Earnings Call Transcript
CHOICE HOTELS INTERNATIONAL INC /DE (CHH)
Earnings Call Transcript - CHH Q3 2020
Operator, Operator
Good day, everyone, and welcome to the Q3 2020 Choice Hotels International, Inc. Earnings Conference Call. At this time, I am pleased to introduce your host, Allie Summers. Ma'am, you may proceed.
Allie Summers, Host
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. Moreover, we'd like to acknowledge that there continues to be significant uncertainty as to the duration and severity of the impact of the COVID-19 pandemic on our occupancy levels and future results. 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 the first quarter 2020 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 third quarter and year-to-date operating results and financial performance. They will be joined by Scott Oaksmith, Senior Vice President, Real Estate & Finance. Following Pat and Dom's remarks, we'll be glad to take your questions. And with that, I will turn the call over to Pat.
Patrick Pacious, CEO
Thanks, Allie, and good morning, everyone. We're glad you could join us and hope you are all well. Our company, like the hotel industry overall, continues to be significantly impacted by the COVID-19 pandemic, which is far from over. The response of our franchisees, their hotel staff, and Choice associates has been remarkable. To them, I say thank you for your incredible dedication to serving our guests during these trying times. Despite the pandemic, I'm pleased to report that Choice Hotels has continued to drive results that significantly outperform the industry in the third quarter. System-wide domestic RevPAR outperformed the industry by nearly 20 percentage points, declining only 28.8% from the third quarter of 2019. All of our limited service brands had significant RevPAR index gains against their local competitors. We continued to grow our effective royalty rate, a reflection of the continuously improving value proposition to our franchisees. And we grew our total system size, especially in our more revenue intense upscale, mid-scale, and extended-stay segments. We attribute this success to Choice's key differentiators, including our diversified brand portfolio, the geographic footprint of our domestic system, the profile of our core customer, and our franchise-focused business model. These core strengths have positioned us well to capture the shifts in consumer demand that occurred over the last 8 months. We believe that the strategy of growing our limited service brands in the right segments and the right locations will allow us to continue to increase our share of travel demand over the long term. And now that we're entering the ninth month of the pandemic, we are beginning to see trends emerge that are likely to have a long-term impact on the travel industry. Let me begin with the trend of remote work and virtual learning. The significant investment in remote access technology by businesses, schools, and consumers is creating more options in where and when traditional activities take place. In a post-pandemic world, this may afford Americans even more flexibility in their schedules to travel for leisure. For the last several years, we've seen a trend in leisure travel demand spreading more evenly throughout the month of the year, which we attribute in part to school schedules shifting over the years as well as the increase in baby boomers retiring and having more time and disposable income to travel. More employees can now work from anywhere with an Internet connection, while their children attend virtual schooling. For the past 2 months, we saw continued leisure demand extending into weekdays. A second trend is the increase in road trips, which we're benefiting from with our high concentration of hotels in drive-to markets. Road trips have been on the rise for the past 5 years, thanks in part to low gas prices, which have been trending down for several years. Consumers' appetite for road trips has only accelerated since the onset of the pandemic as Americans are showing a clear preference for trips that are closer to home. Destinations that may have been overlooked before the onset of COVID-19 are getting fresh consideration. With over 4,000 domestic hotels located within a mile of an interstate exit, our hotels are well positioned to serve travelers as they hit the open road. And with over 2,000 domestic hotels near beaches and national parks, our hotels are also located in the right markets to capture growing demand from travelers who increasingly are looking to rediscover the great American outdoors. Another emerging trend is the economic disruption brought on by the pandemic and its effect on consumers as the recovery takes place. We believe that in uncertain times, as in previous down cycles, consumers will be looking for more moderately priced limited service hotel offerings, presenting an opportunity for our portfolio to capture this demand. Another anticipated economic effect of the pandemic is higher relocation rates. As people shift jobs and industries, demand for longer-term hotel stays rises, a trend we believe will benefit our brands, particularly those in the moderately priced extended-stay segment. And finally, there are signs that consumers' risk tolerance is climbing, even before a vaccine is available. According to a recent survey, the perception of travel safety is up, and Americans' likelihood to take a domestic leisure trip and stay in a hotel during the next 6 months is the highest since mid-March. As a result of these trends, we've seen a rise in our weekday occupancy quarter-over-quarter, on top of the existing base of weekend leisure demand we've historically enjoyed. In fact, our weekday RevPAR index is up 8 percentage points year-over-year in the third quarter. Our year-over-year RevPAR change continued to improve month-over-month in the third quarter. At this time, we remain optimistic that we will see sequential month-over-month improvements related to our year-over-year RevPAR change. Our loyalty program has remained a key driver of our business throughout the pandemic, enhancing our ability to drive franchisees' top-line revenue. We particularly benefited from Choice Privileges Diamond Elite members, our best customers, who contributed an even higher percentage of overall revenue year-to-date versus last year. We expect this bedrock of loyalty business to deliver even higher value going forward as more Americans return to travel and enrollments in our award-winning Choice Privileges loyalty program continue to climb. Our long-term strategy of growing the right brands in the right segments in the right markets allows Choice brand hotels to continue to outperform the competition. Throughout the third quarter, we generated significant month-over-month increases in our proprietary revenue contribution to our hotels. More specifically, our website contribution increased by 400 basis points, and our loyalty contribution increased by 120 basis points quarter-over-quarter. This has helped drive RevPAR index share gains versus our local competitors across all location types as reported by STR. For the past 34 weeks through October 31, we observed significant RevPAR share gains against the competition. In the third quarter, all of our select service brands achieved material RevPAR index gains versus their local competitors, with each of our upscale and extended-stay brands experiencing share gains of over 10 percentage points. I'll now provide a brief update on our segments. Our upscale portfolio once again achieved impressive year-over-year growth in the third quarter, where we increased our domestic upscale room count by 33%. The Ascend Hotel Collection is the industry's first and largest soft brand. Now with nearly 300 hotels around the globe and fast approaching its 200th domestic location, Ascend Hotels achieved the following performance in the third quarter: RevPAR change outperformance by over 26 percentage points versus the upscale segment; RevPAR share gains against local competitors of nearly 19 percentage points; and average daily rate index gains of approximately 9 percentage points. In fact, for the past 6 months, Ascend has significantly outperformed the upscale soft brands as well as the segment as a whole in terms of year-over-year RevPAR change. Our upscale Cambria Hotels brand continues to benefit from leisure travel demand, thanks to being affiliated with our system, achieving RevPAR share gains versus local competitors of nearly 15 percentage points in the third quarter. Our extended-stay hotels are purpose-built for long-term guests. Choice Hotels brands in this cycle-resilient segment continue to outperform in this unprecedented environment, and our portfolio of over 420 extended-stay hotels grew 6% year-over-year in the third quarter. Our WoodSpring Suites brand achieved an average occupancy rate of 77% in the third quarter, and the brand's monthly occupancy levels have remained above 75% since the last week of June. Our Suburban extended-stay brand experienced year-over-year occupancy gains in the third quarter, further enhancing the brand's attractiveness to developers looking for a smart extended-stay conversion opportunity. At the same time, our MainStay Suites mid-scale extended-stay brand gained more than 16 percentage points in RevPAR index versus its local competitors in the third quarter. We remain optimistic about the growth potential of our extended-stay portfolio, whose pipeline increased by 9% year-over-year in the third quarter. Year-to-date through September, Choice has awarded over 40 extended-stay franchise agreements, demonstrating sustained interest in both new construction and conversion opportunities during a challenging time for the industry. I'd now like to turn to our mid-scale segment, whose brands represent two-thirds of our total domestic portfolio and over half of the franchise agreements executed year-to-date. All of our select-service mid-scale brands achieved year-over-year RevPAR index and average daily rate index gains versus their local competitors through the third quarter. The Comfort brand captured RevPAR share gains of over 7 percentage points versus local competitors in the third quarter. And Clarion Pointe, a conversion brand extension of Clarion that launched less than 2 years ago, recently opened its 20th hotel in the U.S. and now has over 50 hotels open or in the pipeline, demonstrating its strong growth as the brand continues its coast-to-coast expansion. Demand for Choice's brands continues despite the challenging environment, aided by our strong value proposition and recent outperformance. Developers choose our brands as they seek to boost the value of their hotels. We have a conversion brand to fit most developers' price points, which has driven our development growth through past downturns. Year-to-date through the end of September, we have awarded over 230 new domestic franchise agreements, nearly 70% of which were for conversion hotels. In the third quarter alone, we executed over 80 domestic agreements, of which nearly three-quarters were for conversions and over 40% of which were executed in the month of September. We have a long history of enhancing the diversity of our ownership base through our one-of-a-kind emerging markets development team, which helps underrepresented individuals such as minority and veteran entrepreneurs enter the rewarding business of hotel franchising. Nearly 70% of our hotels have minority ownership. Despite the pandemic, we have awarded and financially supported 17 franchise contracts with black and Hispanic entrepreneurs year-to-date. Most recently, we entered into the largest minority-owned multi-unit franchise agreement in the program's history. Our long-standing commitment to diversity and further details regarding our efforts to improve the communities we serve will be outlined in our forthcoming ESG report. While this year's challenges have been unique, the cyclical nature of our industry is known. It's something our experienced and disciplined management team, many of whom have led the company through previous down cycles, planned for. Our resilient franchisee base also has deep experience leading their small businesses through down cycles, and they are at the center of everything we do. Over the course of the pandemic, we have supported our franchisees in a number of ways. First, by reducing costs through extending brand program deadlines, implementing cost-saving operational initiatives, reducing certain fixed fees, implementing a tailored fee deferral program, and modifying brand standards. Second, by capturing business through our global sales efforts aimed at first responders and other essential travel; a multi-channel, multi-brand marketing campaign; and tailored promotional programs. Finally, by leveraging hygiene and infection prevention experts like Ecolab in launching our Commitment to Clean initiative, helping to ensure their hotels are clean and safe. We also have been advocating and will continue to advocate with policymakers for additional relief measures aimed at assisting small businesses to provide targeted help for the travel industry. Specifically, we've been urging the enactment of a second draw loan program for existing Paycheck Protection Program borrowers, greater accommodation, and more streamlining for borrowers to obtain forgiveness and liability protections for hotel owners who comply with health and safety protocols during the pandemic. We've also called for additional stimulus to support American discretionary spending, including in areas such as travel. In closing, Choice Hotels is positioned to emerge from these trying times stronger, just as we have before in our 80-year history. Our proven portfolio of well-segmented brands, geographic footprint, and asset-light business model position us well to benefit from current consumer trends as they continue to evolve.
Dominic Dragisich, CFO
Thanks, Pat, and good morning, everyone. I hope that you and your families are well and healthy. Today, I'd like to provide additional insights around our third quarter performance, update you on our balance sheet and liquidity, as well as our approach to capital allocation, and finally, share our thoughts on the outlook for the road ahead. Let's now take a closer look at our results. For the third quarter of 2020, total revenues, excluding marketing and reservation system fees, were $103.6 million. Adjusted EBITDA totaled $74.9 million, representing an adjusted EBITDA margin of over 72%, and adjusted earnings per share were $0.66. Our domestic system-wide RevPAR for the third quarter outperformed the overall industry by nearly 20 percentage points, declining only 28.8% from the same quarter of 2019. In addition, our results exceeded the primary chain scale segments in which we compete as reported by STR by 6 percentage points. We've long focused our brand strategy on driving growth across the higher value and more revenue intense upscale, extended-stay, and mid-scale segments, and it's paying off. In the third quarter, all three segments achieved year-over-year RevPAR outperformance against their respective industry chain scales and gains versus their local competitors. Specifically, the RevPAR change of our upscale portfolio exceeded that of the overall segment by 14 percentage points, and our upscale portfolio outperformed its local competitive set by over 9 percentage points. With average domestic system-wide occupancy rates of 74%, our extended-stay portfolio outperformed the industry's RevPAR change by an impressive 40 percentage points, beating its local competitive set by 14 percentage points. And finally, RevPAR change for our mid-scale portfolio exceeded the segment by nearly 8 percentage points. This RevPAR outperformance is the result of both continued occupancy gains and our franchisees' ability to maintain rate. Our domestic system-wide occupancy rate has seen improvements since the trough of 28% that occurred back in early April. Since the week of June 21 through late October, our average weekly occupancy rates have consistently exceeded 50%. In addition, we continue to see gains in our average daily rate index, which was up 1.7 percentage points against local competitors in the third quarter. Our owners have succeeded in maintaining rate integrity, thanks to the support of our experienced revenue management consultants. These experts have been advising our franchisees on the best use of tools to maximize their pricing strategies and provide sophisticated market intelligence and channel management. Despite the challenging environment, we expanded our system size, growing the number of domestic hotels by 0.7% and rooms by 1.9% year-over-year. Across our more revenue intense brands in the upscale, extended-stay, and mid-scale segments, we experienced even greater growth, increasing the number of hotels by 2.1% and rooms by 3.4% year-over-year. We're especially pleased that Comfort, our flagship brand, continued to experience positive unit and rooms growth in the third quarter following its brand transformation. Comfort's development success, amid unprecedented circumstances, is perhaps the clearest endorsement of the brand's value proposition. Comfort now represents nearly one-third of our total domestic pipeline, which will fuel revenue intense growth for years to come. In addition, the brand's conversion pipeline increased by nearly 50% in the third quarter year-over-year. We are particularly pleased with the company's performance related to our effective royalty rate, which is driven by the attractive value proposition we provide to our franchisees, their continued desire to be affiliated with our strong brands, and our current pipeline. Our royalty rate remains a significant driver of our revenue growth. The company's domestic effective royalty rate increased 7 basis points year-over-year to 4.91% in the third quarter and has increased 9 basis points year-to-date compared to the prior year. We expect to observe continued growth of this lever for the remainder of the year as owners seek the support of a large proven franchisor that delivers strong top-line results to their hotels and helps them maximize their return on investment. I'd now like to say a few words about our balance sheet and capital allocation strategy. Throughout the third quarter, we continued to focus on reducing discretionary costs, exercising discipline around capital allocation, and effectively allocating resources to drive top-line outperformance, all of which allowed us to improve our cash position and further bolster our liquidity. In fact, we reduced our net debt by approximately $50 million during the third quarter and are proud to report cash flow from operations of $70 million for the 9 months ended September 30, over $68 million of which was generated in the third quarter alone. Our cash and liquidity profile remains exceptionally strong. At the end of the third quarter, the company had over $790 million in cash and available borrowing capacity through our revolving credit facility. We remain on track to achieve our previously announced SG&A cost savings of nearly 25% in 2020 and expect to maintain a run rate of SG&A cost savings of approximately 15% in 2021 and beyond. The decisions we have made to better align our cost structure in the post-pandemic environment position us well to capitalize on opportunities as travel demand recovers while allowing us to continue to invest for the long term. Our capital allocation approach, defined by prudence and discipline, remains key to our success. Choice's first priority in this area has always been to increase organic growth by strategically investing back into the business, and that won't change. We are confident that our capacity and cash flows will allow us to not only weather the storm but also increase the organic growth of our business by strategically investing in growing our brands and system size, executing our technology roadmap, and delivering proprietary franchisee-facing tools that help drive top-line revenues. Based on our demonstrated track record of success in organic growth, we believe these internal investments will drive attractive returns for years to come. We will continue to evaluate other investments and capital return opportunities in the context of developing market conditions and our overall capital allocation strategy on a go-forward basis. Before closing, I'd like to offer some thoughts on what lies ahead. The ultimate and precise impact of the pandemic on our business for the remainder of 2020 and beyond remains largely unknown, as is the exact trajectory of our industry's recovery. While we are not issuing formal guidance today, we currently expect that the impact of COVID-19 on the company's year-over-year RevPAR change will be less significant for the fourth quarter versus the third quarter of this year. Our sentiment is based on the following. First, we are observing continued resilience of leisure demand and continue to drive relative outperformance versus the industry. Second, despite entering fall when demand is historically lower, we are pleased that our fourth quarter domestic RevPAR change has continued the pattern of sequential quarterly improvement through the week of October 24. In fact, we expect our October 2020 RevPAR to decline by approximately 25% from the same period of 2019. The final reason we are optimistic is the nature of the current environment. Unlike the Great Recession, which was caused by underlying fundamental economic problems, the current economic downturn is tied to the course of the COVID-19 pandemic, which we believe could contribute to a faster recovery. We will continue to evaluate the impact of COVID-19 across the business and we'll provide further updates in February during our next earnings call. In closing, we are optimistic that Choice Hotels is well positioned to succeed for the remainder of 2020 and beyond. We continue to benefit from our resilient, primarily asset-light, franchise-focused business model, which has historically delivered stable returns throughout economic cycles and provided a degree of cushion from market risks. While we are not immune to the pressures faced by the industry, we believe that our long-term focus and prudent, disciplined capital allocation strategy will allow us to continue to capitalize on opportunities during the recovery. At this time, Pat and I would be happy to answer any questions.
Operator, Operator
Our first question comes from Dori Kesten with Wells Fargo.
Dori Kesten, Analyst
Can you tell what percentage of your development pipeline currently has financing in place? And then separately, what percentage of the pipeline may be open within the next 2 years?
Dominic Dragisich, CFO
Yes. Please continue.
Patrick Pacious, CEO
Let me start with that, Dori. If you look at our pipeline, 25% of it consists of conversion hotels. This is not a situation where financing is being considered. Typically, conversion hotels take about 3 to 6 months to open, and we've experienced a fairly normal progression in this area. The financing market is quite challenging right now, as many are aware. Projects are getting financed, but only those backed by strong sponsors in the appropriate markets with the right brands. The main difficulty for developers currently is figuring out how to underwrite, and the same applies to lenders. I’m not sure, Dom, if you want to discuss the percentage of financing. It’s not something we have detailed knowledge on in terms of the overall pipeline, as many of these projects enter once an agreement is signed and the developer seeks financing afterward. There is a time lag involved in that process.
Dominic Dragisich, CFO
Yes. When you take a look at the historicals, Dori, as Pat explained, about one-fourth of our pipeline is conversions and those are going to open really quickly. And one of the reasons why you see your pipeline holding steady is because as conversions come in the door, you have about 70% to 75% of your development agreements today coming in as conversions. So by the time the next quarter comes around, in many cases, those hotels will actually open. So you're going to see probably a more stagnant pipeline growth just due to the nature of conversions. Historically speaking, we've had about anywhere from 20% to 25% of our pipeline that's also under construction or has some of that financing secured. And so there's certainly a path to basically imply almost anywhere from 40% to 50% of our pipeline is either under construction or is one of those conversions or has that financing secured.
Dori Kesten, Analyst
Okay. Can you generalize where your conversion activity is coming from?
Patrick Pacious, CEO
Yes. Specific brands show high conversion rates. In the upscale segment, the Ascend Collection has nearly a 100% conversion rate. Comfort historically has had a balanced approach with about 50% new construction and 50% conversions. Quality Inn, Clarion Pointe, Econo Lodge, Rodeway, and Clarion are mainly focused on conversions. Therefore, our portfolio includes a beneficial mix of conversion and new construction brands, enabling us to rely on the conversion side for unit growth during times like these.
Dori Kesten, Analyst
Right. I guess what I meant was, are you seeing it from independent properties? Or is it from other brands that are converting to yours?
Patrick Pacious, CEO
It's both. We look at that historically and aren't seeing any difference year-over-year, whether it's from more independents or other flags. Typically, as we observed a decade ago, we saw more independents seeking out a brand. Therefore, I would anticipate that during this downturn, we might begin to see that trend emerge. However, the numbers currently indicate that things appear quite consistent with previous years in terms of that change.
Dominic Dragisich, CFO
And the only thing I would add, Dori, is when you take a look at the upscale segment in particular, Ascend, obviously, a lot of those conversions come from independent boutique hotels just given the nature of the soft brand collection. The further down-market you go, you typically do see share shift from one competitor to the other as well as some level of those independents convert again.
Operator, Operator
And our next question comes from Dany Asad with Bank of America.
Dany Asad, Analyst
Dom, it looks like you were free cash flow positive in the quarter. So I guess my first question is how much of that is collection from franchisees on any of like the relief that you've been giving them?
Dominic Dragisich, CFO
You're absolutely right, we generated over $68 million in cash flow from operations, which puts us in a strong position. We're also optimistic about the collection trends. We experienced a stronger summer than we initially anticipated. Currently, about 95% of our franchisees are paying their bills, and we're observing a consistent month-over-month and quarter-over-quarter increase in this trend. Regarding your question on fee deferrals, early in the pandemic, we estimated that we would provide between $10 million to $20 million in deferrals. Last quarter, we adjusted that estimate to around $10 million to $15 million, and it appears we'll end up closer to the lower end, roughly $10 million in deferrals. Our approach to this program was very targeted, focusing on customers who were struggling with occupancy levels below breakeven, rather than applying a broad approach. Looking ahead, Q4 is generally a period with lower demand, and we'll keep a close watch on it. It's important to note that this is not a waiver, but a deferral that will be repaid over three years, starting with deferral in the first year and repayment over the subsequent two years. Again, we're looking at around $10 million for the lower end of that guidance.
Dany Asad, Analyst
That's totally fair. And a good point on the deferral, not a waiver. But I guess just the natural follow-up I have to ask is when you think of all the puts and takes, so sequential improvement in RevPAR. It sounds like the working capital is kind of in a good place here. How sustainable is this free cash flow generation when you think of maybe 2, 3 quarters out? And then how does that play into your capital allocation strategy in terms of buybacks and so on?
Dominic Dragisich, CFO
Sure. We are not providing guidance for 2021 as it is highly dependent on the virus trends and other factors, making it difficult to predict what the year will look like. In the past, we mentioned that our free cash flow would closely align with net income, considering some adjustments, including key-money amortization. Overall, we feel optimistic about our current position and how it will translate moving forward. The method you choose for calculations can influence this - for instance, taking EBITDA and subtracting interest and taxes. We are confident that the stabilized calculations will remain consistent. Regarding capital allocation, we are pleased with our balance sheet and cash generation for the quarter; our priority is to invest in the business, as mentioned in our earlier remarks. Economic downturns often present opportunities for organic investments that can yield substantial returns, similar to what we have experienced in the past. While there may be market dislocations, I cannot discuss M&A specifically. As we expect to emerge from this situation stronger, our initial focus will be on organic investments, while we will also keep an eye on inorganic opportunities. Depending on the status of our balance sheet and the nature of the virus, we will reconsider share buybacks and dividends in the future. However, we have suspended the dividend at least for this year, and we will provide further updates during the February call.
Operator, Operator
And our next question comes from Michael Bellisario with Baird.
Michael Bellisario, Analyst
Just first question back to the development pipeline, a follow-up to Dori's question. But if we go back to the prior downturn, the number of your new construction hotels in the pipeline, it declined pretty significantly. Maybe could you provide some insight as to why you think that will or won't happen again this time? And maybe some context around what did happen 2008, 2009 versus what you're seeing on the ground today would be helpful.
Patrick Pacious, CEO
Sure, Michael. I mean, I think if you look at the last downturn, that was a financial crisis where the banking industry was frozen for a period of time, and then it took a real long time for that to recover, which financing is a key driver of new construction. I think the other big change is our portfolio today. We have several additional new construction brands today compared to 10 years ago, particularly in the extended-stay segment, which is doing very well operationally and is very sought after as a development opportunity for hotel developers in general. We're seeing a lot of, I would call, developers who just focused on transient hotels showing a lot of interest in those brands right now. And so that's an area today of strength for ours that we didn't have 10 years ago. So I look at those two differences as reasons why we think our new construction pipeline and our pipeline in general will probably be in a better condition during this downturn than the one 10 years ago.
Michael Bellisario, Analyst
As you consider the recovery trajectory for your non-royalty revenue line items, how do you view the rebound in the other revenues category, particularly in procurement services? Do you anticipate those revenues returning to previous peak levels, and will this happen faster or slower than the current outlook for royalty fees?
Patrick Pacious, CEO
A key driver of that is occupancy. If occupancy is at 50%, you're not utilizing as many sheets, towels, soaps, and similar items. While there is some increase due to the Commitment to Clean, which requires additional cleaning products, it's not significant compared to the impact of occupancy. As occupancy continues to increase month over month, that will heavily influence our procurement services operations. Many of our partnerships also rely on travel. Looking ahead to 2021 and beyond, we expect to see a recovery in travel, which will be a key driver for procurement services revenue.
Dominic Dragisich, CFO
Yes. Additionally, Michael, I want to address the other revenue line item. You can see that this line item has decreased significantly, but it is not substantial when considering the overall volume. It includes aspects like quality assurance, brand noncompliance, and some initial fees that were introduced during the pandemic. We have been working with our franchisees to suspend some of these programs or adjust the timing related to them. As we move past the pandemic and occupancy rates rise, we anticipate that these revenue streams will return to historical levels.
Operator, Operator
And our next question comes from Jared Shojaian with Wolfe Research.
Jared Shojaian, Analyst
So you continue to have impressive share gains. Can you tell us where the absolute RevPAR index now stands, above 100%, below 100% and maybe broken out by segment?
Patrick Pacious, CEO
I don't have that information readily available. It has increased, but it's segmented, so you would need to look at that. While I discuss this at a high level, perhaps Dom can provide more details. Overall, it has increased by 10%, and we used to operate in the high 80s to low 90s range. Whether it is at 100% or higher really depends on the segment. For the extended-stay segment, I know it's above 100%. I'm also confident that the mid-scale and upper mid-scale segments are in that range as well. Dom, do you have the specific numbers available?
Dominic Dragisich, CFO
Yes, it's clearly dependent on the segment. I'm feeling positive about the progress we've made. When considering mid-scale properties, we're very close to 100% in local RevPAR index. Both of our upscale brands exceed 100% in that index. Cambria is nearing 110%, which is also impressive. However, the lower RevPAR index is primarily seen in our full-service Clarion brand within the mid-scale segment, which relies more on group bookings. Overall, I'm optimistic about our performance, as many of our brands are approaching or even surpassing 100%. Our extended-stay properties are also above 100% in terms of RevPAR index.
Jared Shojaian, Analyst
That's really helpful. So I know you're seeing nice year-over-year gains, but is that generally higher than where you were several years ago, maybe even 10 years ago? As I start to think about really from an owner's perspective, I think the benefit of a lot of the lower chain scale properties is on the cost side, but if you can start to get some of the revenue premium benefits, I would think that could have a little bit of a positive impact on development as well. So curious how that sort of compares today versus where you were several years ago?
Patrick Pacious, CEO
It has definitely improved. I believe part of this is due to the decrease in business travelers, which makes up a smaller percentage of our business typically. We are benefiting from having a strong leisure base compared to our competitors. As mentioned earlier, we are also seeing an increase in weekday travel, which we think may remain sustainable as we move beyond the pandemic. With greater flexibility in their schedules, people are likely to take trips that extend into the weekdays and are now traveling for leisure in months that are usually not strong for leisure travel. I see opportunity in that area. Additionally, on the cost side for our mid-scale and extended-stay brands, there is more potential because of lower fixed costs. As occupancy changes, owners have a greater chance to maintain their operating margins as demand fluctuates.
Dominic Dragisich, CFO
I wanted to highlight two points regarding the proprietary channel contribution. We are seeing continued improvements there, which has positively impacted our RevPAR index gains. We believe this trend will be sustainable in the long term, especially for refreshed brands like Comfort. In fact, Comfort has surpassed the 100% mark in RevPAR index. When we combine the refreshed rooms and transformation initiatives for that brand with new tools such as enhanced revenue management and loyalty programs, we are confident that we can maintain the RevPAR index trends we have observed, given the brand's current strong position and its significant contribution to our revenue.
Operator, Operator
And our next question comes from Robin Farley with UBS.
Robin Farley, Analyst
Great. The business model is very resilient in this environment. I'm considering the decrease in franchise agreements year-to-date. While one quarter can always fluctuate, it seems like year-to-date agreements are down 38%. Even though conversions make up a slightly higher percentage, the absolute number of conversions is also lower compared to last year. How should we interpret this? Conversions would typically be expected to increase in this environment, so I'm curious why we might not be seeing that, especially since they represent a higher percentage of the pipeline. The decline in new franchise agreements appears to be outpacing the increase in conversions. What should we take away from that?
Patrick Pacious, CEO
Yes, Robin, I believe we are currently experiencing a significant turning point. It’s still quite early in the process. In the second quarter, hotel owners were focused on conserving their capital and cash. Converting a hotel requires financial investment, and while owners might be considering it, they likely felt the need to wait and see how the summer and the third quarter play out. Most of our development activity typically happens in the fourth quarter, which is just a couple of months away. We anticipate that this will come into play soon. Looking ahead into the longer term, as we move into 2021, we expect that owners will have navigated the toughest challenges and will be in a position to invest in hotel conversions, which we believe will contribute to growth in the medium term.
Dominic Dragisich, CFO
Yes, Robin, I would like to add to Pat's point that it can sometimes take a few quarters for an owner to decide to switch, even in a typical business environment. Additionally, looking at the 2019 statistics, the conversion side in a regular business environment is a very challenging comparison. 2019 was almost a record year for us and our development team. Given that context, especially from a competitive standpoint, we feel optimistic about the development results we've achieved so far. Typically, Q4 is our strongest development quarter, and we are confident it will be the same this year. We will continue to work with our franchisees on their situations, but other franchisees and brands may require one or two quarters to make their transition.
Robin Farley, Analyst
Can you provide insight into the current trend of system removals? I'm curious about whether we should anticipate potential negative growth in units for 2021 due to a possible gap created earlier this year.
Patrick Pacious, CEO
Yes. So almost all of our brands are at or below our forecasted terminations. Where the terminations are really coming from, Robin, it's not the economy segment. And so that's really the important point to take away from the prepared remarks, in particular, when you look at where the net unit growth is coming from. That's something that I shared on the last call, but the net unit growth is coming from brands that are typically anywhere from three, in some cases, greater than six or seven times more revenue intense than the economy segment. So the vast majority of the churn is coming from a Castlereagh and Rodeway, obviously, the nature of the contract, the nature of the economy segment. Certainly, in terms of our focused brands, mid-scale, extended-stay, and upscale, we still do expect to see that unit growth continue.
Robin Farley, Analyst
So on a combined basis, how does '21 look like it may be given all those factors?
Patrick Pacious, CEO
Yes. Unfortunately, we're not going to be giving 2021 guidance at this point, Robin. But what I can tell you is you're seeing the trends today and you're seeing the trends continue, especially in some of those focus segments.
Operator, Operator
And our next question comes from David Katz with Jefferies.
David Katz, Analyst
Congrats on the quarter. As we move around in our travels, we happen upon data points and whether those are within your purview or not, around loan distress, right, and franchisee distress, et cetera. Can you just give us some color around what you're seeing within your population and their sort of durability from now to 12 months from now or so?
Patrick Pacious, CEO
Sure. If you examine our portfolio, franchisees generally maintain a moderate level of leverage, averaging around 50%. They aren't overleveraged, which is significant concerning their debt service. Additionally, many owners have been able to secure interest forbearance, leveraging long-standing relationships with community banks. While we can't track this quantitatively, it's clear that owners are collaborating with their lenders. However, this isn't a major issue for us compared to the challenges faced in the upscale market, where we aren't present. Another important aspect is that our portfolio is operating above breakeven occupancy levels, meaning owners are profitable and less likely to encounter distress. These are the factors I consider. When we engage with owners, we understand where their challenges lie, and currently, lender-related issues aren't a primary concern. Of course, circumstances may change in the future, but at this moment, we are optimistic about the well-being of our franchisee network.
David Katz, Analyst
Got it. And apologies if you covered this already, but in terms of how we should think about openings in the fourth quarter, have you said anything about that?
Patrick Pacious, CEO
We have not. And as you know, that's the quarter where a lot of that's happened. So there's a lot of uncertainty around the next two months as far as what will happen. And so therefore, we're being very cautious on trying to project on that number.
Operator, Operator
And our next question comes from Thomas Allen with Morgan Stanley.
Thomas Allen, Analyst
Just one for me. So can you dive a little deeper into what gives you confidence 4Q RevPAR will be better than 3Q? I feel like a number of your peers have come out to suggest they'll be more similar. So I just want to understand kind of what's giving you the confidence.
Patrick Pacious, CEO
Yes, Thomas. As we mentioned in our prepared remarks, the first month showed a 25% decline compared to the third quarter, which had a 28% decline. Looking back to Q2, that was a 49% decline. We are observing improvements both quarter-over-quarter and month-over-month. Additionally, Q4 typically experiences lower demand overall. Historically, there has been more business travel in the fourth quarter, and we are continuing to see an increase in business travelers. Currently, the construction, retail trade, and transportation segments are showing upward trends in business travel. These factors make us optimistic that RevPAR will continue to show month-over-month improvements in November and December.
Thomas Allen, Analyst
Okay. I mean, look, when I look at your weekly trend, it seems like they've stalled out a bit. And then I guess the bigger question though is COVID cases are increasing again in the U.S. Does it feel like that's having any impact on demand level?
Patrick Pacious, CEO
With regard to the case counts, so we saw a pickup in case counts in the months of July and August, and we did not see a correlation between that and bookings going down. We actually saw bookings increase. So the two don't appear to be correlated. And this is in specific areas of the country where the cases were rising. We continue to see travelers build travel demand month-over-month. It's always hard to know what the next two months or the next year is going to entail with regard to the virus. But as I said, as we look back at the last 8 or 9 months, as case spikes have gone in a higher direction, other than that initial shock in March, we haven't seen a correlation between that and travel demand.
Dominic Dragisich, CFO
Thomas, regarding the stalled growth, it's important to assess it on a seasonally adjusted basis. There's been some fluctuations, especially with weekly numbers down by 27%, but we've noted significant improvements during weekend travel due to leisure demand. If you sum up Friday and Saturday, we would anticipate better results, which is why we projected a 25% increase for October specifically. Currently, October's performance is exceeding our expectations with strong seasonal trends. While Pat highlighted the corporate sector, we’re also seeing positive developments in leisure travel, particularly in the South, where RevPAR growth has been the strongest across all our regions from Q3 into October, even with the recent rise in virus cases. We’re not suggesting that the improvements in RevPAR will mirror the changes from Q2 to Q3, but we do anticipate some sequential improvement from Q3 to Q4, reflected in the 25% we've projected for October.
Operator, Operator
And next, we'll move to Alton Stump with Longbow Research.
Alton Stump, Analyst
I think most of my questions have been answered, guys. I just wanted to ask about kind of your mix of leisure versus business. How that trended in 3Q versus 2Q? And then kind of looking forward, obviously, it's a hard question because who knows what the world is going to look like over the next 12-plus months, but kind of how you see that mix kind of trending over the course of 2021?
Patrick Pacious, CEO
Sure. So our traditional mix was sort of 70-30 leisure to business. What we've seen in the third quarter was leisure at about 80%, 82%. So it is a higher portion of the mix, even though the total demand is down. And as I said in our remarks, we are seeing the extended trips where people are taking long weekends, we're seeing actually more in our mix of stays north of 13 nights. So we are seeing some drivers here that are a little different than what we've seen historically. And so the real question is going to be, as the virus gets under control, as the country returns to more of a normal travel pattern, will consumers have more flexibility with the offices they work in and with the schools that their children attend. And that may allow more travelers to travel at different points of the year and also different days of the week. And if that is, in fact, the case, then our locations are really well suited to pick up some of that demand if that's what the future starts to hold as people return to a more normal pattern of travel.
Alton Stump, Analyst
Great. Makes sense. And then just a quick follow-up to that. As I kind of think about your unit builds, is there any thought to kind of maybe shifting more towards kind of the leisure market builds versus business going forward, given what may be a question time until we see things get back to pre-COVID normal? Or is that just too early yet to kind of make that call as you think about unit builds in general?
Patrick Pacious, CEO
I believe that our new construction brands cater to both business and leisure travel, depending on the market. In recent years, we have introduced dual brands, combining extended-stay and transient hotels in the same location, which has allowed owners to capitalize on purpose-built rooms that meet various demand types. Our extended-stay hotels, for instance, see a significant portion of business travelers who are in the market for extended stays, and we anticipate that this trend will persist even as demand shifts more towards leisure travel. Regarding leisure, brands like Ascend have thrived due to their unique hotels in travel destinations, often becoming destinations themselves because of their boutique or historic appeal. They are typically situated in areas frequented by leisure travelers, and I believe we will continue to see growth in these brands moving forward, as we've noted in our prepared remarks.
Operator, Operator
And our final question comes from Dan Wasiolek with Morningstar.
Dan Wasiolek, Analyst
So you're having some strong success, obviously, with your focus on revenue intense segments such as extended-stay, mid-scale, upscale. Just wondering if you could comment maybe a little bit more on the economy scale and what you think might be needed there to, I guess, lift the RevPAR index unit growth? Is it something that's more of kind of a structural issue with that segment? Or is it something that maybe it's just the brands might need a refresh? Just kind of wondering if you could provide some color.
Patrick Pacious, CEO
You need to consider the segment itself, Dan. The last major downturn, the 9/11 recession, has resulted in no growth for this segment over the past 20 years, and in fact, it has begun to decline. There is simply less supply available. Much of the existing product is dated and less appealing, making it a tough environment for refreshing brands in this segment. Additionally, looking at our Rodeway brand specifically, it operates on shorter-term contracts. Owners often come in to try it out and if they feel they can do better independently, they can exit the brand fairly easily. This results in higher turnover within that segment. Furthermore, the franchise fees are not a significant part of their financials due to the average daily rates charged. These factors contribute to the fluidity of ownership and contract changes in that area.
Dan Wasiolek, Analyst
Do you think that the segment has experienced limited growth over the past 20 years because it may have been oversupplied at one time? Is the supply-demand balance more normalized now? Or do you see this segment maintaining its current dynamics over the next five years, similar to the last two decades?
Patrick Pacious, CEO
I would say it's probably going to continue the trend that's been on for some of the factors that are going on in the economy and just the age of the product. I would say, though, that the WoodSpring brand that we have is actually, I think, the only new construction brand in the economy segment, and that is growing significantly as owners who are looking to build in that rate tier for extended-stay, it makes a lot of sense because that's really where that model works. But other than the economy extended-stay segment, there's not much new construction going on in the economy segment.
Dan Wasiolek, Analyst
Congrats on a solid quarter.
Operator, Operator
And that does conclude our question-and-answer session for today. I'd like to turn the floor back over to Pat Pacious for any closing remarks.
Patrick Pacious, CEO
Thank you, operator, and thanks again, everyone, for your time. As you heard today, Choice Hotels continued to drive results that significantly outperformed the industry, and we're positioned to emerge stronger from these trying times. So I hope all of you stay safe and healthy, and we'll talk to you again in the new year. Take care.
Operator, Operator
And that does conclude today's conference call. We appreciate your participation. You may disconnect your lines at this time, and have a great day.