformed the upscale soft brands as well as the segment as a whole in terms of year-over-year RevPAR change.
Our extended-stay hotels are purpose-built for long-term guests.
Choice Hotels brands in this cycle-resilient segment continue to outperform in this unprecedented environment, and our portfolio of over 420 extended-stay hotels grew 6% year-over-year in the third quarter.
Our WoodSpring Suites brand achieved an average occupancy rate of 77% in the third quarter, and the brand's monthly occupancy levels have remained north of 75% since the last week of June.
Our Suburban extended-stay brand experienced year-over-year occupancy gains in the third quarter, further enhancing the brand's attractiveness to developers looking for a smart, extended-stay conversion opportunity.
At the same time, our MainStay Suites mid-scale extended-stay brand gained more than 16 percentage points in RevPAR index versus its local competitors in the third quarter.
We remain optimistic about the growth potential of our extended-stay portfolio whose pipeline increased by 9% year-over-year in the third quarter.
Year-to-date through September, Choice has awarded over 40 extended-stay franchise agreements, demonstrating sustained interest in both new construction and conversion opportunities during a challenging time for the industry.
I'd now like to turn to our mid-scale segment, whose brands represent 2/3 of our total domestic portfolio and over half of the franchise agreements executed year-to-date.
All of our select-service mid-scale brands achieved year-over-year RevPAR index and average daily rate index gains versus their local competitors through the third quarter.
The Comfort brand captured RevPAR share gains of over seven percentage points versus local competitors in the third quarter.
And Clarion Pointe, a conversion brand extension of Clarion that launched less than two years ago, recently opened its 20th hotel in the U.S. and now has over 50 hotels open or in the pipeline, demonstrating its strong growth as the brand continues its coast-to-coast expansion.
Demand for Choice's brands continues despite the challenging environment, aided by our strong value proposition and recent outperformance.
Developers choose our brands as they seek to boost the value of their hotels.
We have a conversion brand to fit most developers' price points which has driven our development growth through past downturns.
Year-to-date, through the end of September, we have awarded over 230 new domestic franchise agreements, nearly 70% of which were for conversion hotels.
In the third quarter alone, we executed over 80 domestic agreements, of which nearly 3/4 were for conversions and over 40% of which were executed in the month of September.
We have a long history of enhancing the diversity of our ownership base through our one-of-a-kind emerging markets development team, which helps underrepresented individuals such as minority and veteran entrepreneurs enter the rewarding business of hotel franchising.
Nearly 70% of our hotels have minority ownership.
Despite the pandemic, we have awarded and financially supported 17 franchise contracts with black and Hispanic entrepreneurs year-to-date.
Most recently, we entered into the largest minority-owned multiunit franchise agreement in the program's history.
Our long-standing commitment to diversity and further details regarding our efforts to improve the communities we serve will be outlined in our forthcoming ESG report.
While this year's challenges have been unique, the cyclical nature of our industry is known.
It's something our experienced and disciplined management team, many of whom have led the company through previous down cycles, planned for.
Our resilient franchisee base also has deep experience leading their small businesses through down cycles, and they are at the center of everything we do.
Over the course of the pandemic, we have supported our franchisees in a number of ways.
First, by reducing costs through extending brand program deadlines, implementing cost savings, operational initiatives, reducing certain fixed fees, implementing a tailored fee deferral program and modifying brand standards.
Second, by capturing business through our global sales efforts aimed at first responders and other essential travel; a multichannel, multi-brand marketing campaign; and tailored promotional programs.
Finally, by leveraging hygiene and infection prevention experts like Ecolab in launching our Commitment to Clean initiative, helping to make sure their hotels are clean and safe.
We also have been advocating and will continue to advocate with policymakers for additional relief measures aimed at assisting small businesses to provide targeted help for the travel industry.
Specifically, we've been urging enactment of a second draw loan program for existing Paycheck Protection Program borrowers, greater accommodation and more streamlining for borrowers to obtain forgiveness and liability protections for hotel owners who comply with health and safety protocols during the pandemic.
We've also called for additional stimulus to support American discretionary spending, including in areas such as travel.
In closing, Choice Hotels is positioned to emerge from these trying times stronger just as we have before in our 80-year history.
Our proven portfolio of well-segmented brands, geographic footprint, and asset-light business model position us well to benefit from current consumer trends as they continue to evolve.
I'll now invite our CFO to provide his update.
I hope that you and your families are well and healthy.
Today, I'd like to provide additional insights around our third quarter performance, update you on our balance sheet and liquidity, as well as our approach to capital allocation, and finally, share our thoughts on the outlook for the road ahead.
Let's now take a closer look at our results.
For the third quarter of 2020, total revenues, excluding marketing and reservation system fees, were $103.6 million.
Adjusted EBITDA totaled $74.9 million representing an adjusted EBITDA margin of over 72% and adjusted earnings per share were $0.66.
Our domestic systemwide RevPAR for the third quarter outperformed the overall industry by nearly 20 percentage points, declining only 28.8% from the same quarter of 2019.
In addition, our results exceeded the primary chain scale segments in which we compete as reported by STR by six percentage points.
We've long focused our brand strategy on driving growth across the higher value and more revenue intense upscale, extended-stay and mid-scale segments, and it's paying off.
In the third quarter, all three segments achieved year-over-year RevPAR outperformance against their respective industry chain scales and gains versus their local competitors.
Specifically, the RevPAR change of our upscale portfolio exceeded that of the overall segment by 14 percentage points, and our upscale portfolio outperformed its local competitive set by over nine percentage points.
With average domestic systemwide occupancy rates of 74%, our extended-stay portfolio outperformed the industry's RevPAR change by an impressive 40 percentage points beating its local competitive set by 14 percentage points.
And finally, RevPAR change for our mid-scale portfolio exceeded the segment by nearly eight percentage points.
This RevPAR outperformance is the result of both continued occupancy gains and our franchisees' ability to maintain rate.
Our domestic systemwide occupancy rate has seen improvements since the trough of 28% that occurred back in early April.
Since the week of June 21 through late October, our average weekly occupancy rates have consistently exceeded 50%.
In addition, we continue to see gains in our average daily rate index, which was up 1.7 percentage points against local competitors in the third quarter.
These experts have been advising our franchisees on the best use of tools to maximize their pricing strategies and provide sophisticated market intelligence and channel management.
Despite the challenging environment, we expanded our system size, growing the number of domestic hotels by 0.7% and rooms by 1.9% year-over-year.
Across our more revenue intense brands in the upscale, extended-stay and mid-scale segments, we experienced even greater growth, increasing the number of hotels by 2.1% and rooms by 3.4% year-over-year.
We're especially pleased that Comfort, our flagship brand, continue to experience positive unit and rooms growth in the third quarter following its brand transformation.
Comfort's development success, amid unprecedented circumstances, is perhaps the clearest endorsement of the brand's value proposition.
Comfort now represents nearly 1/3 of our total domestic pipeline, which will fuel revenue intense growth for years to come.
In addition, the brand's conversion pipeline increased by nearly 50% in the third quarter year-over-year.
We are particularly pleased with the company's performance-related to our effective royalty rate, which is driven by the attractive value proposition we provide to our franchisees, their continued desire to be affiliated with our strong brands and our current pipeline.
Our royalty rate remains a significant driver of our revenue growth.
The company's domestic effective royalty rate increased seven basis points year-over-year to 4.91% in the third quarter and has increased nine basis points year-to-date compared to the prior year.
We expect to observe continued growth of this lever for the remainder of the year as owners seek a shelter of a large proven franchisor that delivers strong top line results to their hotels and helps them maximize their return on investment.
I'd now like to say a few words about our balance sheet and capital allocation strategy.
Throughout the third quarter, we continue to focus on reducing discretionary costs, exercising discipline around capital allocation and effectively allocating resources to drive top line outperformance, all of which allowed us to improve our cash position and further bolster our liquidity.
In fact, we reduced our net debt by approximately $50 million during the third quarter and are proud to report cash flow from operations of $70 million for the nine months ended September 30, over $68 million of which was generated in the third quarter alone.
Our cash and liquidity profile remains exceptionally strong.
At the end of the third quarter, the company had over $790 million in cash and available borrowing capacity through our revolving credit facility.
We remain on track to achieve our previously announced SG&A cost savings of nearly 25% in 2020 and expect to maintain a run rate of SG&A cost savings of approximately 15% in 2021 and beyond.
The decisions we have made to better align our cost structure in the post-pandemic environment position us well to capitalize on opportunities as travel demand recovers, while allowing us to continue to invest for the long term.
Our capital allocation approach, defined by prudence and discipline, remains key to our success.
Choice's first priority in this area has always been to increase organic growth by strategically investing back into the business, and that won't change.
We are confident that our capacity and cash flows will allow us to not only weather the storm but also increase the organic growth of our business by strategically investing in growing our brands and system size, executing our technology road map and delivering proprietary franchisee-facing tools that help drive top line revenues.
Based on our demonstrated track record of success in organic growth, we believe these internal investments will drive attractive returns for years to come.
We will continue to evaluate other investments in capital return opportunities in the context of developing market conditions and our overall capital allocation strategy on a go-forward basis.
Before closing, I'd like to offer some thoughts on what lies ahead.
The ultimate and precise impact of the pandemic on our business for the remainder of 2020 and beyond remains largely unknown, as is the exact trajectory of our industry's recovery.
While we are not issuing formal guidance today, we currently expect that the impact of COVID-19 on the company's year-over-year RevPAR change will be less significant for the fourth quarter versus the third quarter of this year.
Our sentiment is based on the following.
First, we are observing continued resilience of leisure demand and continue to drive relative outperformance versus the industry.
Second, despite entering fall when demand is historically lower, we are pleased that our fourth quarter domestic RevPAR change has continued the pattern of sequential quarterly improvement through the week of October 24.
In fact, we expect our October 2020 RevPAR to decline by approximately 25% from the same period of 2019.
The final reason we are optimistic is the nature of the current environment.
Unlike the Great Recession, which was caused by underlying fundamental economic problems, the current economic downturn is tied to the course of the COVID-19 pandemic, which we believe could contribute to a faster recovery.
We will continue to evaluate the impact of COVID-19 across the business, and we'll provide further updates in February during our next earnings call.
In closing, we are optimistic that Choice Hotels is well positioned to succeed for the remainder of 2020 and beyond.
We continue to benefit from our resilient, primarily asset-light, franchise-focused business model, which has historically delivered stable returns throughout economic cycles and provided a degree of cushion from market risks.
While we are not immune to the pressures faced by the industry, we believe that our long-term focus and prudent, disciplined capital allocation strategy will allow us to continue to capitalize on opportunities during the recovery.
At this time, Pat and I would be happy to answer any questions.

user
choice hotels international q3 adjusted earnings per share $0.66.
q3 adjusted earnings per share $0.66.
domestic systemwide revpar decreased 28.8% for q3 2020 compared to q3 2019.
not providing formal guidance for 2020 at this time.
currently expects impact of covid-19 on its year-over-year revpar change will be less significant for q4 than q3.

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