Choice Hotels International, Inc. (CHH) Q3 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Choice Hotels International Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. During the course of 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 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 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 third quarter 2018 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section. With that said, I would 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 Third Quarter 2018 Earnings Conference Call. Joining me this morning is Dominic Dragisich, our Chief Financial Officer. We're pleased to report another quarter of excellent performance, highlighted by reported diluted earnings per share, adjusted for special items, of $1.24, a 31% year-over-year increase. Our third quarter adjusted EBITDA exceeded our expectations with an 11% year-over-year increase, and our adjusted diluted earnings per share results exceeded the top end of our previous guidance by $0.07 per share. Our effective royalty rate also continued its impressive growth trajectory with a 12 basis point increase over the third quarter of 2017. Plus, our system size growth continues to meet our expectations. While our domestic RevPAR performance was lower than our previous guidance, this was driven by short-term and onetime impacts, which Dom will cover in more detail. We expect RevPAR growth to bounce back in the fourth quarter and have already seen a 2% year-over-year increase for the month of October. Based on our strong third quarter performance and fourth quarter outlook, we are pleased to announce that we have raised our full year adjusted EBITDA guidance by $1.5 million at the midpoint and raised adjusted earnings per share guidance by $0.09 at the midpoint. These strong financial results lay a solid foundation for continued future growth. It's been a year since my first earnings call with you as President and CEO. And in reflecting on the past year, I thought about what sets us apart and what makes us successful. First, we are strengthening our well-segmented and proven family of brands in a number of ways, from launching a new mid-scale brand extension to transforming our largest brand, to growing in both the upscale and extended-stay segments. Second, we're having incredible success as a franchisor. In fact, we are on track to have our best development year as a public company as measured by the number of new domestic franchise agreements. Third, we provide tailored franchisee resources to help our owners run profitable businesses by driving their top line revenue and bottom line results. On my first point, our proven brands, there are four I'd like to highlight this morning. The brand we just launched, Clarion Pointe; the brand we acquired in February and our significantly growing, WoodSpring Suites; the brand that we're building, Cambria; and the brand we're transforming, Comfort. We launched Clarion Pointe this September, and it has been well received by the development community. Even though we announced the brand extension with only two weeks left in the quarter, we have already awarded over a dozen new Clarion Pointe franchise agreements and have nearly 75 in the development pipeline to date. The first Clarion Pointe is expected to open in the first quarter of 2019. We are hearing that Clarion Pointe is exactly what guests and developers are seeking. When sizing this opportunity, we focused on the markets and the hotels that has a potential to deliver on both rate and amenities for the Clarion Pointe brand, and we believe that the potential universe is significant, over 1,000 hotels. Clarion Pointe leverages the global equity of the Clarion brand but differs from its parent in important ways. Whereas Clarion is known for supporting social and corporate gatherings with meeting and event space and a full-service food and beverage option, Clarion Pointe is a select-service concept that fits the expectation of today's mid-scale guests and savvy limited-service hotel operators. At the same time, we responded to developer demand for more limited service conversion opportunities in the popular mid-scale segment, enabling owners to capture higher rates and new guest travel occasions. This is why Clarion Pointe is a further catalyst to our already strong development pipeline. Next is our recent acquisition, WoodSpring Suites, which is growing rapidly. We acquired the brand when it had 238 hotels and expect to have 250 by the beginning of next year. As of September 30, we awarded 55 new WoodSpring contracts, 11 of which were in the third quarter. This means we've already exceeded the WoodSpring brand's record for new contracts awarded in an entire year. Year-to-date through September 30, we have opened 11 WoodSpring hotels in top markets like Chicago, Seattle, Charlotte and Detroit. And this growth is expected to accelerate in 2019. Additionally, in Q4, we have finalized an agreement with a developer to build more than 20 additional WoodSpring Suites over the next 4 years. Turning now to the brand we're building. Our upscale Cambria brand is an important component of our growth strategy for 2 reasons. First, Cambria, along with the Ascend Hotel Collection, has allowed us to expand our upscale footprint to meet guest and developer demand. We're pleased that Cambria and Ascend have been received so favorably. At the end of the third quarter, we have nearly 20,000 upscale rooms opened in the U.S. and over 47,000 globally. Second, Cambria is also a significant contributor to our bottom line. In fact, an average Cambria Hotel produces 3x as much gross room revenue as our average upper mid-scale Comfort Inn. When you consider that we expect to have more than 50 Cambria hotels open next year, it's easy to see what an important driver the brand is for Choice. We are fully committed to Cambria's success and are strategically deploying capital to support its continued growth. As a result, Cambria is on track to set a record for openings for the second straight year. By the end of this year, we expect to open our 40th Cambria Hotel. Cambria has a total pipeline of 85 hotels, which will add nearly 12,000 upscale rooms across markets like Houston, Boston, Milwaukee, Minneapolis, Santa Clara and Napa. Of these, 19 are active construction projects. The final brand I want to highlight is our flagship Comfort Hotels, which we've been transforming through a $2.5 billion long-term investment with our franchisees. We are on track and steadily approaching the finish line of this multiyear effort. After hotels complete both the public space and guest room renovations, the final step in the transformation journey involves updating the hotel's signage on property and across digital channels with the new Comfort logo, which we unveiled in May. The new signage, which hotels can't display until they've completed the renovations, is a real incentive. Our research reveal that consumers would be willing to pay a higher average daily rate when they saw the updated hotels combined with the new sign. And this promising data to show our long-term investments in the brand will pay off. Comfort Hotels that completed their renovations by the end of the first quarter this year experienced third quarter RevPAR growth of 0.3%, which outpaced the upper mid-scale segment by 80 basis points. In addition to renovating existing Comfort Hotels, we're also placing emphasis on adding new construction hotels to the Comfort system. As of September 30, the brand's domestic pipeline is nearly 300 properties, 80% of which are new construction. This will invigorate the brand well into the future. The power of our brand portfolio has put us on track for a record-setting development year in terms of new franchise agreements awarded. Year-to-date through September 30, we've awarded 469 domestic franchise agreements, a 13% increase over the same period of the prior year. Of these, 159 were awarded in the third quarter, a nearly 20% increase over the third quarter of 2017. This record development performance indicates that we are making the right investments and strategic decisions related to our brands. One of the reasons new owners are drawn to Choice is because we offer them resources aimed at running successful businesses. Central to our ability to drive our franchisees' top line revenue is our Choice Privileges loyalty program, which now has over 39 million members. The program is growing fast, and our active population is the highest it's ever been. We have added more than 4 million members this year through the end of the third quarter. Not only do Choice Privileges members book more frequent stays, they stay with us longer, spend more during each stay and rate their stays higher than nonmembers. Further, over 90% of our loyalty program members are U.S.-based, so these travelers continue to stay in our nearly 5,800 domestic hotels. You've heard me say before that we enjoy a particularly close relationship with our franchisees. Not only do we have a voluntary franchisee retention rate of 99%, but half of the new contracts signed through midyear were with existing or returning owners. One of the major reasons we have such satisfied owners is because we're always refining our distribution strategy to support their profitability and keep up with evolving consumer behavior. For example, Choice recently made booking a hotel room directly at our hotel-branded properties easier than ever by enabling Book on Google. This is a win-win for guests and owners alike. Travelers can now complete a reservation on Google using their saved Google credentials. Book on Google is also best for our owners, who will reap many of the benefits of booking direct, like lower commission rates than other third-party sites. It also enables us to own our customer data. Additionally, this feature makes it easier for guests to book seamlessly online and helps to minimize drop-off, which means better conversions and more bookings. In addition to our proven brands, standout franchisee performance and unparalleled franchisee resources, I'd like to close with an update on our international growth. We have made exciting progress this year executing against our international strategy to focus on high-quality multiunit developers and operators for long-term agreements in strategic markets. In the third quarter, we announced plans to bring seven new hotels to the Middle East under our Comfort and Quality brands, four of which are already under construction. These hotels represent the first tranche of a broader strategy with an affiliate of one of the largest tourism and travel companies in the Middle East to open 30 Choice-branded hotels in the region. In addition, we recently announced the expansion of our European portfolio by adding 13 Comfort hotels across France for a total of nearly 1,000 rooms. We're rapidly expanding our international footprint in Latin America and Spain, where we have 40 hotel openings planned this year. And of these, 25 have already opened through the end of October. In addition to entering Spain and Colombia for the first time, hotels are slated to open in Brazil, Ecuador, Mexico and Panama across a mix of our brands. Choice's previously announced alliance with Sercotel is contributing more than half of the 40 openings expected by year-end in Spain and Latin America. In September, we also signed a multiunit agreement with a Mexican private equity fund to develop 20 new construction Sleep Inn hotels in that country over the next five years. The agreement is expected to add 2,000 rooms to top markets like Mexico City and Guadalajara and more than triple the size of Sleep Inn's footprint in the country. In closing, we're pleased with our performance and poised for even more growth. We have a clear strategy. We are investing in growing our well-segmented, proven brand portfolio, for which demand has never been higher, as shown by our impressive development results. And we are an asset-light franchisor that excels at helping our franchisees run profitable hotels with best-in-class resources. I'd like now to turn it over to our CFO, Dominic Dragisich, who'll share more specifics on our financial results. Dom?

Thanks, Pat, and good morning, everyone. As Pat mentioned, we are very pleased with our third quarter results. As Pat mentioned, we are very pleased with our third quarter results. Today's release marks the third quarter this year where our financial performance has exceeded our expectations. We attribute this strong performance to our franchise business model, which provides multiple levers to drive revenue; our investments in and ongoing strength of our mid-scale and economy brand portfolio; our continued expansion of upscale segments with both the Ascend and Cambria brands; and our relentless focus on franchisee profitability. Choice's business model provides multiple levers to drive top line revenue growth. This includes expanding the number of franchised hotels in our system, increasing same-store sales, improving the pricing of our franchise contracts or a combination of all three. While the third quarter RevPAR results were below our expectations due to isolated occurrences like weather and calendar events, we continue to increase top line revenue by attracting new developers and adding new hotels to our portfolio, significantly expanding the royalty rates earned from our franchisees and increasing other revenue streams through offerings within our platform. Bold initiatives like a state-of-the-art new central reservation system, the Comfort transformation, new brands and our award-winning loyalty program continue to deliver strong quarterly and long-term results. Now let's review our third quarter results and outlook in more detail. Our third quarter financial performance was highlighted by revenue growth of 8% over the prior year period and quarterly adjusted EBITDA growth of 11% over the same period of the prior year to $103.6 million. We reported adjusted diluted earnings per share of $1.24, a 31% increase over the prior year quarter. As Pat mentioned, this performance exceeded the high end of our guidance by $0.07 per share. This earnings per share outperformance was driven by 2 factors; our core franchising operations, which exceeded the top end of our expectations by $0.05 per share; and a lower-than-expected effective income tax rate. Our effective income tax rate for the quarter was approximately 21.1% compared to our initial forecast of 22.5%. This rate was primarily lower due to onetime tax benefits. We are now forecasting our full year recurring tax rate to be 20.5%, slightly lower than our previous expectation of 21%. Choice's commitment to our franchisees continues to drive incremental revenue to hotels. As a result, our third quarter hotel franchising revenue increased 9% from the same period of the prior year to approximately $135.4 million. This was driven by our domestic royalty fees, which increased 8% to $105 million. The critical areas that drive our domestic royalty performance include: domestic units, which increased 6.8% in Q3 year-over-year; our domestic effective royalty rate, which increased 12 basis points in the third quarter over the same period of the prior year; and domestic RevPAR. We expect these key metrics to grow for the remainder of 2018 and beyond due to our continued focus on increasing the number of customers booking directly with us and providing resources to help our franchisees optimize pricing and operate profitable hotels. Our first revenue lever, system size, experienced another strong quarter. The number of units and rooms in our domestic system increased 6.8% and 9.6%, respectively. Our unit growth was fueled by the WoodSpring acquisition and our Quality brand, which saw 6% increase in the number of units over the prior year. This quarter, Quality Inn opened its 1,600th hotel in Bellevue, Washington, a noteworthy milestone and a testament to our continued strength in mid-scale hotels. Moving to our extended-stay portfolio. Our MainStay brand is capitalizing on the robust demand for extended-stay properties and increased its unit count by nearly 9%. We expect the strong growth in extended-stay to continue for the next several years as the segment is seeing more favorable consumer demand trends and renewed interest from franchisees, thanks to the WoodSpring acquisition. We believe our steadfast focus on hotel profitability is driving franchisees to enter the Choice system. As Pat mentioned, the number of new domestic franchise agreements increased by 20%. In addition to our system size growing, it's getting younger. We are especially pleased with the increase in new construction domestic franchise agreements, which increased 37% for the third quarter and 47% year-to-date over the comparable prior year periods. As of September 30, our overall domestic pipeline also increased 29% over the prior year to 968 hotels. This represents an increase of over 19,000 rooms. This robust pipeline is expected to fuel both short and long-term domestic unit growth. Specifically, our conversion pipeline at the end of September was 19% higher than the same period of the prior year, and we expect these conversion hotels to open between the next three to six months. Our new construction pipeline has grown 33% as of September 30 and will be a catalyst for our long-term unit, rooms and RevPAR growth. In fact, through the third quarter, we have increased ground-breaks by 50% over the same period in 2017 and expect that figure to accelerate in the fourth quarter. We are currently forecasting a more than 70% increase in ground-breaks for full year 2018 versus full year 2017. In addition to the robust new construction pipeline Pat highlighted, our new construction Sleep Inn brand now has 136 hotels in its pipeline, an increase of 14% over the same period of the prior year. And it's not just our pipeline that's growing, our opening pace is also increasing. In fact, in the third quarter of 2018, the company opened 76 new hotels, a 27% increase over the prior year. For full year 2018, we are maintaining our domestic unit growth guidance and expect it to range between 7% and 8%. We also expect both unit and room growth, excluding the onetime increase due to the WoodSpring acquisition, to accelerate in 2019. The second revenue lever is royalty rate growth, which continues to be driven by the pricing of our franchise agreements. Our domestic effective royalty rates continue to expand, increasing by 12 basis points in the third quarter compared to the same period of the prior year. This growth was higher than expected. Therefore, we are increasing our full year guidance by 1 basis point at the midpoint and now expect our effective royalty rate growth to range between 12 and 15 basis points. The value proposition we provide franchisees through strong brands, robust resources and cutting-edge technology should enable us to continue to improve pricing going forward. Finally, we'll speak to our domestic RevPAR performance. We reported a 1.4% decline in our third quarter domestic RevPAR, which was lower than our previous guidance. On a dollar basis, this translates to approximately $1.5 million of revenue, which was offset by other revenue levers. The RevPAR decline was driven by lower occupancy rates, which declined by 160 basis points, partially offset by nearly 1% increase in average daily rates. We attribute the declines in occupancy to three primary factors: weather-related dynamics, which include tougher-than-expected comparables from last year's hurricane activity and the solar eclipse; calendar shifts and the Jewish holidays as well as July 4 falling on a Wednesday; and finally, the Comfort brand's continued renovation activity. While these investments create a temporary impact, we expect they will yield long-term RevPAR benefits starting as early as 2019. Over 1,000 Comfort Hotels are either under renovation or have recently completed their upgrades. This number exceeds our previous expectation and had a short-term impact on Q3 RevPAR. Today, hotels that have completed renovations are already performing better than the rest of our brand portfolio and prove that we're making solid progress towards the tipping point in the brand's transformation. While we anticipate approximately 40% of the Comfort system to complete their renovations by year-end, a significant number of Comfort Hotels will continue renovation into 2019, given the completion time required at some hotels. Even with the temporary renovation impacts, we expect our fourth quarter RevPAR to grow between 1% and 3% and our 2019 full year RevPAR to increase in line with the industry projections for our chain-scale segments. In addition, in 2019, we expect an acceleration of our domestic unit growth and further improvement in our effective royalty rates that will continue to fuel our royalty growth. We also continue to prudently manage SG&A costs. As a result, our adjusted franchise and SG&A expenses increased only 3% in the third quarter 2018, compared to the same period of the prior year. Our strong operating performance continued to generate significant cash flows, allowing us to both reinvest in our core business and return excess capital to our shareholders. In addition to our quarterly dividend, we repurchased an additional $39 million of our common stock in the third quarter. We have now repurchased over $109 million of Choice stock this year through September 30. Even with investments in expanding our footprint, including the acquisition of WoodSpring and returning significant capital to our shareholders, our leverage levels remain low. We are pleased that Standard & Poor's recent announcement that our credit rating was placed on positive watch to be upgraded to investment-grade levels. Our ability to significantly invest in our business and return excess cash to our shareholders while maintaining low leverage levels demonstrates the continued strength of our business model. Before we open it up to questions, I'd like to comment on our outlook for the remainder of the year. Again, our adjusted EBITDA, adjusted net income and adjusted earnings per share forecast presented in the outlook section of our release were prepared utilizing the new revenue recognition standard and include the impact of the WoodSpring acquisition. However, the outlook excludes the impact of onetime integration and acquisition-related costs, as well as the impact of net surpluses or deficits generated by marketing and reservation activities. Based on our third quarter results and the outlook for the remainder of the year, we are increasing both our full year adjusted EBITDA and adjusted earnings per share forecasts. We now expect our adjusted EBITDA to range between $335 million and $340 million and our adjusted hotel franchising EBITDA to range between $341 million and $346 million. In addition, we are increasing our guidance for adjusted diluted earnings per share to range between $3.79 and $3.86 per share. And we expect our adjusted diluted earnings per share for the fourth quarter to range between $0.78 and $0.85 per share. In summary, we are very pleased with another strong quarter, with healthy GDP growth, rising wages and some of the highest consumer confidence levels we've seen in a decade all signs point to no. We're using our strong position to deepen our decades of mid-scale leadership while continuing our growth in both upscale and extended-stay. At this time, Pat and I will be happy to answer any questions you may have. Operator?

[Operator Instructions] And the first question comes from David Katz with Jefferies. You are live.

I wanted to just ask about indications for 2019 in any qualitative way. I know we're not up to the guidance process yet. But frankly, given how pressured kind of the industry has been, I think it might be helpful to get a sense there.

Yes, I think when we look at where the industry is being forecast for our chain scale, David, it's probably a little bit north of 2%, 2.2%, sort of on average, and we would expect to sort of perform in line with that. The qualitative thing that we've been talking about, which is the Comfort transformation, you got to think about that impact on it. And we'll have a better lens in that when we talk to you all in February as to sort of what the impact is going to look like in 2019. The way to think about the Comfort transformation is really there's about a third of the brand that's already done the Move to Modern. There's a third that's involved in it right now and a third that's yet to begin. And we do expect sort of that tipping point where the sort of a headwind of renovations will be replaced by a tailwind of better-performing properties at a certain point in 2019. So we'll have a better sense of that when we get to February, but I would expect our brands to perform basically in line with industry.

And then I think from a units and effective royalty rate perspective, David, we talked about where we're anticipating ex WoodSpring somewhere in that 3% unit growth range. We do expect that to accelerate into 2019, and we expect our effective royalty rate to continue to accelerate as well, not necessarily accelerate over and above the double digits that you're seeing this year, but certainly in line with historicals call that mid-single-digit range.

And just to follow that up, I think you may have indicated that opening pace is accelerating. I wanted to make sure I heard correctly. And just talk about what the forces are that are driving that. I suppose the devil's advocate might suggest with commodities and labor getting a bit more expensive and interest rate -- cost of money getting a bit more expensive, that sounds counterintuitive to me.

Well, I think it's twofold. One the conversions are easier to obviously get done and open that pace more quickly. If you look at our Ascend collection, the average day from awarding the contract to opening the hotel is about 100 days. So we have some brands that the pace with which we can literally get a contract award and get the hotel open in a very short time frame. We're seeing growth in those brands as well. And I think we've been building our new construction pipeline. Dom talked about that starting to accelerate as well. And so that's starting to have an impact as well. As we think about the Comfort turnaround, a lot of that started several years ago with exiting older products in the brand which opened up markets, which then led to new contracts being awarded over the last couple of years. We're now starting to see those types of hotels come online.

And the next question comes from Shaun Kelley with Bank of America.

Maybe just to stick with David's point on the unit growth pipeline, I mean, maybe to say it more concretely completely, we've actually heard some of the like larger U.S. brand companies starting to talk about a plateau in their U.S. development side and possibly maybe even modest declines when we look at the supply outlook across '19 and '20. It doesn't really appear that you guys are seeing that activity. So just kind of -- could you elaborate just a little bit more on maybe specifically what you're seeing on the interest level for developers and what's allowing them to build or develop Choice properties at this point in the cycle when other guys are struggling to grow.

I think -- I'll talk about it at the brand level, and then Dom can sort of follow in. When you think about what we've done with Comfort Inn, we created a number of markets in this transformation. So we actually shrunk demand, if you go back and look at it, say, five years ago. That created a lot of open markets for our brand that's in very high demand. And so I do think that at this point, where we are in that brand strategy, we're seeing a lot of demand for that and in particularly new construction Comfort Inns. I also think when you think about the brand that we acquired, WoodSpring, that is just a brand that once we brought it on to our platform, exposed it to our current franchisee base, it's really increased the interest, not just in WoodSpring but in the extended-stay segment as well. So both MainStay and suburban are seeing accelerated even beyond our expectations we have at the beginning of the year because there's a renewed interest within our development community for our extended-stay product on the Choice platform. And then obviously, the Cambria and Ascend collection, both of those are upscale opportunities where you look at the number of rooms we have, 20,000 rooms in the U.S., there's a huge number of markets for upscale products on the Choice platform that are available. So I think it's just not just there's developer interest in our brands, but also the opportunity and the brands we're growing into the new segments, that's really attracting the type of development results that we're seeing.

Yes, Shaun, I would say for Comfort specifically, if you think about the new construction pipeline growing as dramatically as it had in the last couple of years and call it the 1 to 2-year time line for construction, we've had more than 120 new ground-breaks this year alone for Comfort, which is about 40% ahead of where we were last year for that particular brand. And I think just more on a macro basis, if you think about the profile of our franchisee and kind of call it that mid-scale space, where they're financing these projects, 50% equity upfront and only going out and raising 50% debt, easier to not run into snags in terms of rising interest rates and some of the tightening that you may see from a loan-to-cost perspective. So we're continuing to see acceleration on that side as well.

And then just 1 or 2 RevPAR questions, if I could. The -- if you could just in the quarter try and quantify for us, if you could, what you think how -- what you think the impact from that Comfort renovation specifically was. And then as we look out to the fourth quarter, most people are pointing us to think that October is going to be the best month of the quarter. And I hate to subsegment your guidance. But if we look at the 2% you said for October, is that your expectation that things can stay there to kind of stick within your guidance range? Or do you expect that to slow at all?

No, 2%, we sort of guided to 1% to 3%. And so we do think 2% is sort of the midpoint, and October is there. We think we can maintain that as we get into November, December. So I think that -- we feel pretty comfortable about our Q4 guidance. Regarding the sort of Q3 RevPAR, we've looked a lot at sort of the impact that the renovations in the Comfort Hotels have impacted. We peg that at about 60 basis points sort of takeaway, if you look at it that way from the standpoint of so where the chain scale should have been. When you take rooms out of service at the level we're doing it for Comfort, it's probably about a 60 basis points decline on that front. The calendar shift is probably about a 20 basis points that Dom mentioned July 4 and some of the Jewish holiday shifts. And then really when you look at the hurricane impact, that's probably about 30 basis points. So we've -- that one is really hard to predict just because -- what's really interesting about these hurricanes is they aren't year-over-year the same thing. If you look at Hurricane Irma from last year, that hurricane actually was almost like the impact of two hurricanes because it approached the East Coast of Florida and created folks evacuating the East Coast. And it didn't hit it. If you remember, it swung around the peninsula and hit the West Coast of Florida. So we got sort of a lot of people moving from East interior and then from the West Coast interior. And you didn't have a similar-type hurricane this year. Florence had a long sort of weeklong -- people expecting a large hurricane to hit, and you ended up with a lot of evacuation zones. So hotels were closing way in advance of any hurricane impacts. And many of those hotels closed, and they ended up being outside the impact area. So the hurricanes are really hard to predict. And the final one, which is maybe unique to Choice, because of where our product sits, is the solar eclipse. We had Econo Lodges in the middle of Kentucky in the late August having three-night stay minimums with triple-digit ADRs because people were going to see the solar eclipse. And there's no way to predicate it because you don't sell tickets to a solar eclipse. People just sort of find out where the path is. So that one was probably unique because of the secondary and tertiary markets in the lodging space, where we had a lot of product. So I think when we look at those impacts, those are sort of the major components to it.

And the next question comes from Robin Farley with UBS.

This is Arpine in for Robin. Did your outlook for Q4 change at all versus what you were looking at a quarter ago? The implied range was quite wide, and it seems like midpoint barely changed, maybe only slightly lower in terms of what you're looking at today versus about three months ago?

I think the easiest way to explain it is if you think about the puts and takes from the beat in Q3 flowing into Q4. So we beat the midpoint of our EPS guidance by about $0.09 per share. A little over two third of that was operational. About one third of that was tax related. And so in Q4, you're picking up a little bit of additional tax benefit, which is why you see that tax rate in Q4 coming down a little bit. And we're investing about $1 million or $2 million more in Q4 for some of our R&D-like activities, et cetera. So long story short is we expect Q4 to come in line with expectations that we previously had, and we're flowing the beat through from Q3 to Q4.

I was start of more asking for RevPAR in terms of implied wide range. Do you feel that, that midpoint changed at all in terms of what you're looking at now versus a quarter ago?

Not the Q4 midpoint specifically, no. So it really is attributed to those onetime impacts that we saw in Q3. We're maintaining that, call, about 2%-ish trend that we had expected, if you normalize all of these onetime impacts as well.

And then the royalty rate is going up on clear basis, and Q3 was actually slightly ahead of our expectations. Could you break down sort of some of the drivers for acceleration next year and growth in terms of published rates and what's in the books? I know you outlined about mid-single-digit, right, versus sort of going back to double.

That's correct. So I mean -- so if you think about the mid-single-digit growth in 2019, a lot of it has to do with the tougher comps. And that's the reason why we guided where we guided for full year as well. Q4, in particular, is tough for comps because as your pricing increases, it's just tougher to overcome that. Now in terms of the drivers, a lot of it has to do with the -- what we had talked about in previous quarters, which is we increased the rack rate across our entire portfolio over the last 24 months a few times actually, which just shows the value proposition that we provide to our franchisees. We're continuing to see some of those burn offs from the discounts that we provided post-recession, post back in 2008, 2009. And so those are 2 of the drivers. And then the third is just when you see the success that we've had in the development environment, we just have to go to market with fewer discounts. And so those 3 drivers in particular have really been the catalyst behind the double-digit increase this year. We do anticipate continuing to benefit in the 2019, not quite to those double-digit rates, but probably somewhere, maybe even a little bit better than those historical, call it, mid- to low single digit.

And then one quick housekeeping. What is driving the nonhotel franchising loss higher versus the last time you guys guided?

So what we're doing, when you think about the company and the brand launches we're doing and expanding sort of the new product offering, things along the lines of vacation rental, our partnership we had with Bluegreen, there's a lot of additional R&D expense that we're providing that really is sort of showing up in those numbers. That's where things like new prototypes, that Clarion Pointe market research and those types of things that we have -- we do in order to identify new growth initiatives for the business, fall into that bucket.

And the next question comes from Gregory Miller with SunTrust Robinson Humphrey.

I'm on the line for Patrick Scholes. Just a question on Clarion Pointe. Since you mentioned that you're aiming for over 1,000 hotels and given that Clarion core brand has about 300 hotels globally and 166 domestically, I'm curious what drove the decision to choose Clarion's brand name as a brand extension versus choosing a new brand name. It seems like you feel the Clarion's brand is well recognized enough to create the brand extension. But could you elaborate on that rationale?

Sure. Let me first address the 1,000 hotels. 1,000 hotels is sort of the available market that we look at out there. So we had 100% market share, say, in the next five years, we would get 1,000 hotels. If you think about our market share in the mid-scale segment today, it's about 25%. So just as you're thinking about available market and then how many will Choice actually award contracts to and bring on to our system, it probably will not be in the 1,000. I'd love it to be, but in that sort of next three to five years, it's probably close to the, say, 250, 300 hotels is more likely. The reason for the use of the Clarion name is Clarion has one of the highest brand equities of our brands, of the 12 brands that we have. There is an aspirational concept or mind shift, if you think about in the mind of the consumer, and we wanted to leverage that. The second thing is that the Clarion hotel owners themselves also have additional product that doesn't have the full-service food and beverage options or meeting space. And so there was interest there from our current Clarion owners in doing additional product within the brand, just not having the food and beverage option and as much meeting space. So that was the reason behind picking a brand extension as opposed to a new brand, which really requires a lot more investment. And actually, when you're selling it to developers, there's really a question mark of is the consumer really going to know what brand X is. It takes years to build some brand equity. So leveraging that, we think gives us a real opportunity to accelerate the development. And with the early results, we believe that's starting to show up.

And could you elaborate a little bit on the geographic rollout in terms of urban, suburban, highway locations, what your intentions are?

For Clarion Pointe?

Correct, for Clarion Pointe.

Yes. It would probably be similar to our other mid-scale brands where it'll be primarily focused on secondary markets to begin with. That's where I think the initial hotel that we'll open will be in Gatlinburg, when you kind of think about those types of markets, but we do expect over time that will push into primary markets in a similar fashion that Clarion has.

And the next question comes from Alton Stump of Longbow Research.

Just wanted to ask, as you kind of think exceptionally about, of course, '19 builds accelerating, as far as the conversion versus new build rate, I would presume that conversions will be a higher percentage of your overall build. How much of that are you seeing players actually with cost going up, interest rates going up that may be some more opportunities for players that are looking to convert into a Choice hotel brand next year?

So with rising interest rates and some of the other headwinds I think that you see on new construction, so steel prices, those types of things, it's interesting because you hear that at sort of a headline level. But when I talk to our developers, they're not really experiencing that yet. And it's possible it is to come. I was with similar owners a couple of weeks back. And one of our developers suggested five Comfort Inns with us down in the Texas market. He's not having trouble finding construction crews and folks to get the hotels built. So it's not something I would just lay a broad blanket across. Your point, though, is well taken, which is in a market of rising interest rates and higher construction costs, you would expect to see more conversion opportunities versus new construction. I think the good news for us is the number of new construction hotels that are already underway because there's a lot of confidence that those are going to show up as open hotels as we move into '19 and 2020.

And then just a follow-up on the RevPAR front. I was just surprised to see it snapped back to 2% October given that -- I would assume that there are some headwinds year-over-year from the hurricane from last year. Of course, it's just 1 month of data, but can you give us some color, if you can, on what drove that pretty steep recovery versus what you put up in 3Q?

Yes, I think part of the October benefit is some of the hurricane sort of aftermath of the 2 that hit sort of in August and September here in the U.S. And I think the other part is some of the Move to Modern hotels are getting through their renovations. They're putting rooms back in service, and that's beginning to benefit us as well. As those rooms come back into service, we're seeing a pickup, too, in business demand as opposed to leisure. And as you think about Comfort Inn, the more hotel rooms we have open in Comfort Inn that helps because we're getting a lift in business now in addition to the leisure lift. Same thing is true for Cambria. That sort of lift in business transient is helping our Cambria and our Ascend brands as well our upscale brands. And on the other side of the house, in the WoodSpring side, that's also a brand that has a higher business to leisure mix than our other brands. So that's also what I think maybe sort of the positive drivers in October.

And as there are no more questions at the present time, I would like to hand the call to Pat Pacious for any closing comments.

Thank you. Thanks, everyone, for joining us today. As you can see, we have a lot to be excited about. Our strong financial metrics are laying a solid foundation for -- to continued growth. We excel at providing our owners with a proven brand portfolio and best-in-class franchisee resources that drive their profitability. This has resulted in greater demand to join the Choice system and put us in a path to set a new company development record. We're pleased with our third quarter and year-to-date performance, and we look forward to ending the year on a high note. So enjoy the upcoming holiday season, and we'll talk to you in the New Year.

Thank you. That concludes the conference call. Thank you for attending today's presentation. You may now disconnect your lines.