Choice Hotels International Inc /De Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International Second Quarter 2021 Earnings Call. 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 would like to remind you that during this conference call, certain predictive or forward-looking statements will be made 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. Moreover, we'd like to acknowledge that there continues to be uncertainty as to the impact of the COVID-19 pandemic on our future performance. 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 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 second quarter operating results and financial performance. He'll be joined by Scott Oaksmith, Senior Vice President, Real Estate and Finance. Following Pat and Dom's remarks, we'll be glad to take your questions. And with that, I'll turn the call over to Pat.

Thanks, Allie, and good morning, everyone. We appreciate you taking the time to join us. I'm pleased to report that Choice Hotels has continued to deliver strong results that once again significantly outperformed the industry and gained share across all segments in which we compete. Our June and July RevPAR results exceeded 2019 levels by approximately 5% and 15%, respectively. A truly remarkable achievement. For almost 1.5 years, we've maintained significant RevPAR index share gains against the competition as compared to 2019. In fact, this quarter, we increased RevPAR index versus our local competitors by nearly 5 percentage points as compared to 2019, through notable lift in both weekday and weekend RevPAR index as reported by STR. Retaining these elevated competitive share gains even as the broader industry recovers illustrates that our strategic investments are working and gives us further optimism about our future revenue trajectory. Our goal is not simply to return to our 2019 performance levels but rather to capitalize on current and future investments to fuel our long-term growth and drive our performance to new levels. As previously discussed, we were very intentional in our approach to investing prior to the pandemic to drive growth across the more revenue-intense hotel segments. While we reduced our overall spend in 2020 due to the pandemic, we continue to invest in key strategic areas. More importantly, in today's stronger demand environment, we see an outsized opportunity to continue or even accelerate strategic investments to capture a greater share of travel demand. What gives us optimism is that the bold investments we've continued to make are paying off. These include launching and enhancing brands in each of our strategic segments, namely expanding our upscale positioning, strengthening our mid-scale leadership role, and rapidly growing our extended-stay portfolio. We're also improving our guest delivery at the hotel level while strengthening our marketing and reservation systems and franchisee tools that have contributed to the outperformance our brands are demonstrating. We are also bolstering our platform capabilities through the strategic partnerships that drive incremental revenue to our existing portfolio, allowing us to play in nontraditional segments, such as gaming and all-inclusive resorts among others. I will now outline more specifically why we are confident that we can continue to increase our share of travel demand in the years to come. First, we strengthened our existing brands and launched new brands to appeal to the customer of tomorrow in key segments that provide a compelling return on investment. Our strategic investments in the extended-stay segment allowed us to quadruple the size of the portfolio over the past five years to reach 460 domestic units with a domestic pipeline of over 300 hotels. Last year, we launched our newest mid-scale extended-stay brand, Everhome Suites, to provide franchisees an opportunity to capitalize on the best-performing segment of the hotel industry. The interest level from multi-unit developers backed by institutional capital for this new product is high, similar to what we are seeing with our WoodSpring Suites brand. In our mid-scale segment, we have reinvested in the future of our brand portfolio with Comfort moved to modern transformation. The Comfort portfolio grew its domestic unit count by 2.5% in the second quarter year-over-year and recently celebrated the highest number of openings since 2014, while achieving RevPAR index gains versus its local competitors in the second quarter. Clarion Pointe has already experienced a fivefold increase of its portfolio since the end of 2019, ending the first half of the year with over 30 hotels open in the U.S. and more than 20 additional hotels awaiting conversion this year. At the same time, we rapidly grew our upscale segment. Specifically, we've increased the number of domestic upscale rooms by nearly 25% since the end of 2019, driven by impressive growth of both Cambria and the Ascend Hotel Collection. We also continue to invest in capabilities to further enhance our owners' value proposition and drive the bottom line results through value-added programs and resources to achieve higher levels of profitability. Notably, we enhanced our pricing and merchandising tools to further enable our franchise owners to reach their target customers and effectively drive top-line revenue. Thanks to these tools, we were successful in swiftly executing our pricing strategy and optimizing rate delivery, which resulted in significant average daily rate gains. The company is currently outpacing the rate recovery seen following prior recessions. And finally, we continue to propel our future forward by expanding our platform capabilities through signing strategic agreements with new travel partners in adjacent business segments. These platform expansion strategies enabled us to attract new franchisees and guests to the core brand portfolio and supplement investments in strategic brand growth with increases to high-margin affiliation fee streams. As discussed on our prior calls, we've been anticipating long-term consumer and demographic trends to drive a significant uptick in travel demand, and we've been making investments to capitalize on them. Specifically, we are benefiting from trends, such as Americans rediscovering domestic destinations and the continued rise of road trips and increase in workers retiring early and the trend of working from anywhere, which affords Americans flexibility in where and when they travel for leisure. We now know that the pandemic has only accelerated these trends, and we believe that our business will, therefore, benefit in an outsized way from additional travel demand coming to our key segments. The investments we've made allowed us to capitalize on demand that has historically propelled our core business and also enabled us to attract and capture a larger share of leisure demand with customers who are new to our brands, driving more revenue this year than in 2019. At the same time, we're benefiting from our most loyal customers, Choice Privileges, Diamond Elite members, who are experiencing our new and refreshed brands and who contributed an even higher percentage of overall revenue for the quarter as compared to 2019. Not only are our customers planning their travel further in advance, as witnessed by the continued lengthening of average booking windows, but we continue to see a slightly greater share of revenue coming from longer lengths of stay. While our expectation to capture a larger share of consumers' wallet among leisure travelers is already coming to fruition, we also see continuing momentum in our business travel trends with additional runway for growth. We have seen sequential quarter-over-quarter and month-over-month increases in our business travel booking trends in the second quarter 2021. Likewise, with our recent refresh of the Comfort brand family and further upscale penetration, we are well positioned not only to recover our existing business customers but to expand our guest base as business travel rebounds. As a matter of fact, our group travel bookings reached 90% of our 2019 levels in the first half of the year with key segments strongly rebounding and lead volumes steadily rising close to 2019 levels. The results we achieved confirm our focus to grow in our strategic segments, which will further fuel the long-term revenue intensity of our system. I'll now provide a brief update on our key segments where all of our select service brands achieved RevPAR index gains versus their local competitors in the second quarter as compared to 2019. Our extended-stay segment, a significant growth engine for the company, expanded by over 45 hotels in the second quarter year-over-year and now represents over 10% of our total domestic rooms. For the second quarter, as compared to 2019, WoodSpring Suites reported 16% RevPAR growth. And the brand's pipeline continues to expand, reaching 155 domestic hotels. Our suburban extended-stay portfolio expanded to nearly 70 domestic hotels open, representing 15% unit growth year-over-year. Additionally, franchise agreements awarded for the brand in the first half of the year exceeded levels reported in the same period of 2019. At the same time, our MainStay Suites, mid-scale extended-stay brand, continued to capture nearly 14 percentage points in RevPAR index gains versus its local competitors as compared to 2019 and the brand's portfolio of over 90 domestic hotels open experienced 27% year-over-year unit growth. We are especially pleased with a significant increase in developers' interest in new construction extended-stay projects year-over-year as hotel financing begins to rebound. The high developer activity and interest reaffirm that our strategic commitment and continued investments in this highly cycle-resilient segment are driving a competitive advantage. Our mid-scale transient brands represent over 2/3 of our total domestic room portfolio and over half of the total domestic pipeline. Specifically, the Comfort family achieved a RevPAR change that was 9 percentage points more favorable than the upper mid-scale chain scale in the second quarter as compared to 2019. In the first half of the year, the Comfort portfolio opened the highest number of the brand's conversion hotels in the past decade while increasing domestic new construction agreements by 20% year-over-year. With newly updated properties from coast to coast, a recently refreshed brand identity and the new Rise & Shine prototype revealed this spring, the future is certainly bright for Comfort. Our upscale portfolio achieved impressive year-over-year growth in the second quarter, where we increased our domestic room count by 24%, marking a record for domestic openings in the first half of the year for the company, including 22 Penn National Gaming properties. The Ascend Hotel Collection leads the industry as the first and largest soft brand. The brand grew its domestic room count by 28% year-over-year and expanded to nearly 390 hotels open around the globe. In addition, Ascend Hotels outperformed the upscale segment RevPAR change by 26 percentage points for the quarter as compared to 2019. Our upscale Cambria Hotels brand continues its positive momentum, growing its portfolio size by 14% to 58 units with 17 projects under active construction at the end of June and approximately 10 additional hotels planned to open this year. These results are proof of Choice's value proposition in the upscale segment for our current and prospective owners. The recovery is not just about travelers returning; it's also about continuing to drive forward our efforts to improve the unit economics of our franchises. I've been traveling a lot since late March across the country. And every time I speak with our franchise owners, they are optimistic about the progress of their business recovery and the outlook for the remainder of the year. The close relationship we've had with our franchisees has always been strong, but the pandemic was an opportunity for us to strengthen this bond. Specifically, our owners are very pleased with the new pricing tool we recently introduced that has helped drive their top-line outperformance versus competitors and with several initiatives we launched that reduce their total cost of ownership. Our franchisees are also benefiting from our strong business delivery. Thanks to our enhancements and our distribution capabilities, we recorded nine of our top 10 all-time highest booking days for choicehotels.com and other proprietary digital channels in the last two months. With such a powerful value proposition, it's no surprise why Choice has an industry-leading voluntary franchisee retention rate and our franchise owners continue to seek and develop our brands. Aided by our strong value proposition for our current and future owners, we also experienced significant demand for new franchise contracts. In the first half of the year, we awarded 200 new domestic franchise agreements, a 32% increase over the same period in 2020. Likewise, demand for our conversion brands throughout the first half of the year has increased by over 40% year-over-year. In addition, our development and franchise service team that is fully dedicated to driving diverse ownership of Choice franchise hotels among underrepresented and minority owners has awarded nearly a dozen franchise contracts in the first half of the year while growing and cultivating the number of women owners. We also continued to strengthen our platform business portfolio, which represents a highly revenue-intense extension for Choice. Our guests are increasingly engaging with our travel partners and continuing to benefit from additional travel options while our more than 49 million Choice Privileges members have the opportunity to earn and redeem points at our travel partners' properties by booking their stays directly on choicehotels.com. In fact, we are seeing an increase in our domestic loyalty program sign-ups in the second quarter 2021 compared to 2019. We are committed to enhancing our value proposition by further strengthening the platform portfolio and continuing to establish new strategic partnerships. In closing, I'm proud to say that our culture centered around diversity, equity, and belonging is being recognized. This year, we've been named one of the best employers for diversity by Forbes, the Best Place to Work for LGBTQ equality by the Human Rights Campaign for the ninth consecutive year, and one of the best places to work for people with disabilities, earning a perfect score on the Disability Equality Index for the second year in a row. I am confident that thanks to the strategic investments we're making, our impressive performance, and this award-winning culture, we are now in a stronger position than ever as a company to further capitalize on outsized growth opportunities over the long term, which will continue to pay off for our owners and shareholders alike. With that, I will hand it over to our CFO. Dom?

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 second quarter results, update you on our liquidity profile and capital allocation, and share our thoughts on the outlook for the road ahead. Throughout my remarks today, I'll provide financial performance and RevPAR comparisons to 2019, which we believe are more meaningful in analyzing trends as the prior year's quarter results were significantly impacted by the pandemic. For comparison to 2020, please refer to our press release. For the second quarter 2021 as compared to the same period of 2019, total revenues, excluding marketing and reservation system fees, were $142.4 million. Adjusted EBITDA increased 9% to $111.8 million, driven by improving RevPAR performance and continued cost discipline. Our adjusted EBITDA margin expanded to 79%, an 8% increase. And as a result, our adjusted earnings per share were $1.22 for the second quarter, a 3% increase versus the same period of 2019. Let's now take a closer look at our three key revenue levers beginning with royalty rate. The continued increases in our effective royalty rate remain 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 once again exceeded 5% for the second consecutive quarter, growing 7 basis points for the second quarter 2021 compared to the same period of 2020, a reflection of the continued strengthening of the value proposition we provide to our franchise owners. We expect to maintain the historical growth trajectory of this lever for the full year 2021 as owners seek Choice Hotels' proven capabilities of delivering strong top-line revenues to their hotels while helping them reduce their total cost of ownership and maximize return on investment. Our domestic system-wide RevPAR outperformed the overall industry by 20 percentage points for the second quarter, declining only 1% from 2019, while occupancy increased by 20 basis points as compared to the same quarter of 2019. At the same time, our second quarter results continue to exceed the primary chain scale segments in which we compete as reported by STR by nearly 7 percentage points versus 2019. We are proud to report that our June RevPAR results exceeded 2019 levels by approximately 5%, driven by a nearly 3% increase in average daily rate and a 2 percentage point increase in occupancy. The trends of improving RevPAR performance have continued into the third quarter. Our July performance was significantly stronger with RevPAR growth of approximately 15%, driven by occupancy levels of 70% and an average daily rate increase of 10% versus 2019 levels. In fact, July RevPAR for our upscale, extended-stay, upper mid-scale, mid-scale, and economy segments all surpassed 2019 pre-pandemic levels. And we saw month-over-month acceleration in performance across all of our segments. These trends give us continued optimism for the remainder of the year. As discussed in the past, 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. These strategic segments continue to help us achieve material RevPAR change outperformance against our respective industry chain scales and drove gains versus our local competitors. Specifically, when compared to the second quarter of 2019, our upscale portfolio increased its RevPAR index relative to its local competitive set and outperformed the industry's RevPAR change by nearly 13 percentage points. Our extended-stay portfolio grew RevPAR by 10% in the second quarter year-over-year, driven by occupancy levels of 82% and a 2% increase in average daily rate. The segment outperformed the industry's RevPAR change by more than 31 percentage points. And finally, the RevPAR change for our mid-scale and upper mid-scale portfolio exceeded these segments by 8 percentage points. Let me also highlight just a few impressive performance achievements for our brands in the second quarter as compared to the same period of 2019. Our WoodSpring brand reported 16% RevPAR growth, reaching an average occupancy rate of nearly 86% and experiencing a nearly 6% increase in average daily rate. Ascend Hotels grew June RevPAR by nearly 5%, driven by an over 12% average daily rate increase and achieved RevPAR index gains of 11 percentage points against their local competitors, while our Cambria Hotels drove the brand's RevPAR share gains versus their local competitors to 14 percentage points. Quality, our largest brand in the portfolio, recorded nearly 2% RevPAR growth driven mainly by a 1.2% increase in average daily rate. And finally, suburban extended-stay grew its occupancy by over 4 percentage points. Across the Choice system, we were able to increase our overall RevPAR index against local competitors by nearly 5 percentage points, driven by both our franchisees' ability to grow rate and occupancy gains. More specifically, our average daily rate improved from the prior quarter, and our average daily rate index continues to increase as compared to 2019, thanks to our investments and pricing optimization capabilities for our franchisees. Finally, we continue to grow the overall size of our domestic franchise system and exceeded 2019 levels for conversion openings through the first half of the year. Across our more revenue-intense brands in the upscale, extended-stay, and mid-scale segments, we observed stronger unit growth, increasing the number of hotels and rooms by 2.5% and 3.1% year-over-year, respectively, and increasing the growth rate from the first quarter of 2021. For the full year 2021, we expect our overall unit growth trend to continue. Furthermore, we continue to expect the unit growth of the more revenue-intense segments to accelerate versus 2020 and range between 2% and 3%. Aided by our strong value proposition and outperformance, demand for our brands continues to gain momentum since the beginning of the year with more than 1/3 of the total domestic agreements executed in the month of June. In fact, development activity for our extended-stay and upscale domestic franchise contracts throughout the first half of the year exceeded 2019 levels by nearly 60% and 14%, respectively. At the same time, our developers are increasingly optimistic about the long-term fundamentals of the lodging industry. Nearly 40% of total domestic franchise agreements awarded in the second quarter were for new construction contracts, which increased by over 20% in the second quarter year-over-year. In fact, demand for our new construction brands continued to accelerate throughout the first half of the year with more than half of the total new construction contracts executed in June alone. I'd now like to say a few words about our liquidity profile and provide a capital allocation update. Our strong results have led to an even stronger liquidity position for the company. At the end of the second quarter 2021, the company had approximately $908 million in cash and available borrowing capacity through its revolving credit facility. We are also pleased to report cash flow from operations of $102.3 million for the second quarter of 2021, a 28% increase versus the second quarter of 2019. Today, our gross debt-to-EBITDA leverage levels remain well within our target range of 3x to 4x. Our impressive results, combined with our confidence in continuing to generate strong levels of cash and our optimism for the future led us to reinstate the quarterly dividend at the pre-pandemic level and resume our share repurchase program. In June and July 2021, we returned over $14 million back to our shareholders in the form of cash dividends and repurchases of our common stock. These actions reflect our continued commitment to driving long-term shareholder value and returning excess capital to our shareholders. 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 detailed guidance today, we currently expect the third quarter RevPAR to grow in the mid- to high single digits as compared to 2019. Assuming elevated consumer sentiment remains and the broader RevPAR and economic recovery trends continue, we expect to see our 2021 adjusted EBITDA approaching 2019 levels, even with potential incremental investments in the back half of the year. Our view is reinforced by our strong year-to-date financial performance, broader macro and consumer trends in our recent domestic June and July RevPAR results, and our continued investments to support growth for the remainder of 2021 and beyond. We will continue to evaluate the impact of COVID-19 across the business and will provide further updates in November during our next earnings call. In closing, we remain confident that our strategic approach and resilient business model coupled with our disciplined capital allocation strategy and strong balance sheet will help us further capitalize on growth opportunities and drive outsized returns for years to come. The investments that we have made and will continue to make will allow us to execute on our ambitious long-term growth plan. At this time, Pat and I would be happy to answer any questions.

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

I wanted to begin by asking about the Choice portfolio's significant market share gains. Can you help us understand whether these gains are occurring in specific chain segments or driven by particular markets? Also, how sustainable do you believe this growth will be?

It's a very broad-based pick-up across all of our brands and regions. When we look at our consumer base, guests aged 65 and older have returned to 2019 levels. We're also seeing an increase in younger travelers, particularly those skewing more female. There isn't a single brand or region driving this; it's really broad-based. We're examining various reasons for this trend. Our investments in merchandising, promotions, and pricing tools over the past several years are significant drivers. These tools have helped us reach customers even during last year's low demand. Additionally, the investments we've made in our brands, particularly Comfort, are showing improved quality and performance. The refurbishment of the Comfort brand is contributing to this success. Before the pandemic, we were renovating Comfort, which meant many rooms were out of commission. This gives us optimism about capturing a larger share moving forward.

Dany, when we talk about the 5 percentage points of RPI gain we achieved in the second quarter, we report it on a local basis, focusing on comparable products within similar markets. In our prepared remarks, we mentioned that all of our select service brands experienced significant RPI gains, indicating that this trend is seen across our entire portfolio. Overall, it averages out to around 5 percentage points.

And Dom, just you ended your prepared comments with talking about EBITDA approaching 2019 levels even with incremental investments in the back half of this year. So can you just unpack that a little bit? First, in terms of the cadence of these investments? And first of all, is it going to be in corporate expense? And then what are these types of investments? Is it like on new brands? Is it on technology? Are you adding more people on your development teams or kind of what's driving that?

When examining our results, it's clear that the outperformance in EBITDA was largely due to strong top-line results, particularly with continued robust RevPAR figures. In Q3, we expected RevPAR to grow in the mid- to high single digits compared to 2019, and year-to-date, we're nearing those 2019 RevPAR levels. We anticipate RevPAR strength to persist, although we may see some moderation in the latter half of the year as we enter Q4, especially as leisure travel starts to slow down. While we do foresee continued top-line strength, we previously indicated that SG&A savings would normalize around 10% to 15%. In Q2, SG&A was about 10% lower when adjusted for comparable factors, which include merit increases. We are certainly aligned with the guidance we provided earlier. The reality is that we are now in a stronger demand environment, and we intend to invest in the latter half of the year. Just as we did during the pandemic, we are prepared to accept a slight reduction in margins if it leads to significant growth and market share gains. Our investments will focus on brand growth opportunities, enhancing our revenue management tools, and improving corporate efficiency. If necessary, we are willing to make capital investments to achieve these objectives. However, our corporate margins are expected to remain near pre-pandemic levels, and historically, the company has operated with margins around 70%. This quarter, we reported a margin of 79% due to high demand and our SG&A investments.

Our next question comes from Robin Farley with UBS.

I just wanted to ensure I understand the dynamics of your EBITDA, which was a strong 9% compared to Q2 of '19, and the EPS increased by 3%. The difference seems related to marketing and system revenues. Could you clarify whether this is just a timing issue, or what caused the lower EPS growth compared to the significant EBITDA growth?

So when we report the adjusted EBITDA and the adjusted EPS, excluding that marketing and reservation. Obviously, we can run surpluses and deficits. So just for comparable purposes, much like several of our competitors do, we adjust that out of the numbers. So it is a corporate EBITDA when we're quoting the significant outperformance. And again, Robin, what I would tell you is the significant EBITDA when you have a RevPAR that's coming in, in line with those 2019 levels, down 1% for the quarter, coupled with the 10% to 15% SG&A reduction that we had committed to, we're operating at a higher margin, and we're a more efficient business today than we were back in 2019. And so again, as we continue to look ahead into the Q3, and you see those outsized RevPAR gains versus 2019, we're continuing to see that margin flow through. Now obviously, on the EPS side, that flows through to the bottom line. Taxes may have been slightly up versus where we had expected. And the reason for that is our taxable income was significantly up as well for the quarter.

What kind of flow-through do you anticipate from EBITDA to the EPS line? In other words, you mentioned that taxes were slightly higher. Is there anything else about the quarter that was unusual and might not result in the same dynamic in future periods?

No, I mean, the reality is it's a pretty normalized and pretty clean quarter, and we would expect to see the same flow-through from EBITDA to EPS in the future.

Next question comes from Dori Kesten with Wells Fargo.

If you think about your trend in new signings, openings, renewals, when would you expect your pipeline to return to year-over-year growth versus its current contraction?

When we examine our pipeline, the increase in conversion contracts is noticeably boosting the speed at which these conversions are entering our pipeline. Typically, average conversions stay in our pipeline for three to six months. In Q2, about 14% of our openings were sold and opened within the quarter, meaning they didn’t appear in a quarter-over-quarter analysis. Regularly, we review the pipeline to eliminate contracts where developers are no longer planning to proceed. This allows our sales team to seek opportunities in those markets to support our long-term growth. Since the onset of the pandemic over a year and a half ago, we have removed contracts when developers indicated they would not move forward. I anticipate this trend may reverse by Q4 as owners start to reengage with their lenders to finance their projects and move ahead. This is contingent on hotel financing improving, which we are observing, especially in our extended-stay segment. Overall, approximately 50% of our pipeline consists of conversion hotels, hotels under construction, or those in advanced planning phases. We feel optimistic about our pipeline and closely monitor the other 50% to ensure those contracts will proceed. Ultimately, we’re not changing our outlook on net unit growth and are encouraged by the increase in application volumes for new contracts. This outlines our perspective on the pipeline and its contribution to long-term net unit growth.

Historically, terminations have typically posed a 3% to 4% challenge to net unit or net rooms growth. Is there a reason to expect that this impact will be lower moving forward, considering the number of hotels that have been updated and the relatively higher-end properties being added to the system compared to the past?

Well, certainly, we're finished with the Comfort cleanup. So if you look back over the last four or five years, that was a key driver of terminations. But we're back to our historical levels and feel really comfortable moving forward that we're not going to see increased terminations. The health of our franchisees right now with the PPP loans, the interest forbearance they were able to get. And those total cost of ownership savings that we're helping them with, which is lowering other areas of cost on their P&L. We see our franchisee base in a very healthy financial situation. So we would not anticipate terminations anything above historical levels.

When we examine the current trend in terminations, they are hovering around the 4% mark. A closer look at the details reveals that most of these terminations are originating from our transient economy brands. While the economy extended-stay segment is experiencing significant unit growth, it is primarily in roadway and catalog brands that we see this trend. This aligns with our focus on revenue intensity, as we are adding more units that generate higher revenue, while losing some of the lower revenue-producing ones. Additionally, the majority of our pipeline is comprised of these revenue-intensive segments, with approximately 95% of it focused on them.

Our next question comes from Michael Bellisario with Baird.

Just along those same lines, maybe can you provide some more details on the sequential decline in the system size? What came in during the quarter? What went out? And then any updated thoughts on when that net unit growth inflection might occur?

So when you take a look at the domestic unit growth, Michael, certainly very optimistic about those trends. We're continuing to see growth portfolio-wide. Excluding the economy transient segment, your rooms growth is above 3%. So certainly in line with where those historical trends were and frankly, accelerating versus where we were last year. The broader net unit growth decline was really driven in international. And a lot of that has to do with the disproportionate impact that COVID had specifically in Europe. Obviously, hotel closures were more common in Europe, especially in the portfolio that we were dealing with. We also looked at this as an opportunity to terminate some marginal or lower-performing products from the European portfolio that we felt in the long term were not necessarily going to be profitable. So a couple of multipacks with lower profitability. And so we expect to continue to see some of that trend continue into Q3 and Q4 this year internationally speaking, but then anticipate significant pickup in 2022 and beyond.

And then a bigger picture, maybe when you look at your franchisee base today, or at least maybe the incremental franchisee, are you seeing new first-time hotel owners join the Choice platform? Or are you seeing the existing franchisee base getting a little bit more concentrated? What's the makeup there of the new signings and the new franchisees coming onto the platform?

Yes, it's been interesting. Historically, we sell about two-thirds of our contracts to existing owners. In the last couple of quarters, we're seeing about two-thirds of new owners joining us. This trend is partially driven by investors in our extended-stay segment, particularly those backed by institutional capital and multi-unit ownership. We're observing a higher percentage of new owners who are developing in the extended-stay category, which presents a great opportunity for us. It indicates that our existing customers are returning to build new hotels, attracting a new category of franchisees. I believe this will serve as a significant advantage for us in the future.

And those new franchisees, are they asking for anything differently? Or are their contracts structured any differently than they would have been if it were an existing franchisee joining the platform?

I mean, I think our franchise contracts are fairly market. So what we are offering our existing owners and what we're offering the new owners are fairly consistent with regard to franchise terms. A new owner that is new to the industry completely. Choice has always been a great place for people who are new to the industry to start. Our Choice University online training platform or area directors and our opening teams out in the field are used to dealing with owners new to the industry. So that's a muscle that we've had for many years, and so it's always helped new people get into the industry. And as I mentioned in the last couple of quarters, we are actually seeing that, which is a real positive.

Our next question comes from Patrick Scholes with Truist.

First off, thank you for discussing changing customer habits and trends. As we try to understand what is evolving in the hotel industry, having insights like that is very helpful. Moving on to my questions here, your balance sheet will, at least by year-end, be in pre-COVID shape. How do you view the priority of share repurchases versus dividends considering that the stock is at or near an all-time high?

We have consistently emphasized that we allocate our capital to its highest and best use. Our priority begins with internal investments, which Dom and I have discussed. We have been making investments before, during, and will continue after the pandemic. We see exciting opportunities in revenue-rich segments to expand our product portfolio. We plan to invest further in our value proposition, as there is significant potential to reduce the costs associated with operating our hotels and assist our owners in pricing and marketing their products more effectively, especially as customer acquisition costs rise. These investments will persist. Additionally, we will seek merger and acquisition opportunities that align with our criteria for enhancing franchisee unit economics and brand growth for our shareholders. Regarding dividends and share repurchases, we consider share repurchases when we notice a misalignment between current market value and our assessment of intrinsic value, approaching it opportunistically rather than systematically. This decision is influenced by capital market performance and our long-term equity growth outlook. We have restored our dividend policy to pre-COVID levels and are comfortable with the current dividend yield. This outlines our approach to capital allocation and our strategy for returning value to shareholders while investing in the business.

The only thing I would add is we feel very good about where those leverage levels are as well. Obviously, on a gross basis, we're well within that 3 to 4x when you look at it on a net basis, just given the fact that we are sitting on a little bit of cash still, you're at 3.5x. And so the reality is when you look at each of those priorities, it's not an either or, in my opinion. I do think that you're going to have the ability to pull every one of those levers, obviously, when we continue to pay the dividend at those pre-pandemic levels. And so again, I think to Pat's point, the ability to play offense, especially in this recovery period is critical. But make no mistake, I think that returning capital back to shareholders will still continue to be a priority going forward.

Certainly, a high-class problem with having to pick and choose what to use there. I have 2 more questions. The first one is, in the press release, you talked about third quarter RevPAR growing mid- to high single digits versus 2019. Can you tell us what that comparable RevPAR number was? As I look back in the press release from two years ago, it was $59, but I don't think that is the, in fact, the comparable number to grow off of? Or do you have a ballpark number we can use?

Let me give you an overview of the third quarter. As mentioned, July started strong, showing a growth of 15%. It's important to note that July had an extra Saturday and the 4th of July fell favorably within the week, contributing to this strong performance. Looking ahead to August and September, we continue to see strength in the business. The calendar factors in those months will have a somewhat reduced impact compared to July. I believe Dom is verifying your figures.

And the number is $55.10, Patrick. And so again, same methodology in terms of full room availability and ensuring that we're actually reporting on a full room availability perspective, just given the fact that COVID did have an impact on temporary rooms out of service. We wanted to make sure that we change that methodology to be apples-to-apples. So the number is $55.

In the owned hotel revenue line for the quarter, there was a significant increase. I'm curious about the factors contributing to this. Was it because many of the Cambrias were out of service around the same time last year? I want to ensure we're thinking about how to model this correctly moving forward. Alternatively, was the growth a result of new hotels opening in the past year?

No, it's really the location of the five hotels. LAX is an airport hotel. So obviously, when there was nobody flying, that one was significantly impacted. And New Orleans and Nashville and now Houston are doing quite well with the type of traveler, who is out there and what's going on in those markets. So it's really location-driven, as to why things were lower last year and why they're really strong this year.

Our next question comes from David Katz with Jefferies.

I wanted to go back to the conversions number, which I think you've discussed somewhat is strikingly large. Can you just talk about the value proposition out there? And I suppose that's a nice way of asking just how competitive it is? And how much capital people are putting into the marketplace because we certainly hear peers talking about conversion pursuits as well? Any color there would be helpful.

I believe, David, that conversions are not new to us, although they may be new for some competitors and certain brands. If a newly built brand suddenly shifts to conversions, there are considerable internal challenges to overcome. However, this is not the situation for most of our brands. For instance, Comfort Inn consists of approximately two-thirds new construction and one-third conversions, which is reflected in the contracts added this quarter. Other brands we own, like Quality, Roadway, and Clarion Pointe, are entirely focused on conversions. We have a system in place that supports performance improvement plans aligned with individual brand standards. We understand market demands and how to connect with owners, especially during times of supply chain constraints, while recognizing what guests value in a property improvement plan. There is a significant complexity in driving conversions if it's not a regular practice. During prosperous times, we engage in conversions, and during downturns, we increase our conversion efforts. This process is ongoing rather than something we activate at will. Additionally, looking back at the previous downturn, brands like Ascend and Clarion Pointe have evolved significantly, and MainStay and Suburban are now gaining momentum in new contracts. We also have brands that weren’t focused on conversions a decade ago but are now integral to our strength. When engaging with owners, we negotiate the necessary enhancements for their existing hotels to meet our brand standards. We offer a superior value proposition compared to independent hotels, which face high customer acquisition costs, labor expenses, and insurance costs. As a network of 7,000 hotels, we can help lower these costs for independent owners and those affiliated with weaker brands seeking a more effective business model and franchisee support system, including training and cost reduction strategies to boost profitability. As a company, we have always excelled in conversions, and this is increasingly evident as owners, having navigated the downturn over the past 18 months, are not only seeking a safe haven but also a partner capable of enhancing their profitability.

David, it's really showing up in the numbers as well when you look at the first half of this year. Your conversion agreements are up 43% year-over-year, and I know that 2020 is probably not the best comp. So even when you take a look, your conversion contracts are approaching 90% of 2019 levels as well, even in the environment that we're in today.

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

Thank you, operator, and thanks, everyone, again, for your time this morning. I hope you all stay safe, stay healthy, and we'll talk to you again in the fall. Have a great day.

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