Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Choice Hotels International First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, today’s call is being recorded. During the course of the conference call, certain predictive or forward-looking statements will be used to assist you with understanding of the company and its results. Actual results may differ materially from these indicated in forward-looking statements, and you should consult the company’s Form 10-K for the year-ended December 31, 2017, and the company’s 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 or reflect subsequent events or circumstances. You can find the reconciliation of our non-GAAP financial measures referred to in the remarks as part of our first quarter 2018 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section. With that being said, I would now like to introduce Pat Pacious, President and Chief Executive Officer of Choice Hotels International, Inc. Please go ahead, sir.

Thank you. Good morning, and welcome to Choice Hotels’ First Quarter 2018 Earnings Conference Call. Joining me this morning is Dom Dragisich, our Chief Financial Officer. We are very pleased with our first quarter results, which exceeded our expectations and continued to build upon our robust 2017 performance. Lodging fundamentals remained strong and our brand continued to perform for hotel owners. As a result, we continue to grow, invest in our business and return capital to shareholders. For the first quarter, our RevPAR and earnings exceeded the top end of our guidance and grew impressively year-over-year. The number of rooms and units in our domestic system increased 9.7% and 7.4%, respectively, including the addition of the WoodSpring Suites brand to our portfolio. We continue to expand our international footprint into new countries and increase our presence in the markets in which we currently operate. In April, we announced a strategic alliance with Sercotel, a leading hotel operator and franchisor based in Spain. This alliance establishes the framework for the extension of Choice Hotels’ global footprint into Spain and other markets as well as the creation of new opportunities for additional hotel development across Europe and Latin America. Our proprietary revenue delivered to our hotels continued to grow, increasing 200 basis points from the first quarter of 2017. Helping to drive our proprietary revenue contribution is the increasing pace of Choice Privileges enrollment. We added 1.2 million new members in Q1 and now have over 36 million in total. We continue to grow the number of people booking directly with us. A great example of our success in this area is the Choice Hotels mobile app, which continued to show strong growth metrics this quarter. Visits to the app are up 60% and revenue is up 45% from the first quarter…

Thanks, Pat, and good morning, everyone. We are off to a great start this year, and we are optimistic that our strong performance will continue. During the first quarter, we exceeded expectations for our key financial and operational metrics including, but not limited to, adjusted EBITDA, adjusted earnings per share and RevPAR. The continued strength in our operating performance and generation of significant cash flows allowed us to repurchase $42 million of our common stock and will enable continued investment in our business and the return of capital to our shareholders. Now let’s talk about the first quarter results and outlook in more detail. This morning, we reported adjusted diluted earnings per share of $0.67, a 24% increase over the prior year. This adjusted diluted earnings per share performance exceeded the midpoint of our guidance by $0.08 per share and the high end of our guidance by $0.06 per share. Our outperformance was driven by both our core franchising operations and a lower effective income tax rate, partially offset by onetime below-the-line items during the quarter. Our first quarter financial performance was highlighted by revenue growth of 11% over the prior year period and adjusted EBITDA for the quarter of $66.9 million, a 15% increase over the same period of the prior year. Our effective income tax rate for the quarter was approximately 18% compared to our initial forecast of 23%. This rate was primarily lower due to onetime discrete tax benefits. We continue to forecast our recurring tax rate for the second quarter and the remainder of the year to be 23%. Our full year tax rate is expected to be slightly lower at 22% due to actual first quarter results. Our commitment to franchisee profitability is driving incremental revenues to hotels. As a result, our first quarter hotel…

[Operator Instructions] And the first questioner today will be Robin Farley with UBS. Please go ahead.

This is Raffi on for Robin. So it looks like you raised your 2018 RevPAR guidance slightly more than the Q1 peak. Can you talk about what you’re seeing that underlies some of the optimism for the raise?

Yes. I think we’re looking at kind of where the first quarter came in and we were looking at the opportunity that we see both in the consumer front. And we’ve been out talking with a lot of economists and forecasters, really looking at what the impact of tax reform is going to mean for both small business owners and also for middle-class travelers, who’s the primary bulk of our consumer base. And we’re feeling a little bit more optimistic on that front. There are some onetime events that occurred in the sort of back half of 2017, the solar eclipse and some hurricane impacts that – we can’t expect those things to reoccur, but we are optimistic on sort of the direction that the consumer is headed in. And particularly when you look at the unemployment rate for the type of consumer that stays in our hotels, that’s getting better. And energy prices, which is the other sort of driver of travel demand, appear to be staying within normal bounds. So all of those factors really, I think, help us develop a little more confidence about the second half or the next 3 quarters into 2018.

All right. And just last question. Looks like WoodSpring had a really strong quarter. Looking into 2019, 2020, do you expect to see WoodSpring continuing to be a tailwind for RevPAR unit royalty rate growth? And when do you think that would normalize?

Well I think it’s a little too early to tell with regards to RevPAR and effectively royalty rate. Obviously, the effective royalty rate is expected to be accretive to the overall portfolio. You can see where the effective royalty rate is today, above the 5% mark. So given where the rest of our portfolio is, we do expect that to be a tailwind to the overall effective royalty rate. I think from a units perspective, we expect it to be a strong tailwind as well. Pat mentioned on the call, in the prepared remarks, the 50 ground breaks that we expect this year. So we do expect to see that as an accelerator of our overall units, and more importantly, our rooms growth, especially given the fact of the 122-room prototype. And then from a RevPAR perspective, to sit here and say that we expect 13.5% RevPAR to continue, I think it’s a little too early to tell. We’re going to get our arms around the RevPAR forecast over the next several months and we’ll be issuing that as part of guidance later in the year.

And I’ll also say on the development front, the enthusiasm around this brand, particularly post acquisition, is increasing. And we were just at our convention in – last week. And we brought the franchisee advisory council from WoodSpring to that event. And there was a lot of interest from existing Choice Hotels owners in the WoodSpring brand. And, I think, also the sort of trajectory that they now see that the brand is sitting on top of world-class distribution platform, it’s really creating a lot more excitement about the brand, and we’re certainly going to be a beneficiary of that.

All right, great. Thanks.

And our next questioner today will be Shaun Kelley with Bank of America. Please go ahead.

This is Daryush [ph] on for Shaun Kelley. So on development net unit growth ex WoodSpring’s in Q1 started off at the middle of your annual guidance, and commentary was pretty positive. How should we think about the cadence in that unit growth for the balance of the year directionally speaking from Q1? And what are some of the puts and takes as we head into the back half of the year as well as 2019 again ex WoodSpring’s?

Yes. I think so we’re off to a really good start in the first quarter from a development perspective. We’re kind of sort of sticking with the current unit growth expectations that we have. We look at the brands that we are selling. When I mention that a lot of the brands are starting are new construction, but the actual – it’s taking more like 2.5 years to get those hotels from executed contract to an open hotel. So that optimism and that new construction lever is going to – is a real positive for us because it keeps the age of the brand moving in the right direction when you bring in new product but it takes longer for those hotels to open. So while we are seeing an increase in domestic contracts, the good news there is it’s a lot of new construction, but the downside or the thing you have to wait for it – a little bit patience as those things take a little bit longer to open. For our conversion brands, we’re seeing, and we talked about the Quality Inn brand in particular, significant growth, and again those conversion hotels tend to get into the system in a much more rapid pace.

Daryush [ph], we talked about this a lot on our previous calls. If you think about where we landed ex WoodSpring in Q1, we are right around that 2.9% or so. We guided for the full year 2.5% to 3.5%. So we expect to maintain that run rate from the first quarter throughout the remainder of the year. We also talked about the fact that in the future 2019 and beyond, we expect an acceleration of the entire portfolio given some of the new construction items that Pat alluded to. And so we have always expected a ramp in 2019 in terms of units and rooms growth, frankly. That’s Comfort transformation and some of the other large products that’s coming through the pipeline. I think, WoodSpring, frankly, when you talk about the ground break that we saw could only serve as a further catalyst.

And one additional point on WoodSpring, the average construction time for that brand is less than 12 months. So that is a brand, while it is new construction, actually opens in a much tighter time window than some of our other brands.

No, that’s super helpful color. And just sort of follow-up on that. Some of – Marriott and some others talked about construction labor being tight in the market, some taking a bit longer than expected. What are you guys seeing, particularly with – on the ground – particularly with some of the brands that may take a bit longer from a duration side on the construction piece?

Yes. I think it’s market-by-market. It’s funny, I had a conversation with some developers who are developing in Houston, and you would think with all the Hurricane Harvey impacts that they’d have a tougher time finding construction labor, and that wasn’t the case. So it’s really spotty market-by-market. Yes, I would say too that when you look at the time frame, a lot of it has to do with the entitlement process, particularly for new construction. So those are the things that are extending the time frame for new construction.

That’s helpful. Thanks. And then Dom, maybe for you on buybacks, you guys repurchased $42 million in the quarter, which is the largest quarterly purchase in a number of years. Moving forward, how should we think about your approach to buybacks and the willingness to tap capital markets?

Sure thing, so I think we think about the way that we always have, right. We’re always going to opportunistically take a look at buybacks as one of our levers for capital deployment in the company. But we’re always going to look first and foremost on internal investments. We talked about in the past, and we continue to talk about the $475 million that we have deployed against Cambria. Certainly have other internal initiatives that we’re going to want to invest in first and foremost. But if we do have excess capital, our plan is to continue to return that capital back to shareholders.

Great. Just as a quick reminder, what’s your target net leverage ratio?

3 to 4.

Great. Thanks a lot guys.

Thank you.

Thanks.

[Operator Instructions] And our next questioner today will be Anthony Powell with Barclays.

Hi, good morning everyone. One of your peers is saying that they introduced again a new prototypes for their extended-stay brand that cost between 70,000 and 75,000 per key. How does WoodSpring compare to that?

WoodSpring is lower than that. I think when we talked to owners on average, we’re talking about 60,000 per key.

Got it. And WoodSpring, obviously, good RevPAR growth in the quarter. Was any of that hurricane-induced demand or any kind of onetime or aberrational demand?

No indication that it was a onetime phenomenon. I think the overall economy extended-stay segment is very strong. And, obviously, with WoodSpring’s business model, we believe that we outpaced.

Okay. And one more for me. The nonfranchising, both revenue and SG&A increased year-over-year. Could you just let us know what’s going on there?

The nonfranchising SG&A?

Nonfranchising revenue and SG&A both were up year over year. So if you can update us on things like vacation rental or any of your SkyTouch or any activities there, that would be great.

I think the overall SG&A, when you think about that is obviously driven by some of those onetime costs associated with WoodSpring, et cetera. I think, on the nonfranchising side of the house we’ve seen some pretty dramatic improvement in terms of the sales cycle for those particular business units. SkyTouch in particular has now has almost over 600, I believe, customers, third-party customers on that platform, and so we’re continuing to see pretty dramatic improvement there on the top line. Obviously, that top line requires some support. We do anticipate coming in right at that midpoint of the, call it, the negative 4 to negative 5 or so in terms of the burn rate for the year, which is a $2.5 million improvement. Quarter 1 tends to be a little heavier just because you are beginning to deploy some of the capital against some of those new initiatives. But we do anticipate still coming in with the midpoint of that range.

Okay. And what’s the update on, I guess, the long-term, kind of, plan with SkyTouch? I know there is an idea of selling it originally, but is that still in the cards? Or is that – are you – do you have a new plan there?

Yes. I mean you have to think of it this way. There is currently about 6,500 hotels that are on that platform. About 6,000 are Choice franchised hotels, and as Dom mentioned, we’re now a little over 600 hotels that around third party on that platform. We like it as a subsidiary. There is about nearly 50,000 rooms outside of the Choice system that are on the SkyTouch platform and about $5 million in recurring revenue. It is a Software-as-a-Service business, so as Dom described it, you sort of pay early on for marketing fees that provide you a nice subscription fee in the longer term. So we’re pretty pleased with it as a current subsidiary of Choice Hotels.

Great. Thank you.

Thank you.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Pat Pacious for any closing remarks.

Great. Thank you all for joining us this morning, and have a great day.