Ladies and gentlemen, thank you for standing by. Welcome to the Choice Hotels International First Quarter 2021 Earnings Call. Please note, this call is being recorded. I would now like to 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 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.

Thanks, Allie, and good morning, everyone. Thank you for joining our first quarter 2021 earnings call, and I hope you are all well. As you'll hear today, we believe that the deliberate set of strategic decisions we've made in recent years and our targeted actions during the pandemic, along with the dedication and hard work of our franchise owners to navigate the impact of the pandemic, drove impressive results that position us well to further capitalize on growth opportunities in 2021 and beyond. Throughout my remarks today, I'll provide comparisons not only to the prior year but also to 2019, which we believe are more meaningful in analyzing performance trends as the prior year's quarter results were impacted by the pandemic. In the first quarter of 2021, we once again delivered results that significantly outperformed the industry, our chain scale segments and local competition. And we expanded our adjusted EBITDA margins to 69%. Our domestic system-wide year-over-year RevPAR change surpassed the industry by 23 percentage points, declining 4.4% and 18.7% as compared to the same quarters of both 2020 and 2019, respectively. And we continued to achieve sequential quarter-over-quarter improvement. In addition, we generated steady month-over-month growth in our choicehotels.com and other proprietary digital channels revenue contribution mix throughout the quarter. We also benefited from our most loyal customers, Choice Privileges, Diamond Elite members, who contributed an even higher percentage of overall revenue for the quarter as compared to 2020 and 2019. These results have helped us increase RevPAR index versus our local competitors by over 6 percentage points in the first quarter as compared to 2019. We achieved that through notable lifts in both weekday and weekend RevPAR index and up significantly across all location types as reported by STR.

Thanks, Pat, and good morning, everyone. I hope you and your families are all well. Today, I'd like to provide additional insights around our first quarter results; update you on our liquidity profile and approach to capital allocation; and finally, share our thoughts on the outlook for the road ahead. Taking a closer look at our results. For first quarter 2021, total revenues, excluding marketing and reservation system fees, were $91.4 million. Adjusted EBITDA totaled $63.1 million, driven by improving RevPAR performance and our ability to realize adjusted SG&A savings of 20%, and our adjusted EBITDA margin expanded to 69%, a 330-basis point increase year-over-year. As a result, our adjusted earnings per share were $0.57 for the first quarter. Let's take a closer look at our 3 key revenue levers, beginning with RevPAR. Our domestic system-wide RevPAR outperformed the overall industry by 23 percentage points for the first quarter, declining 18.7% from 2019. Compared to 2020, our first quarter 2021 RevPAR declined only 4.4%. At the same time, our first quarter results exceeded the primary chain scale segments, in which we compete as reported by STR by nearly 8 percentage points versus 2019. Our domestic system-wide occupancy rate has seen significant improvement since mid-March 2021. In fact, starting in mid-March, we've experienced our highest occupancy levels since the start of the pandemic, with system-wide occupancy rates exceeding 70% on numerous days. We are optimistic that these demand trends will remain elevated, especially throughout summer and will further strengthen the financial health of our franchisees. The trends of improving RevPAR performance have continued into the second quarter. Our April performance was significantly stronger with a RevPAR decline of approximately 4% and an occupancy rate increase of 80 basis points versus 2019 levels. These trends give us even greater optimism for our 2021 performance. 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 the investments we've made are paying off. In the first quarter, these strategic segments helped us achieve material RevPAR change outperformance against our respective industry chain scales and drove gains versus our local competitors. Specifically, when compared to first quarter 2019, our upscale portfolio increased its RevPAR index relative to its local competitive set by 14 percentage points. Our extended-stay portfolio outperformed the industry's RevPAR change by an impressive 38 percentage points and grew versus its local competitive set by 10 percentage points. And finally, the RevPAR change for our mid-scale and upper mid-scale portfolio exceeded these segments by 9 percentage points. For the first quarter 2021 versus the same period of 2019, all of our brands achieved RevPAR index gains versus their local competitors. In fact, we were able to increase our overall RevPAR index against local competitors by over 6 percentage points, notably through our franchisees' ability to maintain rate integrity. More specifically, our average daily rate improved from the prior quarter, and our average daily rate index increased 3.7 percentage points as compared to 2019. We've also observed firsthand that our investments in pricing optimization capabilities for our franchisees are paying off. At the same time, we continue to grow the overall size of our franchise system and open the highest number of hotels in any first quarter in the past 10 years. Across our more revenue-intense brands and the upscale, extended-stay and mid-scale segments, we observed stronger unit growth, increasing the number of hotels by 2.4% year-over-year and improving the growth from fourth quarter 2020. For full year 2021, we expect our overall unit growth trend to continue. Furthermore, we expect the unit growth of the more revenue-intense segments to accelerate versus 2021 and range between 2% and 3%. Aided by our strong value proposition and outperformance, demand for our brands continued to gain momentum since the beginning of the year, with over half of the domestic agreements executed in the month of March. Specifically, we saw an increase in demand for our conversion brands, with domestic conversion contracts up 76% year-over-year. Our royalty rate remains a significant source of our revenue growth, which is driven by the attractive value proposition we provide to our franchisees, their continued desire to be affiliated with our proven brands, and our pipeline. The company's domestic effective royalty rate exceeded 5% for the first time ever in a quarter and increased 7 basis points year-over-year for the first quarter compared to the prior year. We expect to maintain the historical growth trajectory of this lever in 2021 as owners seek Choice Hotels' proven capabilities of delivering strong top line revenues to their hotels, while helping them maximize return on investment. I'd now like to turn to our liquidity profile and share a capital allocation update. Our strong results have led to an even stronger liquidity position for the company. At the end of first quarter 2021, the company had approximately $823 million in cash and available borrowing capacity through its revolving credit facility, even though our cash generation tends to be weaker in the first quarter due to the seasonality of our business and other cash outlays. Given the continuing improvements in our operations, our strong liquidity and credit profile and our increasing optimism for 2021 and beyond, our Board has approved the reinstatement of our quarterly dividend at the pre-pandemic level beginning in July 2021. Additionally, the Board has also approved the resumption of the company's share repurchase program. Both actions highlight the confidence we have in our business to continue generating strong levels of cash and are a testament to our impressive results, while reflecting our continued commitment to driving long-term shareholder value and returning excess capital to our shareholders. Nevertheless, our capital allocation philosophy remains unchanged. We will continue to be disciplined stewards of capital and take steps that we believe will maximize shareholder value. Choice's primary objective in this area has always been to increase organic growth by strategically investing back into the business. We will continue to monitor the environment for other investment opportunities and evaluate capital returns in the context of our leverage levels, market conditions and our overall capital allocation strategy. Before closing, I'd like to offer some thoughts on what lies ahead. While we are not providing formal guidance today, we currently expect RevPAR change for the remainder of the year to be stronger than first quarter 2021 results versus both 2020 and 2019. Our view is reinforced by the following: first, we continue to see consumers' desire to travel climbing, aided by the vaccine rollout, and improving domestic economic environment and higher levels of consumer savings. Second, we are pleased that our domestic RevPAR change has continued the pattern of sequential improvement with significantly stronger April RevPAR results versus 2019 and trends continuing into May. We currently expect strong travel demand trends to continue. Finally, we continue to be optimistic given other positive trends, such as demand increases in key urban locations and our share gains in business travel, combined with the continued resilience of leisure demand. We will continue to evaluate the impact of COVID-19 across the business and will provide further updates in August during our next earnings call. In closing, we remain optimistic that Choice Hotels is well positioned to succeed in 2021 and beyond. Our resilient, primarily asset-light, franchise-focused business model, which has historically delivered stable returns throughout economic cycles and provided a degree of cushion for market risks, will continue to benefit us in the long run. Our investments for the long term that propel our future forward, coupled with our strategic approach, disciplined capital allocation strategy, and strong balance sheet will allow us to continue to capitalize on opportunities during the recovery and drive outsized returns for years to come. At this time, Pat and I would be happy to answer any questions.

Our first question today comes from Robin Farley with UBS.

Just to follow up on the share repurchase authorization, when do you anticipate any balance sheet targets before you actually start the share repurchase?

Robin, share repurchase has always been a key part of our capital allocation strategy. I think when you just look at the recovery of the business, you look at our liquidity position, it allows us to do a share repurchase program. I would probably state it that way. Historically, we haven't been programmatic in our share repurchase. We've been more opportunistic when we see the share price in a dislocated or discounted fashion relative to intrinsic value. So those are the things that we look for with regard to when we would go into the market and repurchase shares. So as of Friday, we have the ability to sort of go back and do that. And then we're essentially returning to the capital allocation strategy that we had prior to the pandemic. So there aren't specific metrics that we look for other than a discount to intrinsic value.

Yes. The only thing I would add is just in terms of that capital allocation hierarchy. Obviously, we've always talked about internal investments that are going to drive outsized growth first, M&A opportunities, and then returning capital to shareholders. In terms of the balance sheet position, I mean, you see where we are. We were one of the very few, if not the only ones that didn't have to renegotiate a covenant as well. And so from that perspective, I don't think that this is an either/or. I think a lot of folks have said, oh, you're going to invest in the business instead of returning capital to shareholders. I think that we're going to have the opportunity to do all of the above over the course of the next several months.

Okay. Great. And if I could ask as a follow-up. I know you talked about the acceleration in growth in the upscale and extended-stay. I'm just curious whether you expect, on a company-wide basis, acceleration from the 2020 growth rate, which I think was about 0.4% overall. Do you think on a company-wide basis, that will accelerate this year as well?

Yes, Robin. I think the only guidance that we provided in the prepared remarks, obviously, was the acceleration in those revenue-intense segments. Last year, those revenue-intense segments grew at about 2%. We gave guidance for 2% to 3% this year. I think that in terms of modeling, I would expect to see the trends that you're seeing today in the economy segment probably carry forward to 2021, but we're certainly seeing that acceleration in terms of those revenue-intense segments. The only thing I would say is it's not really just the story of net unit growth. This is really a story of net royalty contribution. I think that's really important, and that's why we always talk about the revenue-intense segments, and that's the reason that we provided guidance. At the end of the day, we're adding these more revenue-intense segments. So getting to that historical 3% to 4% unit growth is not the only goal here. It's really around getting to that 3% to 4%, maybe even 4% to 5%, that royalty growth overall.

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

Pat and Dom, you both highlighted impressive trends in April compared to 2019, but we've also noted that spring break led to a surge in demand, and there might be some additional stimulus supporting this demand. Can you help us understand how sustainable this recovery trend is and share your thoughts on the outlook for the rest of the year, including any relevant data or observations you have from the field?

Yes, Dan, that's a great question. I've mentioned the pent-up demand and the surge in travel that we're anticipating. The key is figuring out when this surge will settle into a more stable pattern. On a positive note, our group travel, particularly in the sports segment, has already exceeded 2019 levels as early as Q1. The forward bookings for June and July for that segment are also significantly higher than in 2019. As we look ahead to summer, segments that typically book further in advance than our transient business show encouraging signs. Additionally, places like New York City are experiencing a return to travel, and the cruise industry is seeing a resurgence. Venues such as Live Nation are also opening up, providing more opportunities for people to travel and engage in activities. These changes are expected to unfold in the coming months. I believe there is strong confidence in travel, and there will be more destinations and activities available for consumers. I view this as the start of what I hope will be a robust summer. The critical question will be what happens in the fall. Trends from Q1 show a remarkable weekday occupancy index, largely due to the flexibility of people working from anywhere, allowing for extended midweek leisure travel. The main question will be whether this flexibility continues in the fall as we return to a new normal. Early trends suggest that this flexibility may persist.

Yes, Dany. The only thing I would add is from a modeling perspective, April was probably the easier comp out there. Just you hit that on the head there with regards to the return of spring break. When you think about May, June, and July last year, that's when you saw a lot of that pent-up demand returning during the pandemic, especially in the south. And so you're going to have certainly a tougher comp in May, probably an even tougher comp in June and in July. We are running some of those promotions and whatnot. So the 4% in April, 4% down versus 2019, very remarkable. But just from a modeling perspective, we do have a few tougher comps on the horizon as well.

Our next question comes from Michael Bellisario with Baird.

Just want to go back to the topic of capital allocation. I think last quarter, you guys ranked M&A higher around your prior listing base. Dom, you also said it again today, higher than returning excess capital to shareholders. Does the reinstated dividend suggest you're not seeing or maybe you don't expect to see any M&A investment opportunities pop-up over the near term?

I believe Michael, Dom's point is that we have the capability to handle everything. Our capital allocation strategy consists of four pillars. With the business recovering and our balance sheet remaining strong, we are positioned to invest in our company, which we did in the fourth quarter and continued into the first quarter. We are introducing new prototypes and revenue management tools, and we are committed to long-term investment. Additionally, we are exploring M&A opportunities, although it's currently a challenging environment in the hotel sector, making it tough to evaluate assets. We are also focused on share repurchases and dividends as part of our commitment to return capital to shareholders. We can revert to our strategies from February of last year. The key takeaway is that we are not prioritizing one area over another; all four areas provide us with opportunities to enhance overall returns for our investors. This is the comprehensive approach we are taking, and we believe we are now in a position to restore all four aspects to where they were before the pandemic.

Got it. Understood. And then switching gears just a little bit. What are you hearing from developers regarding construction cost pressures? And are you seeing any lower interest in new construction deals from prospective owners?

It's really interesting to see the high level of interest, particularly with WoodSpring, Everhome, and our Comfort brand, which has returned to growth after the refresh. The challenge lies with lumber prices and the fluctuating costs of materials we've encountered. When I speak to some of our largest vendors, they anticipate that things will normalize in about three to four months. This timeline aligns with what many of our developers believe. As such, getting started with applications, executing contracts, acquiring land, and securing financing takes time. Many owners are looking to initiate these processes now, and as we move forward, we hope that in three to four months, construction costs will decrease, allowing for deals to meet the expected returns.

Our next question comes from Thomas Allen with Morgan Stanley.

A big macro theme is just labor shortages. What are you hearing from your franchisees in terms of that?

Yes. The primary concern we hear from our franchisees is about securing the necessary labor for their hotels. Both our company and our franchisees have implemented several strategies during the pandemic to reduce labor costs, including offering housekeeping on request and a flexible grab-and-go breakfast option. These measures are also effective in lowering labor expenses. Consequently, we are working to enable our franchisees to operate their hotels with a smaller workforce than they had before the pandemic. However, a common issue has been the additional unemployment insurance stimulus money, which has discouraged some individuals from returning to jobs such as housekeeping. We hope this situation is temporary. As we approach the end of September, we anticipate that the workforce challenges our franchisees are facing will start to ease.

Pat, just a follow-up on this. When you think longer term, do you have an estimate of how much your kind of changes will help streamline the cost structure of your other hotels?

Yes. We have some internal targets. I would say they're competitive in nature, so I won't speak to them, but they're significant. And it is something that we have been working on prior to the pandemic. We've been able to pull some of that forward during the pandemic and execute it earlier. And what was going to be something we piloted, we just put it out there. And I'm pleased to say in a lot of these the consumer reaction to it has been as positive as our franchisees' reaction to it has been. And a lot of these also help us on the environmental front as well. So everything from not as much water and chemical usage in turn in the rooms every night to the types of things that can impact our environment going forward. So there's a really nice alignment, if you will, of lowered cost, lower environmental impact, and guest expectations are actually in alignment with that. So I think it's something that we have been working on prior to pandemic, and a lot of these are going to stay in place going forward.

Our next question comes from David Katz with Jefferies.

I wanted to just get a little more insight, if I may, on the new build development activities. And the question is really in the context of the capital and the balance sheet use that the company has deployed over time. Is that new build stretching out? What are you sort of hearing and seeing? And how should we think about that curve in the next couple of years as best as we can tell?

Yes, David. As we've discussed in previous calls, the time required for a new build has increased. Initially, this was due to the pandemic, but now it seems that ongoing delays will be mainly influenced by labor, furnishings, fixtures, and equipment costs, as well as material costs for constructing new hotels. What we're observing in the market indicates that we could face delays of three to four months before conditions normalize. These factors contribute to the extended timeline from contract execution to the opening of a hotel.

And then, David, to your point on just key money distributions over the course of the last few years, what we saw is actually that number coming down. Back in 2018, we were close to about $50 million; in 2019, it dropped to about $40 million; and then last year, it was about $37 million distributed as well. We actually were a net recycler of capital for our Cambria portfolio in Q1 as well. So we rebought $25 million in, in terms of some of those investments that we're making. So obviously, a competitive environment, in order to get some of that revenue-intense unit growth that we were talking about, we would be more than happy to lean in a little bit on key money for the remainder of the year to get some of those projects started and accelerated. But I think the better news is it's really the conversion engine. So when you think about those openings in Q1, over 80% of those openings came from conversions. We actually sold 25 or signed 25 franchise agreements in Q1 as well that actually opened in Q1, which is one of the reasons why you're seeing the phenomenon with the pipeline. It's not necessarily the best barometer of near-term, mid-term unit growth. We think that as we continue to see those conversions ramping up, we'll be able to sustain that unit growth target that we have for the company.

Our next question comes from Patrick Scholes with Truist Securities.

The first question, can you tell us what your expectations are this year will be for spending on development in the Cambria brand? And where did you finish last year with that?

Yes. So what I would tell you, Patrick, is overall, we have the $725 million authorized for Cambria. Right now on our balance sheet, we have about, call it, $540 million. So a lot of it obviously depends on the pace in which some of these properties get open and which ground breaks happen. I think hitting that $725 million would actually be welcomed because that means these projects are breaking ground, so to speak. But the reality is, over the course of the next several months and year, frankly, we're going to be working within that authorization, which is the $725 million. As it pertains to broader key money, what I mentioned was last year, we were around $40 million or so deployed. We would expect to see probably pretty similar trends in 2021. Now obviously, we would be willing to lean in a little bit more, just given the fact that we certainly have the capacity that goes back to that organic unit growth story that we talked about before and the #1 priority in terms of the capital allocation hierarchy.

Okay. And then, Dom, just a kind of clarification on your prepared remarks. Did you say that you expect 2021 RevPAR to be better than 2019 on a dollar amount? Is that correct?

What we talked about was that RevPAR for the remainder of the year, so Q2, Q3, Q4, we expect to see as better in terms of the RevPAR change than the RevPAR change that you saw in Q1 of this year.

Our next question comes from Dan Wasiolek with Morningstar.

Just the first one with the infrastructure proposal in the U.S., any potential impact that might have on some of your segments like extended-stay or mid-scale?

Yes. Those are projects that generally fill our extended-stay hotels. If you look at our broader portfolio, even beyond extended-stay, that construction segment is one of the larger segments of our business travel, and that has actually held up fairly well during the pandemic and is not too far off of where we were in 2019. So the more of those types of construction projects that get approved as a result of an infrastructure spending bill, the better. Plus, I think, overall, just improving the airports, roads, bridges, tunnels, particularly for a company like ours that is heavily dependent on domestic travel, and that's a key driver. The more investment the company or the country puts into those assets, the better off it is for productivity and for our business as a whole.

Okay. Great. Makes sense. And then just a question, I guess, on your international brand and the recovery you're seeing there. I mean obviously, domestic is the vast majority of your business. But any comments on kind of how international brands and the recovery are doing? And what you see moving forward there?

Sure. So as you stated, in 2019, it was 3% of our earnings. But as I sort of go around the world, we have a large presence in Australia and New Zealand. That market has performed quite well. They're in Ireland, both countries. And we saw in December there, some real record return of consumer demand. Again, they're in mostly drive to leisure markets, not too different from here in the United States. So that market has done well. When you look at what's happening in India and you look at what's happening in Japan, in particular, from a RevPAR perspective, those 2 markets are extremely challenged today. In China, we only have 7 hotels, but those 7 hotels are seeing the same type of return we're seeing in China. Europe is a different story. I mean Europe has been probably the most impacted at this point with RevPAR down significantly and hotel closures there being much higher than what we experienced here in the U.S. But I think as, again, each of these countries get to the point of where vaccinations are having an impact and where travel restrictions then begin to be lifted, you become more optimistic as you get into the third and fourth quarter for our international markets.

This will conclude our question-and-answer session. I'd like to turn the call back over to Pat Pacious for any closing remarks.

Thank you, operator. Thanks, everyone, again, for your time this morning. As you heard today, throughout the first quarter, Choice Hotels continued to drive the results that once again significantly outperformed the industry and our chain scale segments. And I believe the strategic investments we've made in recent years and the targeted actions we've taken during the pandemic are going to allow us to continue to grow our share of travel demand over the long term. So I hope you all stay safe and healthy, and we'll talk to you again this summer. Take care.

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