Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International First Quarter 2022 Earnings Call. At this time, all lines are in a listen-only mode. I will now turn the conference over to Allie Summers, Investor Relations Director for Choice Hotels.

Good morning, and thank you for joining us today. 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 Forms 10-Q, 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 the reconciliation of our non-GAAP financial measures referred to in our remarks as part of our first quarter 2022 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section. This morning, Pat Pacious, our President and Chief Executive Officer; and Dom Dragisich, our Chief Financial Officer, will speak to our first quarter operating results and financial performance. Following Pat and Dom's remarks, we'll be glad to take your questions. And with that, I'll turn the call over to Pat.

Thanks, Allie, and good morning, everyone. We appreciate your taking the time to join us. It's been a rewarding and successful start to the year. Choice Hotels generated record earnings, continued our industry-leading RevPAR growth and attracted significant new developer interest in our portfolio of proven hotel brands. Consumer trends such as remote work, rising wages, retirements and road trips are all expected to fuel future demand. I'm pleased to report that we generated $96.6 million of adjusted EBITDA in the first quarter, a 53% year-over-year increase and a 28% increase when compared to the same quarter in 2019. At the same time, we expanded our adjusted EBITDA margins to 74% year-over-year. These exceptional financial results were fueled by continued RevPAR growth that materially outperformed the industry by 13 percentage points for the first quarter as we gained share across every segment in which we compete. For over 2 years, our RevPAR gains as compared to 2019 have been significantly higher than the competitions. This continued impressive performance is driving high demand for our brands from the franchise community. In fact, in the first quarter, we saw a 46% year-over-year increase in new applications for domestic franchise agreements. We have always had a strong relationship with our franchisees, and the past 2 years have only reinforced this bond. Last week, we hosted more than 5,000 franchisees, hotel general managers and industry suppliers at our 66th Annual Convention. This was the first time in 3 years that our entire Choice community has been together for an in-person event, and the level of enthusiasm around the future of our brands was remarkable. We spent the week sharing our long-term brand growth plans and listening to our hotel owners and operators. It was also an important opportunity for our franchisees to learn about…

Thanks, Pat, and good morning, everyone. I'm very pleased to be with you today to report our impressive first quarter financial performance. Specifically, I will provide additional insights on our first quarter results, share expectations for what lies ahead and update you on our liquidity profile and capital allocation approach. Throughout my remarks today, I'll be making financial performance comparisons to 2021. Just a reminder, Choice's full year 2021 adjusted EBITDA exceeded 2019 levels. And as a result, we are focused on building on last year's record performance. However, for RevPAR growth, I will continue to make these comparisons to 2019, which we believe are more meaningful in analyzing the industry's trends. For RevPAR comparisons to 2021, please refer to our press release. For the first quarter of 2022 compared to the same period of 2021, total revenues, excluding marketing and reservation system fees, were $131.1 million, a 43% increase. And adjusted EBITDA grew 53% to $96.6 million driven by impressive RevPAR performance, strong effective royalty rate growth and disciplined cost management. Our adjusted EBITDA margin expanded to 74%, an increase of nearly 5 percentage points. And as a result, our adjusted earnings per share were $1.03 for the first quarter, an increase of 81% versus the same period of 2021. I'd like to now turn to our 3 key revenue levers, beginning with RevPAR. Our domestic system-wide RevPAR outperformed the overall industry by 13 percentage points for the first quarter, increasing 10.4% versus the same period of 2019. Specifically, our average daily rate grew by over 9%, and our occupancy levels increased by 60 basis points compared to the same quarter of 2019. As you will remember from our prior calls, our brand strategy is focused on driving growth across the higher-value and more revenue-intense upscale, extended-stay and mid-scale…

The first question today comes from Shaun Kelley with Bank of America.

I appreciate all the color and detail, Dom, especially in the outlook. Just wondering if we could get a bit more color on sort of either what you're implying or expecting to see on overall net unit growth. So it looks like there may be some additional drag here from either hotels you're proactively letting go out of the system or maybe some other moving pieces. But can you maybe just give us a little color on overall system-wide NUG because it sounds like there's probably an offset from higher-value hotels, but help us think about maybe some of the puts and takes there.

Yes, Shaun, let me start, and then Dom can fill in some of the detail. I mean, I think the most important thing we want to be focused on is the hotels that we're expecting to open this year are going to deliver twice the royalty revenue as those that are leaving. And that's reflective of our strategy of focusing on these more revenue-intense hotel segments and hotel locations. So that's the most critical piece of this. And because of that, our unit growth is accretive to our earnings. The growth in our revenue-intense segments we are projecting this year to be between 1% and 2%. And that's consistent with what we're seeing in the marketplace. I would say on the terminations, we did clean up, particularly the Quality Inn brand last year. And a lot of that was due to owners last year had a number of months of really positive performance. And if they weren't investing back in their hotels, we sort of made the decision to eliminate some of those hotels. Right now, we don't see that for this year as far as taking additional terms to improve the quality of the brands. But I'll pitch it over to Dom here for any additional additions there.

Yes, Shaun. So I think when you take a look at the current quarter results, excluding AMR in the strategic terms in Q4, the revenue-intense unit growth was essentially that 1%. Pat mentioned those brands will -- we expect those to accelerate throughout the remainder of the year and range between that 1% and 2%. The other, obviously, component of the broader portfolio unit growth is really the economy brands. And what I would say about the economy brands is we expect them to continue -- the trends to continue much the same way that they had in 2021. Candidly, when you take a look at the first quarter, we do see some green shoots there as well. So we would actually expect those trends to either stay pretty consistent or even improve somewhat for the remaining 3 quarters of the year. I think on the termination side of the house, we do not expect to see any outsized termination similar to what we did in Q4 of last year. In fact, I would say the more historical 4% termination rate, the vast majority of those being involuntary, so Choice actually executing the termination, we would expect those to be more at that 4% historical level.

Great. And maybe just as a quick follow-up if I could. Would love to just talk about, obviously, you're continuing to see super strong rates throughout the balance of this quarter, it seems like heading into second quarter as well. Obviously, you have some mix shift these around as we think about the types of hotels that you're opening and ramping. Can you help us just think about either same-brand ADR growth? Basically, how much tailwind are you experiencing from some of the new brands that you're opening relative to that overall kind of ADR gains? How much is mix shift versus how much is sort of kind of core same brand to same brand ADR growth.

Let me just start, Shaun. I mean, last week, as I mentioned, we were with over 5,000 of our owners. A lot of the rate gain that we're seeing is just more effective pricing. So we rolled out our revenue management tool last summer, at the beginning of the summer. And the effectiveness of that and helping them price their rooms multiple times a day, and that system is getting a significant amount of input on what's going on in the marketplace. And these owners are able to sit on their account at 10:00 o'clock at night and get a recommendation on their phone that they might want to up their rates. So the response time has really improved. And so I think that's part of what we're seeing. As far as additional runway, we look at our ADR index, meaning how much we are setting our rates relative to competition. We see significant runway, and then on top of that, we're still gaining occupancy. So when you look at these cycles, it's sort of once occupancy sort of taps out, that's where the rate pressure comes in. But we're still seeing occupancy gains along the way. So just talking to owners about what they're seeing and what they're experiencing and their ability to set their rates multiple times a day using our new tools, we feel really confident about the strength of our rate setting as we move into the second half of the year here.

Yes. So the only thing I would add is more tactically speaking, when you take a look at Exhibit 5 in the release, you can see that, that average daily rate increase is pretty consistent across the board. So every single brand was pretty much -- pretty close to that, at least mid-single digits, if not higher. So obviously, we're seeing the tailwind on the revenue-intense unit growth. And when you apply that multiplier, the broader unit growth implied is more like a 3% to 4% for the entire portfolio. Then on top of that, you see pretty consistently across the board those average daily rate gains. So you see how that 9.3% breaks out by brand in that Exhibit 5.

The next question comes from Robin Farley with UBS.

I just wanted to -- I know there were a lot of puts and takes with the unit growth. You mentioned that the deletions will kind of go back to a more normal level. And I understand the growth is focused on the extended-stay and upscale segments. But if you net together that and the economy segment and kind of maybe not excluding anything in either period, but just like looking on a company-wide basis, where will units in '22 be versus '21? Is it flat or maybe slightly down a little bit? Just trying to back into that number.

Robin, I would say it's probably close to flat or slightly positive, candidly. Again, when you take a look at that revenue-intense unit growth, I would say that 1% to 2% that we mentioned on the call. I think your best way to model the brands would be to consider what the unit growth was for that portfolio in 2021, if not marginally better year-over-year. And so I think that would -- when you put that through the model, I would think that it would imply somewhere around flat to slightly positive for the broader portfolio.

And what was the unit growth in economy in '21?

Down about 4% or so.

Okay. And then just lastly, I know you mentioned the new revenue management tool. And I think you said that was rolled out at the end of last summer. Was that sort of across the portfolio? I'm just thinking about if there was still -- if it took a couple of quarters to roll out or when we would think about a full year of the full impact of that. Would that have been 12 months starting at the end of last summer? Or did it take a little while to roll out?

We started it, Robin, at the beginning of the summer, and we were rolling out probably a couple of hundred hotels per week. And I would say, by the end of the summer, we had 5,000 of our 6,000 hotels on the system by the end of the summer. So you can kind of look at it that way. The hotels that are not on it yet are extended-stay brands. We're working on that solution as we speak. And then for our economy hotels, they have the ability to opt in to whether or not to use the system. And I think about 1/3 do opt in. And I would guess after last week's convention, when they talk to other owners who are really benefiting from the system, we're going to see a higher uptake from owners who can opt in. For the rest of our brands, it's a mandatory requirement, and our owners are really pleased with the results.

And do you get a greater percent of revenue from when it's booked? Is that why 2/3 of the economy wouldn't be opting in? Is it an incremental basis points of revenue?

I think a lot of the -- yes, no. It's more of -- a lot of -- some of these economy hotels are really small properties. They're in a market where they may be the only hotel in town. So they are the market. It's more of that type of owner where it just doesn't make sense for them. So that's why we didn't mandate it for our economy hotels. If you're an Econo Lodge that's in an urban market or you're in a secondary market, you're more likely to have enough competition and really want to be up-to-date on what's going on in the marketplace. And owners are seeing inflation. And the inflation is moving so quickly that if you're able to price, which we are multiple times a day, it's a real benefit to them to stay on top of what the consumer is willing to pay given that day of the week.

The next question comes from Patrick Scholes with Truist.

First question is regarding your balance sheet, obviously, arguably underlevered and potential capital allocation. I recall about, I think it's roughly 10 years ago, the last time the balance sheet was at these healthy levels, you folks paid out a sizable surprise special dividend. Would you rule that out as a possibility for the use of your balance sheet?

Yes. Sure, Patrick. Let me address that. I mean, I was here and part of that decision 10 years ago. I mean, I think what we look at on a constant basis is, do we have enough capital capacity to make the investments we want to make in our core business. If I look back at those decisions we made, I think you're right, it was about 10 years ago. It was, do we have enough balance sheet capacity to support the growth of Cambria? Do we have capacity to do the investments in our brands? Cleaning up Comfort Inn was just beginning to be considered. So those are the really first steps we take is what's the capital capacity we need to grow our business. We do like to have dry powder if there are opportunities that come around, and so that's also a second factor that drives that. And then at the end of the day, if those are met and we have excess capital capacity, that's how that decision was made 10 years ago. If I look at where we are today, and it was really interesting last week being with our owners because we're not just with the small business owners. We're with the vendor community, with a lot of our international partners from the Middle East and from Europe. There's a lot of change going on in the world. Interest rates are going up. Obviously, there's inflation, there's a war going on. There's a lot of, I think, potential for some opportunities for a business like ours that generates as much cash as we do. And so I think that's -- those are all the factors that we look at with regard to how we allocate our capital. And as we've discussed many times before, that hierarchy is really around investment in our core. And as Dom and I've talked about today, launching new brands and refreshing our prototypes, investing in our value proposition, the technology tools that we're developing, all of that is investment that makes sense for us. And we're a very long-term focused business. So these are investments that might pay off in that 5- to 10-year time horizon. So those are all the things that we consider. First, we do look opportunistically for acquisition opportunities, and then we have returned share -- capital to shareholders through our dividend policy and obviously through share repurchases. So that -- none of that capital allocation hierarchy is any different today but those are the factors we would consider as we think about the best use of the balance sheet.

Okay. Makes sense. And then a technical question on your guidance where you talked about RevPAR growth expectations versus 2019. As I look at your historical dollar RevPAR in 2019 from your earnings releases and also in FactSet, Bloomberg, I mean, it has it at $51.20. Just so we're modeling apples-to-apples, what is the correct base RevPAR from 2019 that we should be modeling that 10% to 13% around? Again, is $51.20 the right number to use?

Well, just give me 1 second on that, Patrick. We can see the exact number. But we did -- in terms of the RevPAR that we've listed in the exhibits of the press release, that's now on an apples-to-apples basis. So we did show a comparison of 2022 versus 2019. So that should be the RevPAR number that you're using that we have there in the exhibit. It's $40.29.

Okay. So $40.29 is the base number to grow that 10% to 13% off of, correct?

Correct. That's correct.

The next question comes from Eric Field with Jefferies.

This is Eric Field on for the team in Jefferies. We're curious about the Everhome Suites brand, which I believe I heard correctly, the signings are already at 30 hotels. If you can just elaborate maybe a little bit more on the strategy here. And maybe should we compare that to Cambria brand, which is certainly adding properties, but albeit maybe at a slightly slower pace and how you're contemplating growing that brand as well?

Sure. So what we looked at was our expertise in the mid-scale segment and our expertise to the extended-stay segment. And the real crossroads there led us to the conclusion that there really had not been a new brand launched in that segment at that price point in over 10 years. Secondly, we looked at the supply and demand factors where the supply is about -- I think it's 9% of the consumed or the available supply is actually purpose-built extended stay. And the consumer demand pre-pandemic for extended stay was at 18%. So you have a sort of 2:1 demand outpacing supply. So a real opportunity there from a macro level. Then we looked at the actual unit growth costs and what it costs to build a hotel. We work with a lot of our existing owners to really develop a prototype that can drive the types of GOP margins that we see in our other successful extended-stay brands. And that's really what, I think, is driving the owner interest is not just the macro trends, but we really have involved them in the development of Everhome. We are working with a number of multiunit developers, which is why we have such optimism that the amount of contracts we're going to award this year is significant. And as we mentioned on the call, we've already got 30 awarded to date. The first one opens here in a couple of months. And we're starting to get a lot more ground breaks as the brand really starts to gain traction.

Yes. And then the only thing I would say, technically speaking, is when you take a look at that pipeline, they are actual individual signed agreements. So those master development agreements -- and we mentioned this in the release, the master development agreements, which commit the developer to future development, those are not included in the pipeline. So if you actually do include those master development agreements, the pipeline would actually be even larger than what you see in the release.

The next question is a follow-up from Robin Farley with UBS.

Great. And I'm sorry if you made this in the introductory comments because there were overlapping calls, so I might have missed if you did. But in the past, you have commented on potential M&A or kind of segments of the market where you might look. Can you sort of give us your thoughts on any opportunities that -- are you still seeing opportunities potentially to do that? And anything around that?

Yes, Robin. I mean, we've always looked at tuck-in acquisitions. So we look for opportunities where we have white space in our portfolio. We've looked at opportunities on the international front, where direct franchising is a viable model. And then we have a litmus test. As I've said multiple times before, we look for opportunities where we can improve the return on investment for the franchisees and where we can grow the system size for the benefit of our shareholders. So those are the criteria that we use. And I would just say we are always looking at the marketplace to see what might fit into our portfolio. And that's sort of the mindset that we have around potential M&A.

Okay. Thank you.

And just as a follow-up on a previous question, Patrick's question on the RevPAR to model. The $40.29 was the RevPAR for Q1. So the right modeling assumption for full year is . So I just wanted to clarify that point as well. The was the Q1 figure.

This concludes our question-and-answer session. I would like to turn the conference back over to Pat Pacious, President and Chief Executive Officer, for any closing remarks.

Well, thank you, operator. And thanks again, everyone, for your time. Enjoy your summer, and we'll talk to you all again in August. Have a great day.

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