Earnings Call Transcript - CHH Q4 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's Fourth Quarter and Full Year 2021 Earnings Call. At this time, all lines are in a listen-only mode. I will now turn the conference over to Allie Summers, Investor Relations Director for Choice Hotels.

Allie Summers, Investor Relations Director

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. These forward-looking statements speak as of today's date and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our fourth quarter and full year 2021 earnings press release which is posted on our website at choicehotels.com under the Investor Relations section. This morning, Pat Pacious, our President and Chief Executive Officer; and Dom Dragisich, our Chief Financial Officer, will speak to our fourth quarter and full year operating results and financial performance. They will be joined by Scott Oaksmith, Senior Vice President, Real Estate and Finance. Following Pat and Dom's remarks, we'll be glad to take your questions. And with that, I'll turn the call over to Pat.

Pat Pacious, President and CEO

Thanks, Allie, and good morning, everyone. We appreciate you taking the time to join us. 2021 was a remarkable year for Choice Hotels. A year our RevPAR and adjusted EBITDA performance surpassed both 2019 levels and our previously reported guidance. Our full year 2021 RevPAR increased 2.2% compared to 2019. And our full year 2021 adjusted EBITDA grew 8% compared to 2019. We drove RevPAR results for the full year 2021 that materially outperformed the industry and gained share across all segments in which we compete. Our fourth quarter RevPAR growth was exceptional, with RevPAR increasing 13.9% from the same quarter of 2019 and marking the strongest quarter of the year. This performance was driven by a set of deliberate actions before and during the pandemic, resulting in Choice Hotels emerging as an even stronger company than we were in 2019. Throughout 2021, our performance continued to strengthen, exceeding our 2019 RevPAR levels for the last seven months of the year. As previously reported, our economy segment led the recovery beginning in the second quarter of the year. Our upper mid-scale and mid-scale segments quickly followed, surpassing 2019 levels in the third quarter, and our RevPAR growth rates have continued to improve quarter-over-quarter since the onset of the pandemic. In 2022, we expect our momentum to continue into the first quarter despite the Omicron variant. In fact, our January RevPAR results exceeded 2019 levels by approximately 12%. We are very optimistic about our runway for growth because of the long-term investments we have made and will continue to make in our business. These investments are designed to capitalize on the consumer trends that have accelerated during the pandemic, favoring leisure travel, limited-service hotels, and longer lengths of stay. We expect these trends to continue to be strong long-term tailwinds for our company. Prior to the pandemic, four out of five trips taken in the U.S. were for leisure purposes. And the domestic leisure travel segment's growth is expected to increase from pre-pandemic levels and continue to fuel the performance of our brands. The rate of workers retiring in the U.S. has more than tripled as compared to pre-pandemic levels, and the baby boomers, one of our key customer segments, have more time and disposable income to travel. In addition, domestic remote workers, whose number is expected to increase from a pre-pandemic level of 19 million to 41 million in the next five years, will have greater flexibility as to when, where, and for how long they travel for leisure. Furthermore, in strategically expanding our extended stay footprint, we have positioned Choice Hotels to benefit from consumer trends that favor longer lengths of stay travel, driven by increases in extended vacations, household relocations, and temporary remote work assignments. Speaking of work assignments, throughout 2021, we witnessed sequential quarter-over-quarter increases in our business travel bookings, with demand and overall revenues continuing the steady progression back to 2019 levels. We expect our business and group travel demand to further strengthen and serve as a catalyst for our portfolio. We are also observing business travel trends that we believe are favorable to our brands. We expect business travel in our key industry verticals to increase with the additional onshoring of the U.S. supply chain. A recent survey indicated that over 80% of North American manufacturers are likely to re-shore their production operations. This trend has already contributed to the accelerated recovery of our business travelers. At the same time, we are well positioned to benefit from leisure travel becoming more mainstream among business travelers, consistent with a recent study that nearly 90% of business travelers report wanting to add a private holiday to their business trips. And we expect upcoming investments from the infrastructure bill will favor our business travelers and locations. Finally, with over 80% of American travelers surveyed saying they are ready to travel among the highest levels we have seen over the last two years. We are confident that these trends and segment-specific tailwinds will allow us to deliver continued RevPAR and adjusted EBITDA growth in 2022 and beyond. Our goal is not to simply exceed 2019 performance levels but rather to capitalize on current and future investments to fuel our long-term growth and drive our RevPAR performance to new levels. I will now more specifically outline why we are confident that Choice Hotels is in a stronger position than we were in 2019. During the past two years, we established key strategic building blocks that will provide us with a solid foundation for driving our continued sustained growth in the years to come. First, we strengthened our core portfolio of brands. We have reinvested in the future of our mid-scale brand portfolio with Comfort's move to modern transformation. Since its successful refresh, the Comfort brand has registered two consecutive years of unit growth year-over-year and continued to generate RevPAR index gains versus its local competitors, demonstrating the attractiveness of this iconic brand to hotel developers and guests alike. Our Quality Inn brand, with over 1,600 hotels opened in the United States, continues to be a leader in the mid-scale segment with strong developer demand and a 14.3% increase in RevPAR during the fourth quarter versus the same period of 2019. Due to the significant developer demand for this brand, we strategically exited a number of underperforming assets in the fourth quarter in order to open attractive markets to new owners and maximize the market potential for more profitable hotels. Our Clarion Pointe brand has also continued to grow. In just three years since its launch, Clarion Pointe expanded to 43 hotels open in the U.S. with another 33 hotels awaiting conversion this year. We also further invested in the extended stay segment, which is a significant driver of our growth. Our extended stay portfolio continued its rapid expansion and drove impressive RevPAR growth. Last year's strong developer interest for our extended stay brands exceeded 2019 levels and we expanded our domestic pipeline to over 340 hotels. Since acquiring the WoodSpring Suites brand four years ago, we have grown its portfolio of domestic hotels by 30%. Our investment in the brand's marketing and distribution capabilities reflected in the nearly 130% increase in the brand's website booking revenue since 2018 enabled us to achieve nearly 30% RevPAR growth in the fourth quarter of 2021 compared to 2019. Last year alone, the WoodSpring Suites brand's pipeline reached nearly 190 domestic properties, a 24% increase year-over-year with nearly 30 construction projects started, and we expect the brand's ground break this year to exceed 2021 levels. In addition, the first hotel for our newest extended stay brand, Everhome Suites, is currently under construction and scheduled to open this summer. The appeal for this new product in the development community continues to grow, with 16 domestic franchise agreements awarded last year and a significantly higher number of contracts expected for 2022. We are also pleased with the continued expansion of our other growth vector, the upscale portfolio, driven by both Cambria Hotels and the Ascend Hotel Collection. The Cambria brand continued its positive unit growth momentum, expanding to 57 units with 17 projects already under active construction at the end of December and four ground breaks in the fourth quarter alone. 2022 is shaping up to be another great year for Cambria and we expect over 10 additional hotels to open across the country. Once open, these upscale properties are expected to further fuel the revenue intensity of our system. Consumer confidence in our upscale products drove the brand's RevPAR outperformance versus their local competitors and demonstrates the attractiveness of Choice Hotels' value proposition in the upscale segment for current and prospective owners. We also continued to propel our future forward by improving the value proposition capabilities we deliver to our franchise owners, which enabled us to continue to grow our effective royalty rate while capturing more domestic franchise agreements in 2021 year-over-year. Specifically, our pricing optimization and merchandising capabilities are further enabling our owners to effectively capture additional market share, drive top-line revenue, and reach their target customers. Our leadership in this area is reflected in the prestigious award we recently received for our leading-edge revenue management tool, recognized as the industry's most innovative enterprise technology. The tools we have introduced are contributing to the outperformance our brands are experiencing. In fact, during the past two years, our RevPAR gains compared to 2019 have been significantly higher than the competition. What's most impressive is that we continue to drive strong performance through both rate and occupancy share gains. We expect to maintain share gains moving forward. As a result of our progress, we are well-positioned for stronger profitability in the future, with ample runway ahead of us as we execute our strategy. The results we achieved in 2021 confirm that our long-term strategy of further improving our revenue delivery to our franchisees while focusing on growth in more revenue-intense segments and locations is working. This is what gives us such high confidence in our ability to continue to drive exceptional results in the coming years. In addition to our performance, I want to recognize the efforts we are making to live up to our ESG commitments which, like our strategy, are long-term focused. Our fully dedicated team within our development and franchise service departments continues to drive diverse ownership of Choice franchised hotels among underrepresented and minority owners. With nearly 30 franchise contracts awarded in 2021, bringing the total agreements executed to over 290 since the program began over 15 years ago, I am especially pleased to note that 8 in 10 total agreements among underrepresented and minority owners executed this year were awarded to women entrepreneurs. To take our sustainability efforts to the next level, we began piloting a property management dashboard which will enable our franchisees to track utilities usage at the hotel level and help identify opportunities for additional energy, water, and waste conservation that can not only protect the environment but also reduce their operating costs. We also have recently announced a commitment to phasing out single-use polystyrene products across our domestic brands by year-end 2023 and to make bulk bathroom amenities standard across domestic brands by year-end 2025. Further details regarding our efforts to live up to our long-standing commitments to diversity and sustainability are outlined in our recently published ESG report. We're proud of everything we've accomplished this year, but we certainly could not have done it without the dedication of our associates and the strength of our award-winning culture focused on diversity, equity, and belonging. I'm especially pleased to say that Choice was recently named one of the best employers by Forbes for the fourth consecutive year, one of the best places to work for LGBTQ equality by the Human Rights Campaign for the 11th year in a row, and one of the best companies for diversity by Comparably for a second straight year. In closing, I'm confident in our continued ability to create value and deliver results for our owners and shareholders through our effective strategic investments and impressive performance. As we begin this new year, we are confident that we are well positioned to build on the success achieved in 2021 and our increased earnings power to further capitalize on growth opportunities in 2022 and beyond. With that, I'll hand it over to our CFO. Dom?

Dom Dragisich, Chief Financial Officer

Thanks, Pat, and good morning, everyone. I hope that you and your families are all well. Today, I'd like to provide you with additional details for our fourth quarter and full year results, updates you on our liquidity profile and capital allocation, and share thoughts on our outlook for the road ahead. As we've discussed in the previous quarters, we are comparing our financial performance and RevPAR growth to 2019, which we believe offers a more meaningful basis for analyzing trends. For comparisons to 2020, please refer to today's earnings press release. For full year 2021, a combination of impressive RevPAR performance, revenue-intense unit growth, and strong effective royalty rate growth, coupled with disciplined cost management resulted in Choice Hotels' full year adjusted EBITDA exceeding 2019 levels. In fact, our full year adjusted EBITDA increased 8% compared to the same period of 2019 and exceeded the top end of our previous full year guidance, even with incremental investments in the fourth quarter. Our adjusted EBITDA margin for full year 2021 expanded to nearly 75%, an increase of over five percentage points compared to 2019. These figures for both our adjusted EBITDA and adjusted EBITDA margin in 2021 are new records for our company. Given these impressive results, combined with our confidence that we will continue to generate strong cash flow and our optimism in our future growth prospects, we recently increased the quarterly dividend to a level higher than pre-pandemic. This follows the previously announced reinstatement of our share repurchase program. For the fourth quarter 2021 compared to the same period of 2019, total revenues, excluding marketing and reservation system fees, were $140.2 million, an 8% increase, and adjusted EBITDA grew 14% to $95.5 million. As a result, our adjusted earnings per share were $0.99 for the fourth quarter, an increase of 8% versus the same period of 2019. I'd like to now turn to our three key revenue levers beginning with the royalty rate. Our effective royalty rate continues to be a significant source of our revenue growth. Our domestic effective royalty rate exceeded 5% for both the fourth quarter and full year 2021, increasing by seven basis points from full year 2020 year-over-year. This performance reflects the continued strengthening of our value proposition to our franchise owners, the attractiveness of our proven brands, and the promising prospects in our pipeline. It also provides further validation of our long-term past, current and future investments on behalf of our franchisees. We expect our effective royalty rate to continue to grow in the mid-single digits in 2022 as owners continue to seek Choice Hotels' proven capabilities to consistently deliver strong top-line revenues that maximize return on investment while reducing their total cost of ownership. Our domestic system-wide RevPAR outperformed the overall industry by 19 percentage points for the full year, increasing 2.2% versus the same period of 2019. For the fourth quarter, our domestic system-wide RevPAR increased 13.9% versus fourth quarter 2019, driven by average daily rate growth of 9.5% and a more than two percentage point increase in occupancy levels. In addition, our results continue to outpace the primary chain scale segments in which we compete as reported by STR by nearly seven percentage points for full year 2021. As we've discussed in prior calls, our brand strategy is focused on driving growth across the higher value and more revenue-intense segments, upscale, extended-stay, and midscale. Our investments in these strategic segments have enabled us to materially outperform the industry in RevPAR growth and continue to gain share versus our local competitors across all of our brands in 2021 versus 2019. For full year 2021, we increased RevPAR index versus our local competitors by over four percentage points as compared to 2019, reflecting continued growth in both weekday and weekend RevPAR index. Specifically, we gained significant average daily rate index share versus local competitors and achieved average daily rate growth stronger than the industry. This is a result of key investments we made during the pandemic, including our award-winning revenue management tool that we successfully rolled out across our system last year. The expert advice from our revenue management consultants, along with tools and capabilities provided to our franchise owners are helping them to quickly determine and exit the right pricing strategy, an increasingly important factor during an inflationary environment. We expect that upcoming enhancements to our revenue management tool will allow us to further drive rate growth and rate share in 2022 and beyond. The third revenue lever I'd like to discuss is unit growth, where our portfolio's absolute size and the revenue intensity of its hotels are key advantages. In fact, a new unit entering the Choice Hotels system in 2021 generated, on average, twice the revenue as a unit exiting our system. Given our continued impressive performance, our brands remain in high demand from the franchise community, providing us the opportunity to further strengthen our portfolio. As a result, during the fourth quarter, we made a strategic long-term decision to exit just over 40 underperforming assets that were below our standards and generated lower royalties, primarily within the quality brand and economy portfolio. We expect these targeted terminations will enable us to increase royalty revenue by replacing these underperforming assets with higher quality and more revenue-intense units that will provide an improved experience for our guests. Furthermore, since these terminations were primarily from our conversion brands, we believe we can replace these hotels quickly, minimizing the short-term impact on our royalties. In addition to these strategic terminations, our domestic unit growth figures include the exit of 17 AMResorts from our Ascend collection during the fourth quarter due to the termination of our relationship with AMResorts following its acquisition. Although the subtraction of these properties impacted the company's unit growth, its impact on overall revenues was immaterial. As these resorts entered our system during the pandemic, the revenue potential from these properties has not been fully realized. Furthermore, we are confident that we can replace these properties with other platform partners in the future and capture the incremental long-term revenue opportunity they may provide. Excluding the departures of these hotels from the portfolio, our revenue-intense brands grew by nearly 2% compared to year-end 2020. Developers continue to choose our brands versus the competition as they seek to improve their operations and boost the long-term value of their hotels. For full year 2021, we awarded 528 new domestic franchise agreements, a 24% increase over the same period of 2020. Demand for our conversion brands in 2021 increased by 17% year-over-year, aided by our strong value proposition and our continued RevPAR performance. As we close 2021, December saw strong momentum with 1/4 of the total agreements for the year executed during the month and openings that were stronger than December's 2019 levels. This momentum gives us further confidence in the prospects for our continued growth in 2022 and beyond. Our developers are also increasingly optimistic about the long-term fundamentals of the lodging industry. In fact, one in three domestic franchise agreements awarded in the fourth quarter were for new construction contracts, representing an increase of nearly 60% versus the same quarter of the prior year. Let me now turn to one of the major reasons why we are an even stronger company today than we were in 2019, giving us confidence in our ability to continue to gain travel demand share, the strength of our balance sheet. As a result of our strong performance and effective allocation of resources to drive top-line outperformance, the company has further bolstered its liquidity position. More specifically, from 2019 to 2021 year-end, the company nearly doubled its cash and available borrowing capacity through its revolving credit facility to $1.1 billion at the end of fourth quarter 2021. We are also pleased to report cash flow from operations of over $380 million for 2021, a 42% increase versus 2019. Nearly $140 million, or 1/3 of the full year total, was generated in the fourth quarter alone. Most importantly, these results were achieved despite a year where we increased our investments in our brands and value proposition, further strengthening our capabilities. We continue to maintain a best-in-class balance sheet with gross debt-to-EBITDA leverage levels below our targeted range of 3x to 4x and the net debt to EBITDA leverage level at 1.4x as of the end of 2021. This lower leverage reflects our improved profitability and provides us the flexibility to utilize our balance sheet as needed for additional growth. These impressive results, along with our liquidity position, a higher collections rate than pre-pandemic due to our improved value proposition, and our confidence in our ability to generate strong levels of cash mean we are well positioned to continue to grow our business and return excess cash flow to shareholders well into the future. Last year, we returned over $38 million back to our shareholders in the form of cash dividends and repurchases of our common stock, followed by an additional $17.6 million returned to shareholders in January 2022. During the fourth quarter of 2021, the company's Board of Directors announced a 6% increase to the annual dividend, and this year, we expect to pay dividends totaling over $50 million. Throughout the pandemic, we demonstrated our ability to adapt while continuing to invest in the core business and deploying capital for ancillary growth opportunities. We will continue to monitor the environment for investment opportunities and expect to continue to utilize our strong leverage position to invest in growth to drive attractive returns for years to come. As we enter 2022, we expect to have all of our capital allocation levers fully at our disposal. Before opening it up for questions, I'd like to turn to our expectations for what lies ahead. While the company exceeded pre-pandemic levels for RevPAR and adjusted EBITDA for full year 2021, the continued precise recovery trends for full year 2022 are still somewhat uncertain. We expect the consumer and macro demand trends mentioned previously to continue to drive outperformance within our brand segments. To capitalize on this opportunity and capture a larger share of the travel demand, 2022 will continue to be an investment year for us. As such, we expect to incur higher SG&A expenses year-over-year in 2022 and revert back to historical growth rates thereafter. For full year 2022, we expect to drive continued growth in both RevPAR and adjusted EBITDA compared to full year 2021 even with these planned elevated investments. We will continue to monitor the broader environment with its recovery trends, adjusting the level of our investments accordingly, and we'll provide further updates in May during our next earnings call. In closing, I want to reiterate our confidence in our long-term strategic approach and the resilience of our business model. We believe these strengths combined with our disciplined capital allocation strategy and strong balance sheet will allow us to further capitalize on growth opportunities and drive outsized returns in the years ahead. At this time, Pat and I would be happy to answer any questions.

Operator, Operator

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

Robin Farley, Analyst

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

Pat Pacious, President and CEO

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

Robin Farley, Analyst

Okay, great. I have one more question about conversions. Many hotel companies have relied on that for a long time, and others are focusing on it in the current environment. Do you have a way to quantify your market share of all the conversions signed in 2021 and how that compares to 2019? I'm trying to understand if the overall market is expanding and whether competition for that market share is increasing.

Pat Pacious, President and CEO

Yes. Historically, in strong markets, our ratio of conversion deals to new construction deals is around two-thirds to one-third. In downturns, this shifts to about 80% conversions. What’s noteworthy for our brands, Robin, is that last year represented a more normalized year. In 2020, we had moved to an 80% conversion and 20% new construction model, but in 2021, we returned to the two-thirds conversion and one-third new construction balance, which is a healthy position for us. As for whether we are capturing our fair share, I believe we are. The quality of the conversions we are achieving is strong. As mentioned, the new entries into the system doubled the exits, indicating that the revenue from the new entries was twice that of what exited. This success is largely due to highly profitable conversions. While I can't provide a precise measure of our total market share for conversions, someone would need to conduct that analysis.

Dom Dragisich, Chief Financial Officer

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

Robin Farley, Analyst

Okay, great. Thank you very much.

Pat Pacious, President and CEO

Thank you.

Operator, Operator

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

Thomas Allen, Analyst

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

Dom Dragisich, Chief Financial Officer

Sure, Thomas. The best way to consider it is through revenue-intense unit growth. When we exclude the AMR terminations and the strategic terms, our revenue-intense unit growth is just under 2%. Looking ahead to 2022, we expect this growth trend to continue. We're even more optimistic because, as Pat mentioned earlier, the units entering the system are twice as revenue intense as those leaving. When we compare this to our historical unit growth, we're looking at approximately 3% to 4% growth today. So, essentially, next year, your revenue-intense units are expected to grow at twice the rate. We also anticipate that this multiplier will increase in 2022, which means the revenue contribution from these units will align well within the historical range of 3% to 4%.

Pat Pacious, President and CEO

Yes. Thomas, I want to emphasize that our unit growth is beneficial. Our goal is to add units that enhance earnings over time, especially in our brands that have a significant presence. We aim to optimize the market potential for each hotel in its specific location. If we can introduce a contributor to the brand that generates more revenue and royalties, that’s the direction we are pursuing. This was evident at the end of the fourth quarter when we made some strategic terminations because we recognized the potential for that market to yield a more profitable hotel for us. This practice will continue as we progress forward.

Thomas Allen, Analyst

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

Pat Pacious, President and CEO

Yes, Thomas, let me start, and then Dom can provide additional details. Overall, we had a strong year in terms of volume and relicensing opportunities, which reflects the value proposition we have been enhancing over the years. When our franchisees have a relicensing opportunity, where they sell their hotel to another franchisee, it allows us to reset that relationship in a way that benefits our shareholders. As the value proposition has improved, we can charge higher fees, and we are seeing this reflected in our numbers. We're experiencing both an increase in volume and an increase in value per contract. Regarding procurement, a significant portion of that business depends on occupancy. As we mentioned, in the last seven months of 2021, we returned to 2019 RevPAR levels, which contributes positively to our revenue. However, much of this is related to basic amenities such as soaps, sheets, and towels, which are influenced by the number of guests in our hotels.

Dom Dragisich, Chief Financial Officer

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

Thomas Allen, Analyst

Helpful. Thank you.

Pat Pacious, President and CEO

Thank you.

Operator, Operator

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

David Katz, Analyst

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

Pat Pacious, President and CEO

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

David Katz, Analyst

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

Pat Pacious, President and CEO

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

David Katz, Analyst

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

Pat Pacious, President and CEO

Yes. I believe our balance sheet is in a very strong position. Considering the opportunities available, we don’t see anything that is too big for us. Our strategy focuses on pursuing revenue-intensive growth areas. We are concentrating on accretive mergers and acquisitions that would be advantageous to us in the long term.

David Katz, Analyst

Understood. Thank you very much.

Pat Pacious, President and CEO

Thank you.

Operator, Operator

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

Michael Bellisario, Analyst

Thanks. Good afternoon, everyone.

Pat Pacious, President and CEO

Good afternoon, Michael.

Michael Bellisario, Analyst

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

Pat Pacious, President and CEO

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

Michael Bellisario, Analyst

Got it. That's helpful. Can you remind us about your balance sheet investments for Cambria on a net basis? How much is remaining, and where do you plan to allocate those funds, whether for Cambria or other brands in the future?

Dom Dragisich, Chief Financial Officer

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

Michael Bellisario, Analyst

Thank you.

Pat Pacious, President and CEO

Thank you.

Operator, Operator

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

Patrick Scholes, Analyst

Hi. Good afternoon, everyone.

Pat Pacious, President and CEO

Good afternoon, Patrick.

Patrick Scholes, Analyst

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

Pat Pacious, President and CEO

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

Dom Dragisich, Chief Financial Officer

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

Patrick Scholes, Analyst

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

Pat Pacious, President and CEO

Historically, our termination rate is around 3% to 4%. We are observing a recovering market and have evaluated the financial performance of those hotels and their potential. As I previously mentioned, in the last seven months of the year, we returned to or exceeded 2019 levels, indicating that the owners were profitable. Therefore, if they are not paying their fees or not providing good service to guests, we will address those issues. We recognized this as an opportunity to proactively open up some markets, especially since there is strong demand for the Quality Inn brand and some economy brands. That’s where the 41 terminations originated. Essentially, we decided to proceed with these terminations now because we see recovery in the market and the potential to enhance profitability in those specific areas. I anticipate the termination rate will likely continue to hover around that 3% to 4% range, and we took this opportunity at the end of the fourth quarter to position ourselves for future growth in those markets.

Patrick Scholes, Analyst

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

Pat Pacious, President and CEO

Thank you.

Operator, Operator

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

Daniel Adam, Analyst

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

Pat Pacious, President and CEO

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

Daniel Adam, Analyst

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

Pat Pacious, President and CEO

Sure.

Operator, Operator

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

Pat Pacious, President and CEO

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

Operator, Operator

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