Choice Hotels International, Inc. (CHH) Q2 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International Second Quarter 2019 Earnings Call. [Operator Instructions]. Please note this call is being recorded. I would now like to turn the conference call over to Mr. Oscar Oliveros, Investor Relations Director for Choice Hotels. Mr. Oliveros, the floor is yours, sir.

Thank you, operator, and welcome, everyone. Before we begin, we would 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 the forward-looking statements. And you should consult the company's Form 10-K and other SEC filings for information about important risk factors affecting the company that you should consider. These forward-looking statements speak as of today's date and we undertake no obligation to publicly update them to reflect subsequent events or circumstances.You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of the second quarter 2019 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations Section.This morning, Patrick Pacious, our President and Chief Executive Officer, will provide an overview of our second quarter 2019 operating results. Dominic Dragisich, our Chief Financial Officer, will then review our second quarter 2019 financial performance and provide an update on expectations for 2019. Following their remarks, we'll be happy to take your questions.With that, I'll turn the call over to Pat.

Thank you, Oscar. Good morning, everyone, and thank you for joining our second quarter 2019 earnings call. We are very pleased with the substantial progress we are making in our strategy to strengthen our mid-scale brands, particularly Comfort Inn, grow our presence in the upscale segment and increase both business travel and midweek revenue delivery to our hotel. With our strong second quarter performance and positive outlook for the remainder of the year, we are once again increasing our full year guidance for both adjusted EBITDA and adjusted diluted earnings per share.In the second quarter, we made significant progress in our Comfort Inn brand-wide renovation program. 2/3 of the hotels in the program scheduled to complete their renovations by the end of this year have already done so, and the post-renovation performance of these hotels is paying off.Comfort hotels that completed their renovations by the end of the first quarter of 2019 outperformed the segment's RevPAR in the second quarter by 60 basis points. This reinvestment in the brand is also having a positive impact on unit growth.During the first half of 2019, openings for new Comfort hotels across the country increased approximately 10%, and new Comfort franchise agreement awarded increased 49% over the same prior year period. We also continued our expansion in the upscale segment. Our Cambria and Ascend brands grew their domestic room count by 16%. And Cambria's RevPAR grew 2.2%, outpacing the industry by 110 basis points and the upscale chain scale by over 260 basis points.And we continue to improve the value proposition for our franchisees, helping them maximize their profitability. In the second quarter of 2019, our system-wide proprietary contribution to our hotel increased by 200 basis points to over 60%. And business travel grew as we captured more room night from corporate account while still maintaining our strength in leisure travel. Finally, our new construction hotel openings increased by 22% in the second quarter, making the first half of 2019 the best period for new construction openings since 2010. We expect these new construction hotels to drive greater long-term RevPAR growth.This morning, I'd like to share highlights of our strategic investments in our brands across all segments, which are delivering strong performance to our franchisees and shareholders, especially our Comfort brand. Last quarter, I previewed one of our strategic focus areas, which is to both build on Choice's success in the leisure space and capture a greater share of the growing corporate travel market, which is projected to reach $1.7 trillion in just 3 years according to the Global Business Travel Association.In June, we launched our nationwide multimedia advertising campaign featuring the tagline, Our Business is You. The campaign leverages the consumer insight that business can be defined broadly and is easily adapted to target business or leisure travel. The multi-platform campaign capitalizes on the years of strategic investments in our brand portfolio designed to attract more business travelers. These investments in our proven mid-scale brands and our expansion in the upscale segment are paying off. Comfort is one of our most competitive brands in attracting business travel and our largest brand in terms of revenue generated. In fact, our domestic Comfort hotels contribute 40% of our royalty revenue yet are only around 1/4 of our system. The strategic transformation initiative for the Comfort brand is in its final stages. Only 1/3 of the Comfort system will be undergoing our Move to Modern renovation in the second half of the year, and nearly 30% of the Comfort system has already installed new exterior signage with the Modern brand identity, signaling to guests on the outside of the hotel that something's new on the inside.As I mentioned, this investment is paying off. RevPAR for Comfort hotels that completed their renovations by the end of the first quarter of 2019 increased by 60 basis points and also outperformed the segment's RevPAR by 60 basis points. We're also seeing positive lift for Comforts that have completed renovations and have the new branding, and we believe the overall brand's RevPAR index will continue to strengthen this year.Additionally, Comfort hotels that completed their renovations have increased their business travel revenue growth 5x faster than Comfort hotels that have yet to compete their upgrade.Further validating our Comfort investment strategy is that refreshed hotels outperformed their peers even before we launched the new media campaign. Comfort is the initial focus of the new campaign, which was strategically timed to reintroduce consumers to the transformed Comfort as peak travel season arrives. We believe that this campaign should have an even greater effect on Comfort's performance as the message reaches a wider audience.The new Comfort has also created demand in the development community. For the first half of the year, Comfort franchise agreements have increased 49% year-over-year. These franchise agreements are expected to generate over 20% higher revenues throughout the life of the contract compared to the pipeline of the same prior year period, largely driven by higher RevPAR location. The ever increasing number of updated Comfort hotels and our new construction pipeline should allow the Comfort brand to gain even greater traction among business travelers, improve the overall guest experience and result in higher RevPAR for years to come. In addition to Comfort, our entire mid-scale brand portfolio is performing well. During the second quarter, we drove strong unit growth in our Quality, Clarion and Sleep Inn brand, and we expect to open over 3 mid-scale hotels per week in 2019.We're also pleased with our newest mid-scale brand, Clarion Pointe. In addition to opening the second Clarion Pointe hotel this quarter, 21 Clarion Pointe franchise agreements were awarded through the second quarter. This brings the Clarion Pointe pipeline to 41, of which 16 are expected to open by year-end. Developer appetite had been strong for Clarion Pointe and initial guest feedback is promising. The first Clarion Pointe is already reporting stellar likelihood to recommend guest scores and is one of the highest-rated hotels on TripAdvisor in its market. Our franchisees are also benefiting from Choice's strong business delivery. In the second quarter of 2019, system-wide proprietary revenue contribution from Choice-generated channels increased by 200 basis points to over 60%. This contributes to the 1,000 basis point growth in our proprietary contribution since the second quarter of 2015. These numbers are even stronger for the Comfort brand.In the second quarter, Choice delivered over 2/3 of Comfort's revenue. Our loyalty program continued its strong growth. Loyalty contribution across the system is up 60 basis points and accounts for more than 40% of the business delivered to our franchisees.In the first half of 2019, more than 2 million loyalty program members have been added to the Choice Privileges program, which is now 42 million members strong. In addition to increasing our franchisees' top line growth, we work to maximize their profitability. Our award-winning Choice University training platform helped over 7,000 franchisees with a wide range of content to run their businesses, spanning lessons on our proprietary systems, hotel operations and brand program. We also help franchisees manage costs through our procurement services organization, which leverages our scale to reduce the cost of product and services our franchisees consistently use, and we provide resources to help our franchisees benchmark their expenses and better analyze their P&L. Our focus on franchisees' return on investment by both delivering business and providing resources to manage their expenses is core to the value proposition for all our brands.With such a powerful value proposition, it is no surprise why Choice has an industry-leading voluntary retention rate among franchisees. And specifically, Comfort has a near-perfect franchisee voluntary retention rate of over 99%. Choice is also focused on corporate travel and midweek business, and both our mid-scale and upscale brands are benefiting. During the second quarter of 2019, we grew the total number of corporate accounts by more than 20%, driven by a doubling of our corporate groups business.With Cambria, we are focused on building a brand that appeals to the modern business traveler and we're seeing success. In J.D. Power's 2019 Hotel Guest Satisfaction Index, Cambria was 1 of only 2 brands that earned the highest-rating tier for customer satisfaction among upscale brands. As this was the first year that Cambria was included in the study, we see it as a direct validation that these hotels really resonate with traveler. And we're giving those business travelers more locations to choose from. In the second quarter, the Cambria pipeline grew to 82 hotels, which are expected to bring nearly 11,000 additional upscale rooms to our system. Out of the 82 hotels currently in the Cambria pipeline, 25 are already under construction. Cambria is on pace for a record-breaking openings year in 2019 and is fast approaching 50 opened hotels in top-tier markets from coast-to-coast. In fact, 7 of these openings are expected this summer, which together represent an additional 1,200 upscale rooms.Finally, robust demand continued in the extended-stay segment, which has outperformed the overall lodging industry for the past several years. We grew our entire extended-stay portfolio by 7% and our extended-stay pipeline by 18% in the second quarter. We believe this growth will continue as there is significant untapped demand from both consumers and developers for extended-stay hotels across the country. Our largest extended-stay brand, WoodSpring Suites, continues to be one of our fastest-growing brand. In the second quarter, net unit growth for the WoodSpring brand was 7% versus the prior year period. More than a dozen hotels have been added in the first half of 2019, and there are currently another 20 WoodSpring hotels under construction.Finally, the brand delivered an impressive 2.7% RevPAR increase in the second quarter, 160 basis points higher than the overall industry. We anticipate having more than 300 WoodSpring hotels opened across the United States by the end of next year.MainStay, our mid-scale extended-stay brand, saw an 8% portfolio growth and 21% pipeline growth in the second quarter versus the prior year period. While suburban, our economy conversion extended-stay brand, also saw 8% portfolio growth and 38% pipeline growth in the second quarter versus the prior year period. Additionally, suburban RevPAR grew by 2.9% in the second quarter, 180 basis points higher than the overall industry. Taken together, our extended-stay portfolio is expected to have continued growth for years to come.In closing, our results halfway through the year highlight significant progress against our long-term growth strategy. We're maximizing the amount of business we deliver to our franchisees across all our brands, and our large development pipeline and results are proof of our strong value proposition. Additionally, we are building long-term strength by investing in our brands to capture more corporate travel while remaining strong in leisure travel. Our strategic investments, combined with our asset-light business model, position us well to continue to deliver strong financial performance to shareholders well into the future.I'd now like to turn it over to our CFO, Dom Dragisich, who will share more specifics of our financial results. Dom?

Thanks, Pat, and good morning, everyone. We are excited to report our second quarter results, which built up our strong first quarter performance. Our key growth metrics continued to improve as we leverage the power of our franchise business model and drive financial results. Specifically, the second quarter was highlighted by an 8% increase in total revenues, a 6.5% increase in adjusted EBITDA and a 120 basis point increase of our adjusted operating margin to nearly 66.%.The combination of strong revenue growth and disciplined cost management resulted in a 7% increase in our adjusted diluted earnings per share exceeding our expectations. Our adjusted diluted earnings per share performance exceeded the top end of our guidance by $0.04 per share. Based on these strong results and our forecast for the remainder of the year, we are again increasing our outlook for full year adjusted EBITDA and adjusted diluted earnings per share.It's important to reinforce that franchisee profitability continues to be at the core of our effort. Strong franchise operations results provide multiple levers to drive top line revenue growth. These include increasing RevPAR, extending the number of franchised hotels in our system, improving the pricing of our franchise contracts and continuing to expand our procurement services with more value-added programs to our platform of over 7,000 hotels and other travel partners. Overall, the combination of these levers resulted in a 5% increase in second quarter revenues, excluding marketing and reservation system fees for $145.2 million. Domestic royalties represent nearly 70% of these revenues and increased 3% to nearly $101 million, highlighted by the net addition of 116 hotels to our domestic system and a 10 basis point increase in our effective royalty rate. Let me dive into our revenue levers beginning with RevPAR.Our domestic system-wide RevPAR result for the second quarter were in line with our expectations and remained essentially flat versus the second quarter of 2018. We were particularly pleased with our Move to Modern Comfort hotels, which as Pat mentioned, outperformed the upper mid-scale segment by 60 basis points.In the second half of the year, approximately 1/3 of the Comfort system is expected to complete our Move to Modern renovation. Of those, more than half are already renovating. Based on these early RevPAR results and the progress of the renovation, we expect Comfort RevPAR index to continue to strengthen this year. Additionally, we continue to grow our Comfort pipeline, 82% of which is new construction. We believe this mix of new construction hotels and the renovated system will help drive RevPAR growth well into the future.In addition, one of our most extensible initiatives has been increasing our presence in the upscale segment through organizational focus and strategic capital deployment. The continued expansion of our Cambria and Ascend brand is expected to drive long-term RevPAR growth. In second quarter, RevPAR for our Cambria hotels grew 2.2%, outpacing the industry by 110 basis points and the upscale chain scale by over 260 basis points. As Pat mentioned, we plan to open 7 new Cambria hotels this summer, which represent more than 1,200 upscale rooms in high RevPAR market. We believe that our investment in Cambria will continue to accelerate the brand's development of all the company's overall portfolio and drive strong financial performance.Based on our second quarter results and our Comfort transformation progress, we are maintaining our guidance for full year 2019 domestic RevPAR growth and expected to range between flat and 1%. We expect our third quarter domestic RevPAR to range between flat and 2%. Our next revenue lever is system side. In the second quarter, the number of units in our domestic system increased by 2% to reach nearly 5,900 hotels. We experienced growth across key segments, highlighted by our mid-scale Quality brand, which grew its hotels by 5%; our extended-stay WoodSpring brand, which grew its hotels by approximately 7%; and our upscale brand, which experienced double-digit rooms growth. Ascend grew its room count by nearly 18%, while Cambria grew its room count by 12%.In addition, we continue to successfully implement our international strategy and are pleased to report that the number of units and rooms open increased by 4.1% and 5.4%, respectively, over the same period of the prior year. Our relentless focus on franchisee profitability continues to resonate with developers, fueling the growth of our overall development pipeline. During the second quarter, we again reported strong development result and awarded 181 new domestic franchise agreements. Additionally, in June, we awarded the highest number of franchise agreement in any June as a public company. Our second quarter development performance was driven by a 39% increase in the number of awarded Comfort franchise agreement. As Pat mentioned, Comfort franchise agreements awarded in the first half of 2019 increased 49% over the same prior year period.At quarter end, our overall domestic pipeline of hotels awaiting conversion, under construction or approved for development was 988 hotels, a 4% year-over-year increase. Our new construction development pipeline grew by 7% year-over-year. The hotels in our pipeline represent nearly 79,000 rooms or 17% of the current room count of our domestic system.Our international pipeline also continued its strong growth trajectory this quarter with the addition of 49 hotels. This brings the total hotels awaiting conversion, under construction or approved for development to 123. We look forward to welcoming these hotels to our international portfolio, which is currently nearly 1,200 hotels strong. Through the first of 2019, we grew net domestic units 2%, and expect this trend to continue for the full year.Our third lever, royalty rate, is driven by the price of our franchise agreement and continuous decline. Our domestic effective royalty rate for the second quarter grew by 10 basis points. Our focus on maximizing franchisee profitability are delivering incremental business and providing our hotel owners with the resources to better manage their properties to stay in demand for our brands and helps drive our effective royalty rate. We remain confident in our value proposition and expect continued growth in our year-over-year effective royalty rate, which we anticipate will increase between 8 basis points and 12 basis points for full year 2019. Another key revenue driver is our ability to continue to provide value-added products and services to our platform of over 7,000 hotels and other travel partners. In the second quarter, our procurement services revenues increased 17% to $20.8 million compared to the same period of the prior year. Furthermore, we're optimistic that we can continue to drive outsized procurement services revenue growth over the next several years.In closing, I'd like to comment on our commitment to making long-term investments in the business and return excess cash flow to drive shareholder returns and our earnings outlook for the remainder of the year. During the first half of 2019, we returned approximately $66 million back to our shareholders. These returns came in the form of $24 million in cash dividends and $42 million in share repurchases. Our strong cash flows and debt capacity position us well to continue to grow the business and return excess cash flow to shareholders well into the future.In late July, we redeemed the third party's remaining equity stake in a joint venture that helped 4 key Cambria hotels. Our outlook does not reflect the third quarter 2019 redemption of this stake and its associated earnings. We currently estimate that the redemption and financial reporting consolidation will generate incremental EBITDA of approximately $3 million to $5 million for the remainder of 2019. Excluding this redemption, we expect our full year 2019 adjusted EBITDA to range between $358 million and $363 million, representing an increase of $2 million at the midpoint versus our previous guidance. We expect our diluted adjusted earnings per share to now range between $4.16 and $4.22, representing an increase of $0.07 at the midpoint versus our previous guidance.Lastly, for the third quarter of 2019, we expect adjusted diluted earnings per share to range between $1.25 and $1.29 per share. Choice had a strong first half of 2019, and we remain optimistic that this performance will continue as we drive results through our long-term focus.At this time, Pat and I would be happy to answer any questions. Operator?

[Operator Instructions]. And the first question we have will come from Shaun Kelley of Bank of America.

Maybe just to start, Dom. Since you finished on a little bit of color around those 4 Cambria hotels. Can you just talk a little bit more exactly about -- I understand it's probably very specific and opportunistic, but is the financial impact here, are you guys going to extend some amount to purchase the delta and the numbers that you gave, so roughly $150 million to buy out the JV partners? And then what's the long-term intention here. Are you planning on ultimately trying to find like a long-term home for these owned assets?

Yes, Shaun, let me start with, it was really an opportunity for us to redeem the equity stake that we didn't own in four of those Cambrias in strategic high-barrier-to-entry market. They're also hotels that are still ramping. So from the standpoint of looking at the future of those hotels and what they're going to be worth once they got to a fully ramped performance level, we saw this as an opportunity for us to not only make an investment strategically, but also, in the long term, have a nice financial return as well. Dom, address the financial piece to it.

Yes, Shaun, it's part of that $725 million that we have authorized for the brand. The $160 million delta you see, the $393 million in the Cambria capital outlays going up to the $550 million number does include that $160 million, so you hit the nail in the head there. And I think as Pat mentioned, really, the opportunity that we saw here, plus from a financial returns perspective, we do anticipate to recycle that capital to find a long-term home. But the hotels are still ramping in a way that the joint venture was also structured. It -- 1/3 of the right to buy out that interest at a structure that will provide a really nice financial return for us, so we see this as the return capital when we ultimately recycle it as well as the return on capital.

Great. Second question is just on unit growth. It looks like you trimmed the high end of that expectation for this year. So could you give us a little more color on what you're seeing on the development side that might have led to that, at least on the domestic side? And then probably more importantly, what's the outlook for 2020 as you kind of think about net unit growth and both attrition as well as potential additions from your pipeline?

I think what we're seeing here is that you're seeing a pipeline is growing significantly. The pipeline growth though was occurring more in our new construction brands, which as, you know, takes a little bit longer than, obviously, the conversion brands do. The other key piece to this is we're going to continue to do incremental strategic terminations to keep our brands fresh. Owners today have the wherewithal to invest back in their assets. And so in a lot of our brands right now, we have significant amount of investments going back into the hotels. And for those owners that aren't willing to do that, we can either shift them down in our brand portfolio, if that makes sense, and we have an open available market. But if they're not willing to make those investments, then we are exercising our rights to strategically exit them from the brand to keep the brands relevant for the long term.

Shaun, and the only thing I would add to that, just if you take a look at our international growth and you blend both the domestic and the international growth, the overall unit growth comes in closer to about 2.5%. The 2% is still well within the range of our previously reported guidance, but the factors that Pat mentioned as well as the fact that we've got these new construction hotels that typically take a little bit longer open, the revenue intensity of these units are going to be significantly higher as we enter 2020 and beyond. And 2020, we're obviously not issuing unit growth guidance, but we do expect to see unit growth accelerate as the impact of the Comfort transformation, obviously, continue to whittle away. I think the other thing that provides a significant optimism is when you take a look on the opening forecast. In particular, you're talking somewhere in that call, it, 8% range. So we're seeing both our pipeline grow and you're seeing an acceleration in terms of our open units for the year. And so to Pat's point, the reason why you're seeing the muted growth this year is really on the termination side that are very strategic to the portfolio.

And next we have David Katz with Jefferies.

Can you talk about the extended-stay segment just a bit. I think it's an area that you've talked about fair amount in its growth and whether there's any possibility that you might consider bolstering that growth with further acquisitions since WoodSpring is going so well?

Yes, we're, as we mentioned before, we're pretty bullish on the segment as a whole, particularly the economy segment of the extended-stay set of brands. I think when you look at where WoodSpring is today, we expect to have about 270 of those opened by the end of the year and then another 30 by the end of 2020, so that brand's growing at a significant pace. We're just seeing a lot of demand from both developers and consumers for that product in markets across the country, and it's had a spillover effect as we've mentioned in both our MainStay and our Suburban brand. Do we see additional branding opportunity there? We do, and that could come either in the form of an acquisition or potentially a new brand launch. So we do see other white space in the extended-stay segment that we don't play in today. But I think given the strengthening of our own capabilities to deliver that type of consumer and to drive the return on investment for that type of developer, we do see additional opportunity in that for the long term.

Got it. And with respect to just new construction, I want to make sure I'm sort of capturing all the commentary the right way. Should we take away that the construction cycle may be stretching out just a little bit? Is there any trend to be derived from that and that might be impacting the prospects for net unit growth, going forward?

You're referring to the amount of time between a contract execution and when a hotel opens around new construction?

Yes.

I think what we are seeing, and we look at the sort of months that it's taking, we're seeing that creep up little bit. A lot of that has to do with entitlements and just sort of the access to labor today. There are some weather impacts that have impacted this year as well. One thing I will note is our new construction pipeline, particularly out in California, has increased significantly. It's an area in the country, where relative to our competitors and the industry, we're underpenetrated, and it is an area where we have had significant pipeline growth. So that is impacting us as well. The West Coast, in general, is just little bit more challenging from a development timeline from executed contract to open a hotel.

And next we have Robin Farley of UBS.

Got two questions. One is, can you quantify -- you mentioned, it was I guess termination rates that's making unit growth for the year a little bit lower. What reasonable rate do you expect in 2019 versus average, if you can quantify that? And then I have a question after that.

I think the best data point that you have, going forward, from a involuntary termination, so terminations that we basically execute, is typically right around 4% or so. And so when I mentioned that we're talking about an 8% openings growth rate year-over-year, you're implying probably another 2% on the strategic termination side of the house, which gets you to that 2% domestic unit growth. It had about a 50 basis point impact on the overall unit growth figures, so the 2% would actually have been increased to about 2.5%. And again, we expect that to accelerate into 2020.

Okay. Great. That's helpful. And then just the math on the JV that you're acquiring for the $160 million. In the release, you talked about bringing the $3 million to $5 million for the remainder of the year into the EBITDA line. And so to annualize that, I guess, we could sort of double that. But am I right in thinking also that only half of that is really new to your bottom line and that of half of it's on your JV line? And if that math is right, the $160 million is quite a significant multiple right? I mean I don't know if it's 15 or 20x half of the EBITDA that's actually new to your bottom line. I wonder if you could just talk -- give some color around such I multiple. I know you've mentioned the properties are ramping, but maybe if you help quantify how much they'll be ramping?

So I think the $3 million to $5 million, when you take a look at just doubling that from a full year impact perspective, probably a little conservative. But we think probably closer to the high end of that from a full year perspective. When you take a look at that multiple, I think just doing the headline math, you're absolutely correct, probably higher multiple. But again, it really is about the ramp of those hotels in particular. And so we do anticipate generating a much higher EBITDA into2020 and beyond at which time we would explore the potential disposition of those assets to another franchisee.

And so what multiple -- I guess, when you think about where the EBITDA can get to, do you think that you're paying -- in other words, what you're paying now at multiple future cash flow? If there's a way to help us think about how you arrived at this sort of, I don't know 20x or whatever, but...

I think we're paying a very fair price for where our multiple is today as a company. Frankly, a little bit lower than that.

And next we have Thomas Allen of Morgan Stanley.

So just a, I'd say, a broader question. How are you viewing the broader lodging demand currently?

I think if you look at the health of the consumer, consumer confidence is at a record high, unemployment at a record low. If we look at the broader occupancy and demand trends, we expect them to hold up for the remainder of the year. That's baked into our RevPAR guidance. We do expect our rate to actually accelerate, given the sort of headwind that the Move to Modern renovations have created in the first half of the year. We expect, as I mentioned in the last call, that, that will turn into a tailwind. And so I think we look at where the demand trends are, they're fairly positive, I mean especially on a historic basis. But even as we look into the second half of the year, we're expecting to be similar in the first half.

I guess just following up on that. I mean if I think about the other lodging companies, they've all cut their RevPAR guidance this quarter and have a little bit softer commentary than they've had for the past few quarters. I mean, why do you think you're bucking the trend?

I think there's really three factors, in particular. Obviously, Move to Modern is the biggest factor when you take a look at how the Comfort portfolio is doing, those that have renovated versus those that have not, will be a very material tailwind for us in the back half of the year, so I think that's #1. I think the second is just the revenue intensity of the hotels that I mentioned in terms of the unit growth. The mix is starting to skew much more upper mid-scale as well as upscale when you take a look at the open properties, which would certainly lift the RevPAR. And then, certainly, an easier comp as well in the back half of the year, combined with what Pat had mentioned, just macroeconomic trends in terms of who our consumer is, all of those really appear to be favorable for us in the back half of the year and entering 2020.

Next we have Jared Shojaian of Wolfe Research.

I'm trying to frame the 60 basis point RevPAR index gain a little bit better. Can you maybe help me understand what the absolute RevPAR index level is for those hotels that have undergone the renovations versus the Comfort hotels that have not undergone renovations. And I appreciate that you might not have the exact numbers, but maybe just kind of directionally speaking.

Yes, Jared, the number, directionally, is positive. I think when you look at RevPAR index, particularly when our hotels index against what's in their competitive local market, that number moves around a little bit. We can probably get back to you on more of the sort of focus concept against the other brands in the upper mid-scale segment. But it's generally positive, and we've seen RevPAR index lift for the hotels that have gone through the renovations more so than the ones that have yet to do it.

Yes, Jared, when you take a look at the exhibits and the press release, I think your best data points, when you take a look at the Comfort Inn line item, the overall portfolio itself was down about 60 basis points or so. So you're talking about 120 basis points swing, but it's actually even more than 120 basis points because those hotels that have completed renovations are also in that number. So if you see that trend extend into the back half of the year, we expect to sustain, call it, that 60 basis points or so RevPAR index lift in the second half of the year.

Got it. Okay. And I guess I asked because I'm a little surprised that the renovations would have only yielded about 60 basis points of RevPAR share gains, and I also appreciate that it is early and I know you're pretty bullish on the longer-term outlook here. But particularly in an environment where it feels like brands are already gaining some share, I mean, can you maybe speak to that a little bit? And is this part of the reason why it seems like you might be assuming a little bit of a step-up in fourth quarter RevPAR? I mean is that the assumption that these renovated Comfort hotels are going to continue to gain steam here on the RevPAR index share gains?

Yes, I think your initial point is probably the one that has the biggest impact, which is it takes a while for those hotels once the renovation is completed to build their base of business back from when they've had rooms out of commission. They go and win back corporate accounts that they may have had prior to renovations, those types of things. So that 60 basis points, those hotels that finished the renovation basically before the end of March. So they've only had 3 months' worth of performance that we've measured against. What we have seen is those that have done the renovations prior to them a bit more sort of post-renovation period with which we're able to measure, those hotels are performing higher. The other is, as they've added the new signage, we're going to, probably in the next call, give you a sense of what the new signage is adding. But that's another positive lift on both RevPAR and RevPAR index for those hotels.

Okay, and then just one more for me. Are there any brands in your portfolio that you think may need a similar refresh initiative, like what Comfort has undergone? And I asked because it feels like we've been talking about sort of these strategic terminations for quite some time now. And maybe this is a broader question, but what is the right longer-term involuntary termination rate? So I get the 1% voluntary rate. What do you think the right longer-term involuntary rate is?

Yes, it's probably 3% to 4%. We don't have another brand that would go through the type of, call it, investment that we made in Comfort. If you remember, we exited a significant number of hotels as part of that, and the dollar amount that went back into those hotels was significant. The Quality Inn is our next largest brand. That's the brand that as we mentioned on the last call is undergoing strategic terminations, but it's nowhere near the type of cleanup that we needed to do on the Comfort brand. And the investment in the Quality brand on a relative per key basis for owners is much smaller than what we required at the Comfort in the Move to Modern renovation.

[Operator Instructions]. Next we have Dan Wasiolek of Morningstar.

So I just wanted to dive in a little bit on the effective royalty rate, clearly trending higher. Wondering if you can maybe provide some clarity what's driving that. Is that mostly mix, or is that combination of mix and pricing power as your brand strength -- branded platform continue to strengthen?

Yes, I think it's primarily mix. A lot of it is new construction, a lot of it is the brands that we don't do discounting on in any significant way. And so that's impacting the sort of pipeline aspects of it. The discounting that was done during the last downturn has been burning off as well, which has helped us. And as we've indicated on prior calls, that number is expected to moderate as both those trends either flatten out or don't continue to accelerate, if you will. So I think what we've guided to over the last couple of quarters has been strong effective royalty rate, but the growth in the effective royalty rate will moderate, over time.

Okay, very good. And then if I could just ask for a reminder. You guys talked a little bit about some business initiatives to try to drive that. What is your mix of business? I recall that you guys have a decent exposure off highway.

1/3 business, 2/3 leisure. But when you think about where the portfolio is heading, just with Cambria and Comfort, et cetera, we do expect that mix on the business side of the house to increase over the course of the next several years.

We're showing no further questions at this time. We'll go ahead and conclude our question-and-answer session. I would now like to turn the conference back call back to Mr. Patrick Pacious for any closing remarks. Sir?

Thank you, Operator. Thank you, all, for joining us today. I hope you have a great rest of your summer, and we will talk to you in the fall.

And we thank you, Sir, also and to the rest of the management team for your time today. Again, the conference call is now ended. At this time, you may disconnect your lines. Thank you, again, everyone. Take care and have a great day.