Choice Hotels International, Inc. (CHH) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International Fourth Quarter and Full Year 2019 Earnings Conference Call [Operator Instructions]. Please note, this call is being recorded. I would now like to turn the conference over to Allie Summers, Investor Relations Director for Choice Hotels.

Thank you, operator. And welcome again, everyone. It’s my honor to joining for the first time as Investor Relations Director. I look forward to meeting and working with all of you.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 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 fourth quarter and full-year 2019 earnings press release, which is posted on our Web site at choicehotels.com, under the Investor Relations section.This morning, Pat Pacious, our President and Chief Executive Officer, will provide an overview of our 2019 operating results. Dom Dragisich, our Chief Financial Officer, will then review our fourth quarter and full year 2019 financial performance and provide an update on expectations for 2019. Following their remarks, we'll be glad to take your questions.And with that, I'll turn the call over to Pat.

Good morning, everyone. And thanks for joining our fourth quarter and full-year 2019 earnings call. I'd like to welcome Allie to the team and I know that she will be a great resource for all of you. We're pleased to report positive results for the fourth quarter and 2019 as a whole. This morning, we announced strong financial performance, reflecting the following results for full year 2019 as compared to the prior full-year period.We grew adjusted earnings per share by 11%, exceeding the top end of our previous guidance by $0.05 per share. And, we grew adjusted EBITDA 7% and that's the top end of our previous full year guidance. 2019 was a year of investment; investment in brands for the customer of tomorrow; investments that are improving the value proposition for our franchise owners; and investments in our platform that continues to provide our guests with new travel options and our franchise owners with new services they value.2020 will also be an investment year as we continue our strategy of positioning the company to grow in more revenue intense segments and locations. To be more specific, we are strengthening our existing brand and building new ones to appeal to the customer of tomorrow in the upscale, midscale and extended stay segment. We have also been intentional about the geographic market we are targeting to grow our brands across these three keys segments.Stated timely, our focus is on the revenue intensity of each hotel, those currently in our system and for the new hotels we are attracting in the upscale, midscale and extended stay segments, both domestically and internationally. And we've had great success executing this strategy last year. For full-year 2019 versus the prior full year period, we drove substantial growth across the higher value and more revenue intense upscale, midscale and extended stay segments with a 3.1% increase in units, and we expect this growth rate to increase in 2020.Our portfolio is improving and our pipeline is welcoming a higher percentage of new construction hotels. New construction hotels are typically more revenue intense and more likely to pay off for the company in the long term. The anticipated gross room revenue of a hotel in our pipeline is higher than that of the average hotel in our system today. And as a result, we expect these new hotels will generate nearly 15% higher revenues to Choice throughout the life of the franchise agreement. These metrics are proof that we are having success strategically growing the right brand, in the right segment, in the right market. And as we'll share this morning, Choice Hotels’ franchisees and shareholders are benefiting.I'll now provide a brief update on each segment and say a few words about how we're investing in our value proposition and expanding the value-added program we provide to our platform of over 7,000 hotels and other travel partners before handing it off to Dom. In the upscale segment, our Cambria and Ascend brands each experienced impressive growth last year.In 2019, we increased the company's domestic upscale room count across these two brands by 44% year-over-year and now have over 29,000 rooms in our domestic upscale portfolio. This growth was highlighted by the ongoing momentum in our Cambria brand, which grew its domestic room count 28% year-over-year and reached a milestone of 50 open hotels with a pipeline of 89 hotels, 27 of which are already under construction as of year-end.And the Ascend Hotel Collection, which grew its domestic room count over 50%, including over 6,500 rooms associated with our strategic partnership with AMResorts and Apple Leisure Group brands, known for its portfolio of luxury, all inclusive resort. Our upscale rooms’ growth was complemented by our ability to drive 27% year-over-year increase in new upscale franchise agreements last year. Once opened, these upscale properties will further fuel the revenue intensity of our system. Last year, the Cambria brand opened 11 new hotels, representing over 1,700 upscale rooms in major markets like Boston, Houston and Phoenix, and we ended the year by opening the doors of our 50th Cambria hotel, the brand's largest property in a high RevPAR market just outside Disneyland in Anaheim, California.2020 is shaping up to be another great year for Cambria, as we expect to exceed the brand's openings record for a second consecutive year, with 13 anticipated openings across the country. This year, we expect to begin construction on 17 new Cambria hotels, which will join the 27 projects currently under active construction and the additional 62 hotels in pre-construction, setting the stage for continued growth of the brand for many years to come.The Ascend Hotel Collection, Choice's upscale top brand also had a record year in 2019. For the second straight year, we broke development records for Ascend with 53% year-over-year increase in the number of domestic, franchise agreements awarded. With over 300 hotels in its global system, the Ascend Hotel Collection is the industry's largest soft brand by far. In fact, its larger than the next two soft brands combined.Our mid-scale segment continues to be a critical component of our strategy to drive the revenue intensity of our portfolio. The transformation of our upper mid scale Comfort brand points to the continued commitment of Choice and our franchisees to maintain the leadership position of our flagship brands, and our strategy is working. Performance is improving. Our efforts to refresh existing Comfort hotels through the multiyear $2.5 billion transformation is driving share gain.Comfort hotels that completed their renovation continued to experience RevPar index gains versus local competitors for the past three consecutive quarters. And developer interest is growing. Last year, we opened an average of more than one domestic Comfort hotel per week, the highest number of openings for the brand in eight years. The appeal for the Comfort brand in the development community continues to grow with 20% increase in domestic franchise agreements awarded in 2019 versus the prior year, and over 40 hotels under active construction at the year end. In fact, we have nearly doubled the Comfort pipeline to almost 300 hotels since the refresh.I mentioned earlier that our focus is on revenue intensity. Domestic Comfort franchise agreements awarded for full year 2019 are expected to generate over 25% higher revenues over the life of their contract as compared to domestic Comfort franchise agreements awarded in the prior year. And we expect Comfort to return to net unit growth this year and accelerate in 2021 and beyond.Our attention has now turned to the next chapter in Comfort’s transformation. Next month, we expect to unveil the new Comfort prototype to help the brand maintain its position as the leader in the upper mid scale segment. The prototype maintains Comfort’s low cost to build advantage over its competition, and delivers flexible design options that meet guests and owner preferences. The prototype has already received enthusiastic reviews from existing Comfort franchisees and developers who are eager to invest in the future of our flagship brands. Part of what’s driving demand for Comfort is our proven value proposition, which builds on our existing commitment to invest in our franchisee success. More than 70% of the room’s revenue delivered at Comfort hotels in the fourth quarter came from Choice generated channels.Relatively new to our midscale portfolio is Clarion Pointe, which is experiencing great success as an extension of our popular Clarion brand. We awarded more than 30 domestic franchise agreements last year, and expect to open two dozen Clarion Pointe hotels this year. The total number of Clarion Pointe hotels open or awaiting conversion since the brand launch has now surpassed 50 hotels, and the Clarion Pointe brand is resonating with guests. Our first Clarion Pointe hotel has a guest satisfaction score of 9.3 out of 10.Shifting now to extended-stay, one of the fastest growing segments of the hotel industry. We kicked off 2020 by launching Everhome Suite, a new construction midscale extended stay brand. Everhome Suite is the first brand to enter the midscale extended stay segment in nearly a decade where a significant portion of the inventory is 15 years or older and where the data tell us that demand far exceeds supply for hotel stays of seven plus nights.We celebrated the brand launched by breaking ground on the first hotel expected to display the Everhome Suites brand, and multiple developers have already committed to build 13 Everhome Suites hotels in the Austin, Texas and Los Angeles market. We expect to open the first Everhome Suites next year. We unveiled Everhome Suites just as the company surpassed 400 open extended stay hotels across our WoodSpring, MainStay and Suburban brands. A major driver of our extended stay growth is WoodSpring suite, which continues to improve in both performance and growth. In 2019, we increased unit count for the brand by 8.4%. We also awarded 66 additional domestic WoodSpring franchise agreements last year.I'll close with a few words about how we're committed to enhancing our value proposition by maximizing our franchisees’ return on investment and expanding our platform business. Last year, we drove 150 basis point increase in our loyalty contribution and increased both the share of revenues and the total number of stays coming from our existing loyalty members. Our strong loyalty contribution follows several major enhancements to our Choice privileges offering.This fall we rolled out new benefits for our elite members, as well as special rewards for business travelers at our Cambria hotel. This help increase the brand's loyalty contribution by nearly 400 basis points year-over-year in 2019. And just this month, we went live with our newest offering, Golf By Choice. The program, the first of its kind in the hospitality industry, gives members exclusive access to deals on top rated golf, apparel and equipment, while allowing members to earn and use points when bookings times at golf courses across the country. We're also pleased to offer our more than 44 million Choice privileges members the opportunity to earn and redeem points at all inclusive locations in Mexico, the Caribbean and Central America, by booking their stay directly on choicehotels.com. This latest perk for Choice privileges members is the result of our strategic agreement with AMResort, which positions Choice as having the largest all-inclusive luxury resort offering of any major U. S. hotel company.In closing, three points prove we're delivering on our franchisee value proposition. First, owners are willing to pay more for our brands when renewing their agreement to remain in our system or when joining as a new owner. Specifically, 2019 was a record year for re-licensing and renewal revenue. And we continued to improve the effective royalty rates of new franchise agreements awarded. This gives us optimism that owners continue to see increased value in our brand. Second, nearly six out of 10 franchise agreements awarded last year were with existing or returning owners. And finally, we maintained 98% voluntary franchisee retention rate, of which we are extremely proud.As we look ahead to 2020, we remained committed to investing in the business to grow the right brands, in the right segment, in the right market. This will fuel Choice's long-term growth and continue to pay-off for our owners and shareholders alike. 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 very pleased to close out another year of strong financial performance on a high note. The resiliency of our business model continues to position us well financially and allows us to continually invest in the business for the long term, grow earnings and return capital to shareholders. What we have accomplished in 2019 and our investment plan in 2020 is not just for the next 12 months, but rather the next decade and beyond.For full year 2019, a combination of solid revenue growth, disciplined cost management and revenue focused investments resulted in 7% increase in our full year adjusted EBITDA, achieving the top end of our previous full year guidance. Thanks to our strong operational performance, combined with the implementation of tax strategies to reduce our effective income tax rate, we exceeded the top end of our full year 2019 adjusted earnings per share guidance by $0.5 per share, representing an 11% increase over the prior full year period to $4.32. Total revenues for full year 2019 reached $1.1 billion and grew by 7% over the prior year.Let's now take a closer look at our fourth quarter results. For the fourth quarter 2019 as compared to the same period of 2018, total revenues excluding marketing and reservation system fees, grew by 10% to $130.2 million and adjusted EBITDA increased 6% to $81 million. Fourth quarter 2019 adjusted earnings per share were $0.92, a 5% increase over the prior year quarter and exceeded the top end of our previous guidance by $0.06 per share.Our financial performance continues to be driven by the resilience of our franchise business model and growth across higher value segments, geographies and brands. These results are proof that our long-term strategy is paying off and positions us well for future growth. Our franchise business model, which places our owners’ profitability at the center, provides multiple ways to drive top line revenue growth. As a reminder, the key levers are; increasing rev par, expanding the number and revenue intensity of their hotels in our system, improving the effective royalty rate and continuing to expand our procurement services revenue by providing more value added solutions to our platform of over 7,000 hotels and other travel partners.Let me dive into our four revenue levers beginning with RevPAR. This year, we along with our competitive set, experienced softer overall RevPAR results compared to industry expectations for the key segments where we operate. Our domestic system wide RevPAR declined 90 basis points for the full year, which was in line with our guidance. Our fourth quarter, 2019 domestic system wide RevPAR results were at the low end of guidance, declining 2.1% compared to the same period of the prior year. We attribute the fourth quarter performance primarily to the regional performance in oil and gas market, which had been impacted by oil price and production challenges, the geographic mix of our current portfolio versus our competitive set and tougher comparable, which in the fourth quarter of 2018, benefited from the lingering hurricane activity in the Southeast United States.These results also correspond with overall industry stopping in our key chain scales during the fourth quarter. Despite the RevPAR environment, we are very pleased that the investments we've made in high value segments are paying off. This is especially true for the higher RevPAR upscale segment where we significantly increased our presence last year, thanks to the continued expansion of our Cambria brand. We once again achieved strong same-store RevPAR growth for Cambria, which exceeded its competitive set by 70 basis points in the fourth quarter. We expect the brand's long-term performance to be further bolstered in 2020 by the opening of 13 Cambria hotels taking the total Cambria system to over 60 hotels. The Cambria brands continue to expand in tough RevPAR markets, which will further enhance the revenue intensity of our portfolio and drive strong financial performance.We expect Choice's upscale portfolios to contribute an even greater proportion of the company's gross room revenue in 2020. Furthermore, our largest extended stay brand, WoodSpring, grew its RevPAR share gains versus local competitors by 210 basis points year-over-year in the fourth quarter. Finally, the initiatives we've implemented to improve the guest experience at our Comfort hotels are working. Comfort that completed their renovations experienced for the third consecutive quarter RevPAR index gains versus their local competitors. And our Comfort pipeline continues to be more revenue intense.For both the first quarter and full year 2020, we expect system-wide domestic RevPAR to be between flat and a decline of 2%, which is in line with industry expectations for our competitive set. We are optimistic that our strong pipeline in higher RevPAR markets and geographies, as well as strategic investments we are making to fuel growth will be a catalyst for long-term RevPAR expansion.Our second revenue lever is unit and rooms growth, which benefit from the absolute size of our portfolio and the revenue intensity of its hotels. For full year 2019, Choice Hotels opened an average of nearly one hotel per day for a total of 332 domestic hotels, representing over 31,800 new rooms. Notably, we opened the most domestic new construction hotels in a decade, a 37% year-over-year increase from full year 2018. In 2019, we increased domestic unit by 1.6% to reach over 5,950 hotels. We are pleased with the domestic unit growth in our key segments for full year 2019. Across our more revenue intense brands in upscale, mid-scale and the extended stay segment, we increased the number of hotels by 3.1% and grew rooms by 4.3% year-over-year.Let me share a couple of highlights. First, we increased the number of domestic rooms in our upscale portfolio to over 29,000, a 44% growth from the prior year. More specifically, Cambria grew its room count by 28%, while Ascend increased the number of rooms by more than 50%. Next, we surpassed 400 domestic hotels in our extended stay portfolio last year, a 10% increase since year end 2018. We nearly doubled the number of WoodSpring openings in 2019, resulting in more than 8% growth in the number of domestic Woodspring hotels. MainStay and suburban each experienced double digit unit growth with nearly 16% and over 11% year-over-year increases respectively. And finally, we continue to successfully execute against our international strategy in 2019, resulting in an increase of the number of units and rooms internationally by 3.5% and 7.4% respectively over the same period of the prior year.Demand for Choice's brands grew significantly in the fourth quarter, where we awarded the total of 307 domestic franchise agreements, a 7% increase compared to the same period of the prior year. Of note, we achieved the best month ever in the company's history by awarding 220 domestic franchise agreements in December alone, a 41% increase over December 2018. Our Upscale brands are a great example of the inroads we are making. We awarded 94 new domestic franchise agreements for our upscale brands in 2019, a 27% year-over-year increase. 43 of these agreements were signed in the fourth quarter alone, a 30% increase over the same period of 2018.In addition, we executed 151 global franchise contracts for our Ascend brand in 2019, the highest number for a single year in the brand's history. These results drive even greater optimism for our 2020 outlook. At year-end 2019, we increased our total domestic pipeline of hotels awaiting conversion under construction or approve for development over 1,050 hotels. This represents the largest domestic pipeline in the company's history, accounting for nearly 85,000 rooms. More importantly, we are very pleased with this composition. At year-end, new construction projects represented over three quarters of the pipeline.In addition to Comfort's robust new construction pipeline fueling the brand's future growth, we are very pleased to see momentum in the extended stay segment. The extended stay domestic pipeline grew by 13% year-over-year to 315 hotels in 2019, driven by the continued expansion of the Woodspring brand. For full year 2020 we expect net domestic unit growth to range between 1.5% and 2.5%. Furthermore, we project the unit growth rate of our key segments, upscale midscale and extended stay, to increase further versus 2019's growth rate.Our third lever, the price of our franchise agreements, remains a significant driver of our revenue growth as franchisees are willing to pay more for our brand, affirming our strategy focused on maximizing franchisee profitability. We are pleased with the company's performance in this area, both for the fourth quarter and full year 2019. Our effective domestic royalty rates for fourth quarter 2019 grew 10 basis points and for full year 2019, increased 11 basis points to 4.86% versus the same period of the prior year. 2019 marked the fourth consecutive year of double digit basis point royalty rate growth for the company, which we achieved while simultaneously increasing demand to enter our system. We remain committed to providing our franchisee with the highest return on investment by driving the top and bottom line. As previously communicated, we expect to see continued growth of the effective royalty rate and projected to increase between a range of 4 and 8 basis points for full year 2020.Given the increasingly attractive value proposition we provide to franchisees and their desire to be affiliated with our brand, we anticipate sustained growth of this lever for years to come. Our fourth and final revenue lever and one where we are seeing great success is our ability to expand our platform business through key partnerships, new technology and other key franchisee resources. In 2019, this enabled us to further drive our top line revenue and deliver tangible value added solutions to our hotel owners and customers. In 2019, we increased our procurement services revenues 18% to $61.4 million compared to the same period of the prior year. We believe that we can sustain strong procurement services revenue growth in the years ahead as we continue to increase the number of products and services to over 7,000 hotels, guests and other travel partners, while expanding our platform.Before opening it up for questions, I will close with a few words about our capital allocation strategy and our earnings outlook for 2020. We remain committed to investing in the business for the long term and generating significant operating cash flow that allows us to continue to return capital to our shareholders. Last year, we returned approximately $100 million back to our shareholders through a combination of $48 million in cash dividends and approximately $50.6 million in share repurchases. During the fourth quarter of 2019, the company's Board of Directors announced 5% increase to the annual dividend rate to $0.90 per common share outstanding.I would like to now turn to our outlook for the full year 2014. Looking ahead for full year 2020, we expect adjusted EBITDA to range between $378 million and $385 million and adjusted diluted earnings per share to range between $4.22 and $4.33 per share. For the first quarter of 2020, we expect adjusted diluted earnings per share to range between $0.80 and $0.84 per share. Choice continues to strengthen its position in the industry and we remain optimistic that we will continue to drive outsized returns for years to come.We see 2020 as another year of investment in key strategic areas of our business. These areas include further strengthening our franchisee value propositions and driving a larger room count, continued focus on the revenue intensity of our system while launching new brands that allow us to penetrate higher RevPAR market and growing the number of value added programs and services we offer to our franchisees, guests, and other travel partners. We expect these investments to further fuel our franchise business and position us successfully for 2020 and well into the future.At this time, Pat and I would be happy to answer any questions. Operator?

We’ll now begin the question-and-answer session [Operator instructions]. First question comes from Shaun Kelley, Bank of America. Please go ahead.

Thank you for the detail in the release and in the prepared remarks. For Pat or Dom, I was wondering if you guys could maybe give us a little bit more color on the net unit growth guidance. So as we think about the numbers that you provided here, 1.5% to 2% is probably a little bit on the low end of what we were thinking, especially as you continue to move on. Are you expecting any sort of elevated level of either terminations or voluntary kind of system cleanup in that number? And then overall, just the base effect, I think you actually came in within Q4 with also very high. So is any of that just timing as it shifts between maybe 4Q and 1Q that will be helpful?

Dom can speak to the timing. I think broadly what we're seeing is, as we mentioned in our remarks. We're developing hotels in higher RevPAR market and higher RevPAR segment. So as a result, we're doing a lot more new constructions hotels and we're developing in markets where entitlements and the costs of labor to actually get hotels built is actually probably more expensive, takes a little bit longer. So we're seeing a little bit more of a delay in the amount of time it's taking new hotels once they start construction to actually open, but that's reflective of the fact that we're pushing more into the upscale segment. And where we're doing a lot more of our Comfort’s are in markets where higher RevPAR markets usually translate to a little bit more time to get it through entitlement and actually get the project open.

And then just in terms of the numbers, Shaun, I mean overall generally in line with where we thought we could be, just to ground everybody. Every six hotels or so, it's about 10 basis points. So just having a little bit of shift from Q4 into Q1, which we did shift could impact those numbers, 10 basis points or 20 basis points either way. I think what we're really optimistic about is when you take a look at those more revenue intense segments, obviously a little softer in the economy segment just based on what we're seeing just in terms of conversion activity there, continuing to keep that portfolio relevant by cleaning some of the lower performing units out of there. But when you take a look at those stronger segments, we were at 3.1% this year. We expect to actually increase that in terms of growth rates in 2020. So that's obviously going to be a big tailwind for us as we think about 2021. And those numbers actually are even when you think about Comfort declining moderately in 2019. We expect Comfort to actually return to growth in 2020 albeit moderate growth and then further accelerate back to historical averages in 2021 and beyond.

And one follow up if I could quickly, which would be, I think Dom in your prepared remarks you mentioned a little bit about tax strategies or some items there. I think the tax rate did move around a decent amount and that impacted both the EPS growth we saw in ‘19 and then also probably has a material impact on the guidance for ‘20 just in terms of cadence. Could you give any -- just a little bit more color either. Are there strategies, things that can continue and therefore maybe the guidance is conservative but hard to predict? Or is there sort of a meaner version back to low 20s the right place to be from here?

I think the key is, Shaun, we actually do not guide to any of those discreet items, which typically are a bit of a tailwind for us in terms of a better tax rate for the full year. So when you take a look at obviously 2019, we are at 19.7%. We’re guiding to 22.5% but that does not include any of those discrete items. So we do definitely see more opportunity in the tax rate in 2020. We are also in the process of implementing a new tax structure. So you're going to see a little bit of noise in the Q1 numbers. You're probably going to see a pretty significant benefit in the reported but from an economic perspective those benefits are going to be amortized over an eight year period. So 22.5% is the best guess that we have right now. Obviously, we see some additional benefits that we could see in terms of the discrete items.

Next question comes from Thomas Allen, Morgan Stanley. Please go ahead.

Just following up on one of the earlier questions. Now that you're focusing much more on the higher RevPAR hotels. How should we think about your long-term unit growth targets? Thank you.

So Shaun, I think if you look at the growth rates that we're seeing, particularly in the upscale segment with both Cambria and Ascend, the Ascend collection is existing hotel. So we're seeing a significant amount of growth in that brand right now, and those are hotels that literally can get open in as short as a day or three months. So sort of you've got a tale of two brands in the upscale segment. When you look at Comfort, our Comfort brand, in particular has shifted to much more of a heavier mix on new construction. So as Dom mentioned, we do expect begin to grow that brand again in 2020 with getting back to sort of a historical norm closer to 3% growth as we get to 2021 and beyond. So when you look at those two segments in particular, it's a changing story.Extend stay become for us both a new construction story with WoodSpring and now Everhome. What's interesting about that brand is you can get a WoodSpring built in about 12 months. So the short timeframe and the markets where those are going into, the ability to grow that brand more rapidly is a big difference there from mid-scale. And then what's also happened in our extended stay brands is we're starting to attract particularly MainStay and Suburban, we're getting more conversion brands, conversion hotels into those brands. So it's really three different stories, each one has a different growth trajectory. But from a unit growth perspective, overall, we do look at that sort of call it 2% at the midpoint is what we're expecting to see in 2020.

So when you remove Comfort specifically and when you remove some of the other noise, when you take a look at just again those mid-scale and above segments as 3.1% removing Comfort out of there, you're actually closer to about 4% just given the decline that you saw, just given the Comfort transformation, so we are pretty much right at our historical averages in terms of our key focus brands. Our historical average has been somewhere between 3% and 4% and in the long-term, we expect to get back to those rates.

And just on RevPAR growth, your guide. Can you give some qualitative comments around that down 2 to flat? And then Hilton on their call last week talked about seeing some recent strength in bookings. Have you seen anything similar? Thank you.

So on our guidance, I mean I think the overall industry continues to stop and you're getting a situation right now where supply that's coming in is it’s being demand. For us in particular, we look at the two areas where we are over penetrated from an inventory perspective. Those oil and gas markets in the southeast in particular, those are expected not to perform as well as what you might see in the Mountain States or on the West coast. So it is a performance mix perspective. What’s great news for us as we look at where our pipeline is, we do have a greater opportunity in our pipeline to open hotels in those markets where we're currently under penetrated?

When you take a look at just 2020, January came in probably close to negative, call it mid 50 basis points or so. We are trending more positively in February. And so again some of those tailwinds that we expect, just in terms of the strength of consumer, obviously, moved to market being a bit of a tailwind, slightly better comps, you could see some improvements over the first quarter. However, still our best guess right now is in line with that negative 2 to flat.

Next question comes from Robin Farley, UBS. Please go ahead.

I've got a question related to your unit growth expectations. I'm wondering if part of the miss in 2019 was were removal prior than you're expecting, and just looking at Comfort brand you expected to return to net unit growth in 2020. Is that because -- was there sort of a deadline with your franchisees where they would have had to exit the system by 2019 if they didn't make certain assessments? Or I guess just trying to get a feel for why that Comfort will start to trend up in 2020? Thanks.

Robin, broadly speaking, we did continue to take some strategic terminations out of the quality and brand and those were planned. I think where we saw higher terminations is actually in the economy segment where Econo Lodge and Rodeway are brands in that part of the portfolio. And that's a larger percentage when you think about it as a segment is we have a lot of economy hotels. So that's kind of a key driver on that front. I think on Comfort, what we are seeing as I mentioned is it is just more of a shift towards new construction, which is taking a little bit longer for us to see that unit growth show up. So as we look at out and number of hotels that are actually beginning construction, getting their footers forward, we feel really good about the guidance we’re giving on Comfort moving forward.

So really it's not that removal will slowdown, it’s just that the new construction will come online for Comfort?

The terminations out of Comfort have been pretty steady around our historical average over the last two years.

And then also on your royalty rate guidance, I think last quarter you had said you expected it to be kind of high single digits for this year. And now the low end of the range is at 4 basis points. Just wondering if you could give us some color on what's happening with royalty rates? Thanks.

So we talked about it moderating a little bit, just given the fact that two years ago we did raise the rack rates for particular brands and then the additional six, and so just a lot of it is dependent obviously on the relicensing and renewal environment as well. We've seen a record number of [relics] and renewals in 2019. And so that sets a new royalty rate for those contracts whenever the contracts are transitioned to a new owner. So right now we're guiding to 4 to 8 basis point, obviously, the midpoint of that is 6. We still do see a path depending on what the transaction environment looks like in 2020 to achieve that top end of that guidance. But for the time being, 4 to 8 is a pretty fair range.

Next question comes from Anthony Powell, Barclays. Please go ahead.

Are you seeing more franchisees that owned your competitors’ brands in the upscale segment, looked to Cambria for growth and that you have seen a change in how the lenders look at Cambria in terms of loan to value or rates as the brand grows?

Yes, I think from the standpoint of lenders being aware of and starting to understand the value prop of Cambria that has improved over the last couple of years as the brand itself has grown, we pushed into higher RevPAR markets and the brand is performing. The question around do our owners own other brand, absolutely. And I do think it is something that we've talked about on prior calls that since we don't have other upscale brands, we really have a clean palette from the standpoint of open markets for that brand and that really resonates with developers who like a particular market, but are boxed out from other competitor brands. So Cambria has become a nice option for those owners. So we do have owners that own Cambria, as well as competitors in the same segment.

And onto capital allocation, there was -- I know you want to focus on growing the business more, but there was a pretty big year-over-year decline in share buybacks. Can you just revisit kind of overall buy back velocity and how that may look in 2020?

Well, I think first and foremost, we are committed to returning to that 3 to 4 times that's really our target leverage ratio. Repurchase activity obviously dependent on a variety of different factors, one of which is our Cambria investments that we're making. And when you take a look at what happened in 2019, obviously, with the assets that we ended up purchasing the equity and as well as some other potential inorganic opportunities, we thought it was prudent to keep the powder dry a little bit. But again, I think it's becoming clearer and clearer that with the 725 million that we have allocated to Cambria, we still do have tremendous amount of capacity on our balance sheet and can certainly continue to raise the dividend like we did this year, obviously return additional capital to shareholders in the form of buybacks as well. We did also increase the authorization to $4 million. We had that conversation with the board late last year. And so we have the ability to purchase up to another 3.9 million shares as of today.

Just to follow up on that answer, you talked about inorganic opportunities and you talked about the revenue intensity of the portfolio. Are there opportunities for you to maybe buy into even higher RevPAR categories to cover up scale? And could you maybe trim some of your economy brands throughout the sales this year?

Well, just to take the second part. We don't have any assets in the economy segment [Multiple Speakers]…

Brand sales…

No, I mean, we look at our economy brand as an opportunity for owners to get to know us, to start out with us. A lot of our very successful Comfort owners today began with us with Econo Lodge back four decades ago, so that's a great opportunity for us to attract new capital and new owners to our business. It's also a place where with owners have an asset and they don't want to put money into it, favor quality and they want money into it, it gives us an opportunity in the portfolio to keep them in the system. So I think it's a necessary piece of who we are and it's a great piece of earnings for us.Speaking more broadly on the first part of your question, I think when you look at opportunities for us that are out there, we have holes in our portfolio today. If you think about upscale, extended day, you think about an upper upscale brand where we don't have opportunity, those maybe opportunities for us at some point to do something on the acquisition front. And so from time to time, we do consider those things, because to Dom's point, we may want to keep our powder dry if something like that becomes available.

Next question is from David Katz, Jeffries. Please go ahead.

So two questions. One is, can you remind us, when we're looking at your balance sheet, the 582 million that's out, that's spread over a few different buckets. Can you remind us where that is? And in the past, I think you have talked about some capital that has come back or that you recycled in the quarter of the year. Can you remind us of those?

So when you take a look at the 582 million, call it about just out the 15% or so key money, so about 80 million, a little more than 70 million is in the form of joint ventures where we have an equity partner. We have loans out of about, call it 130 million or so and the remainder is the owned assets, we talked about that, so the owned assets are a part of that 725 million authorization as well. On a recurring basis, we've been at about 75 million of disbursements and then about 40 million is what we actually brought back this year. This year we actually increased the disbursement slightly, it’s about 100 million that we outlaid and 40 million was recycled.

The 75 million of disbursements, that’s on an annualized basis roughly?

Correct. Yes, that’s right.

And then secondarily, I seem to remember and I did go back and look at some of your prior commentary where there was some expectation of unit growth acceleration. And it seems as though it's been hovering around that 2% level. What's changed or have things changed over the past couple quarters that maybe stretching some of that up?

Yes, I think as we’ve mentioned, we're doing more new construction, that's one piece of it. In the economy segment where we still have a significant number of hotels, we are seeing more sort of flattish growth, more of the owners in that segment that may come in. If you look at our Rodeway brand, that's a brand where they can sign a franchise agreement has a one year out. So they come in and it works for them they'll stick with us if not, they may move on. So the more exciting growth that we look for is really in the midscale and above segments in upscale and in extended day.And as we mentioned in our remarks, that's where 2019 we had over 3% growth. To Dom's point, Comfort, which we've been turning around pulled that out of the number, it's actually 4% growth. So it’s the historical growth of our brands beyond the economy segment is where it needs to be. We’ve strategically been turning Comfort around that's done basically, so you're going to see Comfort return to growth. And then the exciting opportunities we have for both upscale and extended stay I think are going to be key drivers of growth going forward.

Next question comes from Patrick Scholes, SunTrust. Please go ahead.

Two of your closest competitors who have reported earnings, InterCon and Wyndham, both gave some type of quantification of the corona virus on either the RevPAR or their earnings. I haven’t heard it brought up at all this conference call. Are we to assume that it's very minimal worst case scenario for your folks?

Patrick, I would call it less than minimal. If you look at our portfolio, we have 7,000 hotels, seven of which are in China. Those hotels have been temporarily closed as has happened with many of our competition. And is what's going on in the country. But when you look at it from a revenue perspective on our base, it’s 0.02% of our revenue. So from the standpoint of in market impact, it is very, very small. I think when you look at inbound Chinese travel to the U. S. and our portfolio, again, we don't have heavy concentration in those gateway cities, and a lot of our international inbound travel comes from markets other than China. So we're not looking at an impact on the U. S. business today. Broadly speaking, it remains to be seen how this will evolve overtime. So we do remain open to potentially looking at what an impact could be. But just broadly speaking as we look at its impact on our business, it is very, very small.

[Operator Instructions] Our next question comes from Smedes Rose, Citigroup. Citigroup. Please go ahead.

I just wanted to ask you something about your positioning in the extended stay space. You mentioned in your opening remarks that you continue to see demand significantly ahead of supply in that space. And I was just wondering if you could just provide a little more kind of color around why you think that kind of persistent imbalance has kind of been the case there, just because we don't usually think that that’s sort of existing so much in the hotel space in general, supply and demand, supply is usually keeping up with demand. So what's kind of your thoughts there and your decision to introduce another brand into that segment?

I think if you look at the 2019 supply and demand, you have about 20% of the rooms sold in 2019 were for stays of longer than seven nights, and only 9% of the current inventory is purpose built for extended stay. So there is a fact where consumers are probably staying longer in transient hotels when they prefer to be in an extended stay hotel. So that's the first factor. The second around Everhome is we've got eight decades of experience in the mid scale segment, and we have a fantastic operating model on the extended stay side of the house. So bringing the two together for a brand launch like Everhome was the right thing for us to do. We've worked with our current extended stay owners on the prototype to help design it to be a low cost to build option, and also a low cost to operate for the mid-scale segment.When you think about the segment itself, the average product age there is 15 years or older. So it was time to bring a new brand to the space and we get a lot of consumer research around what consumers in that segment want. They want to be able to customize the space. They want to have me space, if you will. And so there is a lot of things in the brand that allow the customer to move the furniture around, to move the shelving around and its really designed to drive that type of a consumer into a product that's more purpose built for them. And so we're pretty excited by the initial reaction we've gotten from our developers, and we've already broken ground on the first one and we expect to open it next year.

And then on Everhome, what would you, without land, what are kind of the per key construction costs?

About $85,000 per key…

Last question comes from Jared Shojaian, Wolfe Research. Please go ahead.

Can you just tell us what you're expecting for the owned hotel’s EBITDA contribution in 2020? Third quarter adjusted looks like it was negative, but fourth quarter positive. How do we think about this line? And how much is it contributing to 2020 versus 2019? Thank you.

Jared, you said from an EBITDA perspective, just to make sure I can clarify…

Correct…

So from an equity perspective, obviously there's a range midpoint somewhere call it about $15 million or so in the owned assets, and that contribution in 2020. In 2019, it was about $6 million or so.

And then on SG&A, what kind of growth is embedded in the guide for 2020? It looks like 2019 came in a little bit lighter than the guide. Can you talk about what drove that so late in the year and how you think about 2020?

So when you take a look at SG&A on a full year perspective, in 2019 it was flat. Now on an apples-to-apples basis, it wasn't flat because if you remember back in midyear, we actually sold a small SaaS based company that was supporting our vacation rental unit. So about $5 million of SG&A attributed for that particular entity is not included in those numbers, so apples-to-apples SG&A probably grew closer to 1% to 2% or so. Obviously, with the softer RevPAR environment, we've been able to prudently manage the cost a little bit better than we had expected. And frankly, a lot of the investments that we're making in 2019, we were able to deliver at a lower cost.Now there was some timing differences between '19 and '20. As we talked about on the call, 2020 is expected to be an investment year. We're expecting to increase our SG&A pretty materially. Embedded in the numbers is about 6% increase year-over-year from '19 into '20. And so between that and obviously the surpluses and deficit on the system fund side of the house, we do expect to continue to make investments in these revenue intense areas in 2020 but that’s all are obviously embedded in that guidance that you see.

And one more if I may. Dom, you called out some of the challenges in the fourth quarter RevPAR. But can you drill down a little bit further just to your RevPAR index in the quarter? How that looks specifically the comp set, how it's been trending? And then if you could give us year-over-year change in the absolute level, that would be helpful. Thank you.

So when you take a look at the RevPAR in Q4 specifically, obviously, a negative 2.1. Pat mentioned it but there was a lot of weakness in the oil and gas market. When you take a look at just the impact to our portfolio that was about 60 basis points, so that took us to 1.5. And then there's a tougher hurricane comps that were lapsing in Q4 of 2018 in the southeast with another call it 50 or so basis points. So from an index perspective, if you just normalize for those two specific items, overall portfolio was pretty similar to our comp set, actually probably about 50 basis points or so better than the comp set if you normalize for those two specific areas. And then on the Comfort side of the house, we talked about specifically those move to modern Comfort’s are continuing to outperform the industry, this quarter it was about 40 basis points or so. So we expect to see that trend continue in 2020, either at or slightly better than the midpoint of the industry guidance.

Just one more quick one hopefully. Cambria RevPAR was down 6% in the quarter. I guess I would have thought that as this brand continues to ramp up, maybe you get a little bit of tailwind to RevPAR. Is that not you've historically seen? Any color you can shed on why RevPAR was down too much at Cambria.

So the RevPAR is actually not a same store RevPAR. When you take a look at same store RevPAR, it was actually up by 0.1 so it's about 70 basis points better than the comp set. The reality is almost half of the portfolio, just given how new it is, it’s 50 hotels, 24 those hotels are still in ramp. So when you take a look at it just from an overall portfolio perspective, it’s dragged it down. But same store again is positive 0.1, which we’re very excited about just given where it is from an RPI perspective.

This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Pat Pacious for any closing remarks. Please go ahead.

Thank you everybody for your time this morning. We'll talk to you again in May when we announce our first quarter results. Have a great day.

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