Choice Hotels International, Inc.

(NYSE:CHH) Q3 2020 Earnings Conference Call

November 5, 2020 10:00 AM ET

Company Participants

Allie Summers - IR

Patrick Pacious - CEO

Dom Dragisich - CFO

Conference Call Participants

Dori Kesten - Wells Fargo

Dany Asad - Bank of America

Michael Bellisario - Baird

Jared Shojaian - Wolfe Research

Robin Farley - UBS

David Katz - Jefferies

Thomas Allen - Morgan Stanley

Alton Stump - Longbow Research

Dan Wasiolek - Morningstar

Operator

Good day, ladies and gentlemen, and welcome to your Q3 2020 Choice Hotels
International, Inc. Earnings Conference Call. [Operator instructions]

At this time, it is my pleasure to turn the floor over to your host, Allie Summers.
Ma'am, the floor is yours.

Allie Summers

Good morning, and thank you for joining us today. Before we begin, we'd 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.

Moreover, we'd like to acknowledge that there continues to be significant

uncertainty as to the duration and severity of the impact of the COVID-19 pandemic
on our occupancy levels and future results. 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 first quarter
2020 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 third quarter and year-
to-date operating results and financial performance. They will be joined by Scott
Oaksmith, Senior Vice President, Real Estate & Finance. Following Pat and Dom's
remarks, we'll be glad to take your questions.

And with that, I will turn the call over to Pat.

Patrick Pacious

Thanks, Allie, and good morning, everyone. We're glad you could join us and hope
you are all well. Our company, like the hotel industry overall, continues to be
significantly impacted by the COVID-19 pandemic, which is far from over. The
response of our franchisees, their hotel staff and Choice associates has been
remarkable. To them, I say thank you for your incredible dedication to serving our
guests during these trying times.

Despite the pandemic, I'm pleased to report that Choice Hotels has continued to
drive results that significantly outperform the industry in the third quarter.
System-wide domestic RevPAR outperformed the industry by nearly 20 percentage
points, declining only 28.8% from the third quarter of 2019. All of our limited
service brands had significant RevPAR index gains against their local competitors.
We continued to grow our effective royalty rate, a reflection of the continuously
improving value proposition to our franchisees. And we grew our total system size,
especially in our more revenue intense, upscale, mid-scale and extended-stay
segments.

We attribute this success to Choice's key differentiators, including our

diversified brand portfolio, the geographic footprint of our domestic system, the
profile of our core customer and our franchise-focused business model. These core
strengths have positioned us well to capture the shifts in consumer demand that
occurred over the last 8 months. We believe that the strategy of growing our
limited service brands in the right segments and the right locations will allow us
to continue to increase our share of travel demand over the long term. And now that
we're entering the ninth month of the pandemic, we are beginning to see trends
emerge that are likely to have a long-term impact on the travel industry.

Let me begin with the trend of remote work and virtual learning. The significant
investment in remote access technology by businesses, schools and consumers is
creating more options in where and when traditional activities take place. In a
post-pandemic world, this may afford Americans even more flexibility in their
schedules to travel for leisure. For the last several years, we've seen a trend in
leisure travel demand spreading more evenly throughout the month of the year, which
we attribute in part to school schedules shifting over the years as well as the
increase in baby boomers retiring and having more time and disposable income to
travel. More employees can now work from anywhere with an Internet connection,
while their children attend virtual schooling. For the past 2 months, we saw
continued leisure demand extending into weekdays.

A second trend is the increase in road trips. which we're benefiting from with our
high concentration of hotels in drive-to markets. Road trips have been on the rise
for the past 5 years, thanks in part to low gas prices, which have been trending
down for several years. Consumers' appetite for road trips has only accelerated
since the onset of the pandemic as Americans are showing a clear preference for
trips that are closer to home. Destinations that may have been overlooked before
the onset of COVID-19 are getting fresh consideration. With over 4,000 domestic
hotels located within a mile of an interstate exit, our hotels are well positioned
to serve travelers as they hit the open road. And with over 2,000 domestic hotels
near beaches and national parks, our hotels are also located in the right markets
to capture growing demand from travelers who increasingly are looking to rediscover
the great American outdoors.

Another emerging trend is the economic disruption brought on by the pandemic and
its effect on consumers as the recovery takes place. We believe that in uncertain
times, as in previous down cycles, consumers will be looking for more moderately
priced limited service hotel offerings, presenting an opportunity for our portfolio
to capture this demand. Another anticipated economic effect of the pandemic is
higher relocation rates. As people shift jobs and industries, demand for longer-
term hotel stays rises, a trend we believe will benefit our brands, particularly
those in the moderately-priced extended-stay segment.

And finally, there are signs that consumers' risk tolerance is climbing, even
before a vaccine is available. According to a recent survey, the perception of
travel safety is up, and Americans likelihood to take a domestic leisure trip and
stay in a hotel during the next six months is the highest since mid-March. As a
result of these trends, we've seen a rise in our weekday occupancy quarter-over-
quarter, on top of the existing base of weekend leisure demand we've historically
enjoyed. In fact, our weekday RevPAR index is up eight percentage points year-over-
year in the third quarter.

Our year-over-year RevPAR change continued to improve month-over-month in the third

quarter. At this time, we remain optimistic that we will see sequential month-over-
month improvements related to our year-over-year RevPAR change. Our loyalty program
has remained a key driver of our business throughout the pandemic enhancing our
ability to drive franchisees top line revenue. We particularly benefited from
Choice Privileges Diamond Elite members, our best customers, who contributed an
even higher percentage of overall revenue year-to-date versus last year. We expect
this bedrock of loyalty business to deliver even higher value going forward as more
Americans return to travel and enrollments in our award-winning Choice Privileges
loyalty program continues to climb.

Our long-term strategy of growing the right brands in the right segments in the
right markets allow Choice brand hotels to continue to outperform the competition.
Throughout the third quarter, we generated significant month-over-month increases
in our proprietary revenue contribution to our hotels. More specifically, our
website contribution increased by 400 basis points and our loyalty contribution
increased by 120 basis points quarter-over-quarter. This has helped drive RevPAR
index share gains versus our local competitors across all location types as
reported by STR. For the past 34 weeks through October 31, we observed significant
RevPAR share gains against the competition. In the third quarter, all of our select
service brands achieved material RevPAR index gains versus their local competitors,
with each of our upscale and extended-stay brands experiencing share gains of over
10 percentage points. I'll now provide a brief update on our segments.

Our upscale portfolio once again achieved impressive year-over-year growth in the
third quarter, where we increased our domestic upscale room count by 33%. The
Ascend Hotel Collection is the industry's first and largest soft brand. Now with
nearly 300 hotels around the globe and fast approaching its 200th domestic
location, Ascend Hotels achieved the following performance in the third quarter:
RevPAR change outperformance by over 26 percentage points versus the upscale
segment; RevPAR share gains against local competitors of nearly 19 percentage
points; and average daily rate index gains of approximately nine percentage points.
In fact, for the past six months, Ascend has significantly outperformed the upscale
soft brands as well as the segment as a whole in terms of year-over-year RevPAR
change.

Our upscale Cambria Hotels brand continues to benefit from leisure travel demand,
thanks to being affiliated with our system, achieving RevPAR share gains versus
local competitors of nearly 15 percentage points in the third quarter. Our
extended-stay hotels are purpose-built for long-term guests. Choice Hotels brands
in this cycle-resilient segment continue to outperform in this unprecedented
environment, and our portfolio of over 420 extended-stay hotels grew 6% year-over-
year in the third quarter. Our WoodSpring Suites brand achieved an average
occupancy rate of 77% in the third quarter, and the brand's monthly occupancy
levels have remained north of 75% since the last week of June.

Our Suburban extended-stay brand experienced year-over-year occupancy gains in the

third quarter, further enhancing the brand's attractiveness to developers looking
for a smart, extended-stay conversion opportunity. At the same time, our MainStay
Suites mid-scale extended-stay brand gained more than 16 percentage points in
RevPAR index versus its local competitors in the third quarter. We remain
optimistic about the growth potential of our extended-stay portfolio whose pipeline
increased by 9% year-over-year in the third quarter. Year-to-date through
September, Choice has awarded over 40 extended-stay franchise agreements,
demonstrating sustained interest in both new construction and conversion
opportunities during a challenging time for the industry.

I'd now like to turn to our mid-scale segment, whose brands represent 2/3 of our
total domestic portfolio and over half of the franchise agreements executed year-
to-date. All of our select-service mid-scale brands achieved year-over-year RevPAR
index and average daily rate index gains versus their local competitors through the
third quarter. The Comfort brand captured RevPAR share gains of over 7 percentage
points versus local competitors in the third quarter. And Clarion Pointe, a
conversion brand extension of Clarion that launched less than 2 years ago, recently
opened its 20th hotel in the U.S. and now has over 50 hotels open or in the
pipeline, demonstrating its strong growth as the brand continues its coast-to-coast
expansion.

Demand for Choice's brands continues despite the challenging environment, aided by
our strong value proposition and recent outperformance. Developers choose our
brands as they seek to boost the value of their hotels. We have a conversion brand
to fit most developers' price points which has driven our development growth
through past downturns. Year-to-date, through the end of September, we have awarded
over 230 new domestic franchise agreements, nearly 70% of which were for conversion
hotels. In the third quarter alone, we executed over 80 domestic agreements, of
which nearly 3/4 were for conversions and over 40% of which were executed in the
month of September.

We have a long history of enhancing the diversity of our ownership base through our
one-of-a-kind emerging markets development team, which helps underrepresented
individuals such as minority and veteran entrepreneurs enter the rewarding business
of hotel franchising. Nearly 70% of our hotels have minority ownership. Despite the
pandemic, we have awarded and financially supported 17 franchise contracts with
black and Hispanic entrepreneurs year-to-date. Most recently, we entered into the
largest minority-owned multiunit franchise agreement in the program's history. Our
long-standing commitment to diversity and further details regarding our efforts to
improve the communities we serve will be outlined in our forthcoming ESG report.

While this year's challenges have been unique, the cyclical nature of our industry
is known. It's something our experienced and disciplined management team, many of
whom have led the company through previous down cycles, planned for. Our resilient
franchisee base also has deep experience leading their small businesses through
down cycles, and they are at the center of everything we do. Over the course of the
pandemic, we have supported our franchisees in a number of ways. First, by reducing
costs through extending brand program deadlines, implementing cost savings,
operational initiatives, reducing certain fixed fees, implementing a tailored fee
deferral program and modifying brand standards. Second, by capturing business
through our global sales efforts aimed at first responders and other essential
travel; a multichannel, multi-brand marketing campaign; and tailored promotional
programs.

Finally, by leveraging hygiene and infection prevention experts like Ecolab in

launching our Commitment to Clean initiative, helping to make sure their hotels are
clean and safe. We also have been advocating and will continue to advocate with
policymakers for additional relief measures aimed at assisting small businesses to
provide targeted help for the travel industry. Specifically, we've been urging
enactment of a second draw loan program for existing Paycheck Protection Program
borrowers, greater accommodation and more streamlining for borrowers to obtain
forgiveness and liability protections for hotel owners who comply with health and
safety protocols during the pandemic.

We've also called for additional stimulus to support American discretionary

spending, including in areas such as travel. In closing, Choice Hotels is
positioned to emerge from these trying times stronger just as we have before in our
80-year history. Our proven portfolio of well-segmented brands, geographic
footprint, and asset-light business model position us well to benefit from current
consumer trends as they continue to evolve.

I'll now invite our CFO to provide his update. Dom?

Dom Dragisich

Thanks, Pat, and good morning, everyone. I hope that you and your families are well
and healthy. Today, I'd like to provide additional insights around our third
quarter performance, update you on our balance sheet and liquidity, as well as our
approach to capital allocation, and finally, share our thoughts on the outlook for
the road ahead.

Let's now take a closer look at our results. For the third quarter of 2020, total
revenues, excluding marketing and reservation system fees, were $103.6 million.
Adjusted EBITDA totaled $74.9 million representing an adjusted EBITDA margin of
over 72% and adjusted earnings per share were $0.66. Our domestic systemwide RevPAR
for the third quarter outperformed the overall industry by nearly 20 percentage
points, declining only 28.8% from the same quarter of 2019. In addition, our
results exceeded the primary chain scale segments in which we compete as reported
by STR by six percentage points. We've long focused our brand strategy on driving
growth across the higher value and more revenue intense upscale, extended-stay and
mid-scale segments, and it's paying off. In the third quarter, all three segments
achieved year-over-year RevPAR outperformance against their respective industry
chain scales and gains versus their local competitors.

Specifically, the RevPAR change of our upscale portfolio exceeded that of the
overall segment by 14 percentage points, and our upscale portfolio outperformed its
local competitive set by over nine percentage points. With average domestic
systemwide occupancy rates of 74%, our extended-stay portfolio outperformed the
industry's RevPAR change by an impressive 40 percentage points beating its local
competitive set by 14 percentage points. And finally, RevPAR change for our mid-
scale portfolio exceeded the segment by nearly eight percentage points. This RevPAR
outperformance is the result of both continued occupancy gains and our franchisees'
ability to maintain rate. Our domestic systemwide occupancy rate has seen
improvements since the trough of 28% that occurred back in early April. Since the
week of June 21 through late October, our average weekly occupancy rates have
consistently exceeded 50%. In addition, we continue to see gains in our average
daily rate index, which was up 1.7 percentage points against local competitors in
the third quarter. Our owners have succeeded in maintaining rate integrity, thanks
to the support of our experienced revenue management consultants. These experts
have been advising our franchisees on the best use of tools to maximize their
pricing strategies and provide sophisticated market intelligence and channel
management. Despite the challenging environment, we expanded our system size,
growing the number of domestic hotels by 0.7% and rooms by 1.9% year-over-year.
Across our more revenue intense brands in the upscale, extended-stay and mid-scale
segments, we experienced even greater growth, increasing the number of hotels by
2.1% and rooms by 3.4% year-over-year.

We're especially pleased that Comfort, our flagship brand, continue to experience
positive unit and rooms growth in the third quarter following its brand
transformation. Comfort's development success, amid unprecedented circumstances, is
perhaps the clearest endorsement of the brand's value proposition. Comfort now
represents nearly 1/3 of our total domestic pipeline, which will fuel revenue
intense growth for years to come. In addition, the brand's conversion pipeline
increased by nearly 50% in the third quarter year-over-year. We are particularly
pleased with the company's performance-related to our effective royalty rate, which
is driven by the attractive value proposition we provide to our franchisees, their
continued desire to be affiliated with our strong brands and our current pipeline.
Our royalty rate remains a significant driver of our revenue growth. The company's
domestic effective royalty rate increased 7 basis points year-over-year to 4.91% in
the third quarter and has increased 9 basis points year-to-date compared to the
prior year. We expect to observe continued growth of this lever for the remainder
of the year as owners seek a shelter of a large proven franchisor that delivers
strong top line results to their hotels and helps them maximize their return on
investment.

I'd now like to say a few words about our balance sheet and capital allocation
strategy. Throughout the third quarter, we continue to focus on reducing
discretionary costs, exercising discipline around capital allocation and
effectively allocating resources to drive top line outperformance, all of which
allowed us to improve our cash position and further bolster our liquidity. In fact,
we reduced our net debt by approximately $50 million during the third quarter and
are proud to report cash flow from operations of $70 million for the 9 months ended
September 30, over $68 million of which was generated in the third quarter alone.
Our cash and liquidity profile remains exceptionally strong. At the end of the
third quarter, the company had over $790 million in cash and available borrowing
capacity through our revolving credit facility.

We remain on track to achieve our previously announced SG&A cost savings of nearly
25% in 2020 and expect to maintain a run rate of SG&A cost savings of approximately
15% in 2021 and beyond. The decisions we have made to better align our cost
structure in the post-pandemic environment position us well to capitalize on
opportunities as travel demand recovers, while allowing us to continue to invest
for the long term. Our capital allocation approach, defined by prudence and
discipline, remains key to our success. Choice's first priority in this area has
always been to increase organic growth by strategically investing back into the
business, and that won't change.

We are confident that our capacity and cash flows will allow us to not only weather
the storm but also increase the organic growth of our business by strategically
investing in growing our brands and system size, executing our technology road map
and delivering proprietary franchisee-facing tools that help drive top line
revenues. Based on our demonstrated track record of success in organic growth, we
believe these internal investments will drive attractive returns for years to come.
We will continue to evaluate other investments in capital return opportunities in
the context of developing market conditions and our overall capital allocation
strategy on a go-forward basis.

Before closing, I'd like to offer some thoughts on what lies ahead. The ultimate
and precise impact of the pandemic on our business for the remainder of 2020 and
beyond remains largely unknown, as is the exact trajectory of our industry's
recovery. While we are not issuing formal guidance today, we currently expect that
the impact of COVID-19 on the company's year-over-year RevPAR change will be less
significant for the fourth quarter versus the third quarter of this year. Our
sentiment is based on the following. First, we are observing continued resilience
of leisure demand and continue to drive relative outperformance versus the
industry.

Second, despite entering fall when demand is historically lower, we are pleased
that our fourth quarter domestic RevPAR change has continued the pattern of
sequential quarterly improvement through the week of October 24.

In fact, we expect our October 2020 RevPAR to decline by approximately 25% from the
same period of 2019. The final reason we are optimistic is the nature of the
current environment. Unlike the Great Recession, which was caused by underlying
fundamental economic problems, the current economic downturn is tied to the course
of the COVID-19 pandemic, which we believe could contribute to a faster recovery.
We will continue to evaluate the impact of COVID-19 across the business, and we'll
provide further updates in February during our next earnings call.

In closing, we are optimistic that Choice Hotels is well positioned to succeed for
the remainder of 2020 and beyond. We continue to benefit from our resilient,
primarily asset-light, franchise-focused business model, which has historically
delivered stable returns throughout economic cycles and provided a degree of
cushion from market risks. While we are not immune to the pressures faced by the
industry, we believe that our long-term focus and prudent, disciplined capital
allocation strategy will allow us to continue to capitalize on opportunities during
the recovery.

At this time, Pat and I would be happy to answer any questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dori Kesten with Wells Fargo.

Dori Kesten

Can you tell what percentage of your development pipeline currently has financing
in place? And then separately, what percentage of the pipeline may be open within
the next 2 years?

Dom Dragisich

Yes. When you take -- go ahead.

Patrick Pacious

Let me start with that, Dori. Just from a -- if you look at our pipeline, 25% of it
is conversion hotels. So those are -- that's not a situation where you're looking
at financing. I think when you look at how long those hotels, the conversion ones
in particular, take to open, it's usually a 3- to 6-month time frame. And we've
seen pretty normal, I would say, progression on the conversion side of the house.
The financing market, as I think you hear everybody is all aware of, is very
challenged. There are projects getting financed with strong sponsors in the right
market with the right brand. And the challenge for most developers right now is
understanding how to underwrite, and the same is true for lenders as well. I don't
know, Dom, you want to talk about the percentage of finance. It's not something
that we're familiar with as far as the total pipeline as some of these are projects
that come in. And once the agreement is signed, then the developer goes out and
looks for financing. So there is a time lag there involved.

Dom Dragisich

Yes. When you take a look at the historicals, Dori, as Pat explained, about 1/4 of
our pipeline is conversions and those are going to open really quickly. And 1 of
the reasons why you see your pipeline holding steady because as conversions come in
the door, you have about 70% to 75% of your development agreement today coming in
as conversions. So by the time the next quarter comes around, in many cases, those
hotels will actually open. So you're going to see probably a more stagnant pipeline
growth just due to the nature of conversions. Historically speaking, we've had
about anywhere from 20% to 25% of our pipeline that's also under construction or
have some of that financing secured. And so there's certainly a path to basically
imply almost anywhere from 40% to 50% of our pipeline is either under construction
or 1 of those conversions or has that financing secured.

Dori Kesten

Okay. And I'm sure it's a little bit sensitive, but where -- can you generalize
where your conversion activity is coming from?

Patrick Pacious

Yes. It's specific brands that are high on the conversion side. So in the upscale
segment, it's the Ascend Collection, which is nearly 100% conversion. Comfort is --
historically has been sort of 50-50 new construction and conversion. And then
Quality Inn, Clarion Pointe, Econo Lodge, Rodeway, Clarion, those are primarily
conversion brands. So the mix in our portfolio is a nice mix of conversion brands
versus new construction brands, which allows us during times like this to really
lean on that part of the portfolio for unit growth.

Dori Kesten

Right. I guess what I meant was, are you seeing it from independent properties? Or
is it from other brands that are converting to yours?

Patrick Pacious

It's both. We do look at that historically. We're not seeing any difference year-
over-year, whether it's coming from more other flags versus independents. Normally
-- and this occurred 10 years ago. We did see more independents seek out a brand.
And so I would expect during this downturn us to see that to start to pick up.
We're not seeing it yet in the numbers that it looks pretty familiar to us year-
over-year as far as that change goes.

Dom Dragisich

And the only thing I would add, Dori, is when you take a look at the upscale
segment in particular, Ascend, obviously, a lot of those conversions come from
independent boutique hotels just given the nature of the soft brand collection. The
further down market you go, you typically do see share shift from one competitor to
the other as well as some level of those independents convert again.

Dori Kesten

Okay. Thanks, guys.

Dom Dragisich

Thank you.

Operator

And our next question comes from Dany Asad with Bank of America. Please go ahead.

Dany Asad

Hi. Good morning, guys. Dom, it looks like you were free cash flow positive in the
quarter. So I guess my first question is how much of that is collection from
franchisees on just any of like relief that you've been giving them?

Dom Dragisich

Sure. So you're absolutely right, over $68 million of cash flow from operations. So
we feel very good about where we are. We also feel very good about the trends in
collections. Obviously, we had a very -- a stronger summer than we had previously
expected. And when you take a look at those franchisees who are essentially non-
payers, you're pretty much in the ballpark of 95% of your franchisers today are
actually paying their bills. So we're actually seeing that trend sequentially
increase month-over-month and quarter-over-quarter as well. In terms of your fee
deferral question, we had talked about early in the pandemic that we were looking
at anywhere from $10 million to $20 million. Last quarter, we guided to something
closer to $10 million to $15 million. We're actually looking like we're going to
come in at the low end of that range as well.

So call it about $10 million of deferrals. Again, back to that program, it was
very, very surgical, certainly targeted those customers who were struggling at
occupancy levels below breakevens, etc, versus peanut butter spread. So we feel
very good about the approach that we took there as well. And so obviously, Q4 tends
to be a slightly lower demand quarter, so we'll continue to monitor it. We still
feel very good about the fact that, again, it's not a waiver. It's a deferral that
would essentially be paid back over a three-year period. So you defer in the first
year and then pay it back over the next 2. And so again, lower end of that guidance
is well around $10 million.

Dany Asad

That's totally fair. And a good point on the deferral, not a waiver. But I guess
just the natural follow-up I have to ask is when you think of all the puts and
takes, so sequential improvement in RevPAR. It sounds like the working capital is
kind of in a good place here. How sustainable is this free cash flow generation
when you think of maybe 2, 3 quarters out? And then how does that play into your
capital allocation strategy in terms of buybacks and so on?

Dom Dragisich

Sure. So obviously, we're not issuing 2021 guidance, very dependent on the virus
trend and several other factors. So pretty tough to tell what 2021 is going to look
like. In the past, what we've talked about was our free cash flow would really
approximate your net income with a couple of other puts and takes, obviously, with
key-money amortization, et cetera. And so again, feeling very good about where we
sit today in just as an approximation going forward, Obviously, it depends on the
algorithm that you use. You could take your EBITDA less your interest, less your
taxes as well. And so that's -- we feel very good about the stabilized algos
holding steady.

Now in terms of capital allocation, I would say, again, feeling very good about our
balance sheet and the cash generation for the quarter, but going to invest first
and foremost in the business, and we talked about that in the prepared remarks.
Obviously, with downturns, you have an opportunity to invest organically. That's
going to hopefully lead to those outsized returns that we've seen in the past.
There could be market dislocations as well, so I can't comment on M&A in
particular. But given the fact that we're going to emerge from this thing stronger,
we're going to look first and foremost to invest organically, obviously, take a
look at inorganic opportunities out there. And then at that point in time,
depending on where the balance sheet sits and, obviously, the nature of the virus
itself, we'll revisit the share buybacks and/or dividends. But again, we've
suspended the dividend through at least this year. We'll provide more input during
the February call.

Operator

And our next question comes from Michael Bellisario with Baird.

Michael Bellisario

Just first question back to the development pipeline, a follow-up to Dori's

question. But if we go back to the prior downturn, the number of your new
construction hotels in the pipeline, it declined pretty significantly. Maybe could
you provide some insight as to why you think that will or won't happen again this
time? And maybe some context around what did happen 2008, 2009 versus what you're
seeing on the ground today would be helpful.

Patrick Pacious

Sure, Michael. I mean, I think if you look at the last downturn, that was a
financial crisis where the banking industry was frozen for a period of time, and
then it took a real long time for that to recover, which financing is a key driver
of new construction. I think the other big change is our portfolio today. We have
several additional new construction brands today compared to 10 years ago,
particularly in the extended-stay segment as well, which is doing very well
operationally, is very sought after as a development opportunity for hotel
developers in general. We're seeing a lot of, I would call, developers who just
focused on transient hotels showing a lot of interest in those brands right now.
And so that's an area today of strength for ours that we didn't have 10 years ago.
So I look at those 2 differences as reasons why we think our new construction
pipeline and our pipeline in general will probably be in a better condition during
this downturn than the one 10 years ago.

Michael Bellisario

Helpful. And then a separate topic. As you think about the path of recovery for
your non-royalty revenue line items, maybe how are you thinking about the rebound
there with -- in the other revenues line, in the procurement services? And would
you expect those revenues to get back to prior peak levels, maybe faster or slower
than the royalty fee outlook today?
Patrick Pacious

Sure. So a key driver of that is occupancy. If you don't -- if you're running at

50% occupancy, you're not using as many sheets and towels and soaps and the like.
There is some uptick with the Commitment to Clean, the need for additional cleaning
products, but it's not a meaningful number relative to what occupancy would drive.
So as occupancy builds and we have seen it continue to build month-over-month,
that's a key driver of what we do on the procurement services side. A lot of our
partnerships are also dependent on travel. So from the standpoint of more travelers
being out there as we head into 2021 and beyond, we do expect those to recover. But
those are the drivers of the procurement services revenue that I would look to.

Dom Dragisich

Yes. And then, Michael, I'd add just on the other revenue line item. Obviously, you
see that particular line item down pretty significantly, obviously, immaterial in
the grand scheme of things in terms of total volume. But those are things like your
QA, your brand noncompliance, some other initial fees obviously during the
pandemic. We've continued to work with our franchisees on either suspending some of
those programs or pushing -- obviously, pushing out some of the timing associated
with them, I should say. And so we do expect post pandemic or as the occupancy
rates continue to rise and our franchisees become healthier, you would actually see
those return back to historical levels as well.

Operator

And our next question comes from Jared Shojaian with Wolfe Research.

Jared Shojaian

So you continue to have impressive share gains. Can you tell us where the absolute
RevPAR index level now stands, above 100%, below 100% and maybe broken out by
segment?

Patrick Pacious

So I don't know that we have that handy. I would say it's increased up -- it's by
segment you would have to look at it. Maybe while I'm covering this at a high level
Dom can fill it in. But it's essentially increased by 10% and that we used to run
sort of in that high 80s, low 90s. So whether it's actually at 100% or above is
really segment dependent. I can tell you on the extended-stay segment, I know that
is north of 100% from that standpoint. I'm pretty sure that the mid-scale, the
upper mid-scale and the mid-scale are in that ballpark as well. So I don't know,
Dom, if you've got the specifics called out there.

Dom Dragisich

Yes. I mean it's obviously dependent by segment. I'm feeling very good, to Pat's
point. We've continued to take those share gains. When you take a look at your mid-
scale properties, Jared, you're pretty darn close to that 100% in terms of local
RevPAR index. Both of our upscale brands are well over 100% in terms of local
RevPAR index. You've got Cambria that's close to 110% or so, sounds pretty close to
that as well. And so again, where you see the lower RevPAR index, it's -- the only
brand is really our full-service Clarion brand in the mid-scale space. And
obviously, that's more dependent on group's bank worth, et cetera. And so again,
feeling very good about where we are getting close to that 100% or frankly, even
above 100% for most of those brands. Our extended-stay properties also above 100%
in terms of RevPAR index.
Jared Shojaian

That's really helpful. So I know you're seeing nice year-over-year gains, but is
that generally higher than where you were several years ago, maybe even 10 years
ago? As I start to think about really from an owner's perspective, I think the
benefit of a lot of the lower chain scale properties is on the cost side, but if
you can start to get some of the revenue premium benefits, I would think that could
have a little bit of a positive impact on development as well. So curious how that
sort of compares today versus where you were several years ago?

Patrick Pacious

Well, it's definitely improved. I mean, I think part of this is there are fewer
business travelers out there. So that's a smaller percentage of our business on a
normal basis. So we are benefiting relative to competitors by having that strong
leisure base that we have. But as we mentioned in the script, we're seeing a pickup
in weekday, which we do think maybe -- there may be some of this that is
sustainable once we get on to the other side of this pandemic. As people have more
flexibility in their schedules, they will take trips that extend into the weekday
and they're taking trips, leisure trips in months that historically were not as
strong on the leisure front. So I do think there's opportunity there. And you're
right, Jared, on the cost side of the house, particularly for our mid-scale and our
extended-stay brands, there is an ability there. That's just lower fixed costs. So
the variable costs, when occupancy flexes, the owner has a lot more opportunity to
maintain their operating margins as demand moves up and down.

Dom Dragisich

And then the only two points I was just going to say, Jared, as you look at the
proprietary channel contribution, you're continuing to see gains there. Obviously,
that has been really nice catalyst for some of these RevPAR index gains and where
you're seeing additional gains, and we think it's going to be long term, is those
brands that have been refreshed like Comfort. In particular, I mentioned Comfort
was above that 100% in terms of RevPAR index. You combine some of those refresh --
the refreshed rooms, some of the transformation activities that we did for that
brand and then layer on new tools such as revenue management, loyalty program
enhancements, etc, we think that given where that brand sits today and, obviously,
a big chunk of our revenue right now that we'll be able to sustain some of those
RevPAR index trends that we've seen.

Jared Shojaian

Great. Thank you very much.

Dom Dragisich

Thank you.

Operator

And our next question comes from Robin Farley with UBS. Please go ahead.

Robin Farley

Great. Thank you. I mean the business model is so resilient in this environment. I
guess I'm just thinking about the decrease in franchise agreements year-to-date.
Because I know any one quarter that can always be lumpy. But kind of looking at
that year-to-date down 38%, even with conversions making up a slightly higher
percent, it seems like the absolute number of conversions is down as well versus
last year. And I guess just how should we think about that? Because it seems like
conversions would be up in this environment. And so just wondering why we may not
be seeing that, even though they're -- again, they're higher as a percent of the
pipeline, but the new franchise agreements decline is more than that gain. So just
how should we think about that? Thanks.

Patrick Pacious

Yes, Robin, I think we're in the middle of this inflection point. So it's very
early on. If you look at the second quarter, what owners were doing was preserving
capital and preserving cash. And if you're going to convert your hotel, it does
cost money to do that. And so while owners may be thinking about it, they were
probably at a point where they're saying, "Well, let me get through the summer
months. Let me see how Q3 looks." As you know, most of our development opportunity
occurs in the fourth quarter. And so that is -- those are months to come. We'll see
that in the next 2 months here. And so I think that's part of it. We do believe, as
you get into this longer term, we get into 2021 and owners have sort of figured out
how to weather the worst of the storm, and they are back in a place where they have
the money to convert their hotels, that, that will be a driver of this in the
medium term.

Dom Dragisich

Yes, Robin, the only thing I would add there, to Pat's point, it sometimes takes a
few quarters even in a -- seems in a business-as-usual environment for that owner
to make the decision to switch. The other point that I would make is when you take
a look at the 2019 stats, even on the conversion side of the house in a business-
as-usual environment is a really tough comp. 2019 was a near record year for us and
our development team. And so when you take a look at that, especially where we're
sitting just competitively speaking, feeling very good about the fact that we've
seen the development results that we have today. And obviously, Q4 tends to be the
highest development quarter for us, and we still feel pretty confident that, that
will be the case this year. Obviously, we're going to continue to work with our
franchisees in terms of where they are. But then other franchisees and other
brands, obviously, may need that quarter or 2 quarters to make that switch over.

Robin Farley

And can you give us some color on kind of how system removals are trending? And I'm
just thinking about what -- between those 2 factors, whether we should be just kind
of prepared for '21 unit growth maybe to be negative or not to be positive, just
because of this maybe like air pocket being created that was created kind of
earlier this year?

Patrick Pacious

Yes. So almost all of our brands are at or below our forecasted terminations. Where
the terminations are really coming from, Robin, it's not the economy segment. And
so that's really the important point to take away from the prepared remarks, in
particular, when you look at where the net unit growth is coming from. That's
something that I shared on the last call, but the net unit growth is coming from
brands that are typically anywhere from 3, in some cases, greater than 6 or 7x more
revenue intense than the economy segment. So the vast majority of the churn is
coming from a Castlereagh and Rodeway, obviously, the nature of the contract, the
nature of the economy segment. Certainly, in terms of our focused brands, mid-
scale, extended-stay and upscale, we still do expect to see that unit growth
continue.
Robin Farley

So on a combined basis, how would you -- how does '21 look like it may be given all
those factors?

Patrick Pacious

Yes. Unfortunately, we're not going to be giving 2021 guidance at this point,
Robin. But what I can tell you is you're seeing the trends today and you're seeing
the trends continue, especially in some of those focus segments.

Operator

And our next question comes from David Katz with Jefferies.

David Katz

Congrats on the quarter. As we move around in our travels, we happen upon data
points and whether those are within your purview or not, around loan distress,
right, and franchisee distress, et cetera. Can you just give us some color around
what you're seeing within your population and their sort of durability from now to
12 months from now or so?

Patrick Pacious

Sure. I mean, I think if you look at our portfolio, I mean, on average, the
franchisees do not lever their assets up very highly. So on average, they're
probably at about a 50% leverage. So they're not over levered and where their debt
service is a significant piece to this. I think, secondly, many of the owners we've
talked to, and we're still seeing just this broadly, they've been successful at
getting interest forbearance. A lot of our owners have relationships with community
banks that go back years. So there is a real helpful relationship on that side of
the house. So anecdotally, I mean we don't have a way of actually tracking this.
But anecdotally, what we're hearing is that our owners are working with their
lenders. But it's not as big of a component as it is when you move into that upper
upscale world where we don't play today. So that's a key factor here.

And the second piece of it is we've been running our portfolio at an occupancy
level for the most part that's significantly above breakeven. And so owners are
making money, and therefore, they're not falling into distress. So those are the
factors that I look at, David. And I think just from a -- when we're out talking to
owners, we have a sense of sort of where their pain points are. It's not in that
lender front at this point. Obviously, the longer this goes on, things may change
as we move into the future. But right now, we're feeling pretty good about the
health of our franchisee base.

David Katz

Got it. And apologies if you covered this already, but in terms of how we should
think about openings in the fourth quarter, have you said anything about that?

Patrick Pacious

We have not. And as you know, that's the quarter where a lot of that's happened. So
there's a lot of uncertainty around the next 2 months as far as what will happen.
And so therefore, we're being very cautious on trying to project on that number.
Operator

And our next question comes from Thomas Allen with Morgan Stanley.

Thomas Allen

Just 1 for me. So can you dive a little deeper into what gives you confidence 4Q
RevPAR will be better than 3Q? I feel like a number of your peers have come out to
suggest they'll be more similar. So I just want to understand kind of what's giving
you the confidence.

Patrick Pacious

Yes. Sure, Thomas. So we've -- as we said on the prepared remarks, the first month
came in at 25%, down relative to the third quarter, which was negative 28%. And if
you dial that back to Q2, that was negative 49%. So we're seeing quarter-over-
quarter and now month-over-month improvements. So that's 1 factor. The other factor
is, for us, traditionally, Q4 is a month where there's just lower demand out there
in general. There is more business travel out there in the fourth quarter,
historically, for us, and we are seeing continued volume year -- month-over-month
volume in business travelers that are out there. As you know, in our segment, it's
primarily construction, retail trade, and transportation segments right now that
we're seeing increase on the business travel side. So I think those factors lead us
to believe when we look at the month of November and December, that they will
continue the trend we've seen in RevPAR decline improvements month-over-month.

Thomas Allen

Okay. I mean, look, when I look at your weekly trend, it seems like they've stalled
out a bit. And then I guess the bigger question though is COVID cases are
increasing again in the U.S. Does it feel like that's having any impact on demand
level?

Patrick Pacious

With regard to the case counts, so we saw a pickup in case counts in the months of
July and August, and we did not see a correlation between that and bookings going
down. We actually saw bookings increase. So the two don't appear to be correlated.
And this is in specific areas of the country where the cases were rising. We
continue to see travelers build travel demand month-over-month. It's always hard to
know what the next two months or the next year is going to entail with regard to
the virus. But as I said, as we look back at the last eight or nine months, as case
spikes have gone in a higher direction. Other than that initial shock in March, we
haven't seen a correlation between that and travel demand.

Dom Dragisich

And then, Thomas, to your point on some of the stalled growth, I think you got to
look at it on a seasonally adjusted basis. The demand -- so a couple of things
there. When you take a look at some of the weeklies, which were down 27%,
obviously, there's some fluctuations there based on -- you'll see some pretty
dramatic improvements during weekend travel for us, obviously, just given the
leisure demand, etc. And so when you add the Friday and the Saturday, you probably
would expect to see some improvement. That's why we actually guided to the 25% for
October in particular. What we're seeing in October is much stronger than expected
in terms of seasonal trends.

Pat mentioned corporate side, but also on the leisure side, especially when you
look at the South -- in the South, it's had the strongest RevPAR growth among all
of our regions Q3 into October despite the recent elevation in virus cases. So I
wouldn't -- we're not sitting here saying, you can expect to see the improvements
in RevPAR looked like they did from Q2 to Q3. We just expect to see some level of
sequential RevPAR improvement from Q3 to Q4, and that's shown up in the 25% that
you see in October.

Thomas Allen

All really helpful color. Thank you.

Dom Dragisich

Thank you.

Operator

And next, we'll move to Alton Stump with Longbow Research. Please go ahead.

Alton Stump

Yes. Thank you. I think most of my questions have been answered, guys. I just
wanted to ask about kind of your mix of leisure versus business. How that trended
in 3Q versus 2Q? And then kind of looking forward, obviously, it's a hard question
because who knows what the world is going to look like over the next 12-plus
months, but kind of how you see that mix kind of trending over the course of 2021?

Patrick Pacious

Sure. So our traditional mix was sort of 70-30 leisure to business. What we've seen
in the third quarter was leisure at about 80%, 82%. So it is a higher portion of
the mix, even though the total demand is down. And as I said in our remarks, we are
seeing the extended trips where people are taking long weekends, we're seeing
actually more in our mix of stays north of 13 nights. So we are seeing some drivers
here that are a little different than what we've seen historically. And so the real
question is going to be, as the virus gets under control, as the country returns to
more of a normal travel pattern, will consumers have more flexibility with their --
with the offices they work in and with the schools that their children attend. And
that may allow more travelers to travel at different points of the year and also
different days of the week. And if that is, in fact, the case, then our locations
are really well suited to pick up some of that demand if that's what the future
starts to hold as people return to a more normal pattern of travel.

Alton Stump

Great. Makes sense. And then just a quick follow-up to that. As I kind of think
about your unit builds, is there any thought to kind of maybe shifting more towards
kind of the leisure market builds versus business going forward, given what may be
a question time until we see things get back to pre-COVID normal? Or is that just
too early yet to kind of make that call as you think about unit builds in general?

Patrick Pacious

Yes. I think if you look at our brands, for most of our new construction brands,
they work off a driver of both business and leisure travel. And that really depends
on the market that we put them into. I think some of the things that we have been
doing in the past couple of years, these dual brands, we have an extended-stay and
a transient hotel on the same piece of dirt, is really owners waking up to that
fact to tap into purpose-build rooms that are more suited for the different types
of demand drivers. So if you've got extended-stay and you've got business travel
and leisure travel, we are seeing some of that. I would say, if you look at our
extended-stay hotels, there is a significant contribution in those hotels that is
related to business travelers that are in a market for a long period of time. So
those -- and those we would expect to continue even if this shifts more to a
leisure travel demand.

On the leisure front, the points we made around why Ascend has done so well. A lot
of those are in their unique hotels. They're in markets that are travel to
destinations where the hotel itself may be the destination because of their
boutique or historic nature. And they're usually located in places where that type
of traveler is going to be headed. So those are the types of brands that I think
we'll see grow in this new environment. And we're already seeing some of that as we
talked about in our prepared remarks.

Operator

And our final question comes from Dan Wasiolek with Morningstar.

Dan Wasiolek

So you're having some strong success, obviously, with your focus on revenue intense
segments such as extended-stay, mid-scale, upscale. Just wondering if you could
comment maybe a little bit more on the economy scale and what you think might be
needed there to, I guess, lift the RevPAR index unit growth? Is it something that's
more of kind of a structural issue with that segment? Or is it something that maybe
it's just the brands might need a refresh? Just kind of wondering if you could
provide some color.

Patrick Pacious

Well, I think you have to look at the segment itself, Dan. I mean if you look at
the last -- really, the 9/11 recession, the segment really hasn't grown in the past
20 years and, in fact, has started to shrink. So there's just less supply out
there. There's a lot of that product that is exterior quarter. It's old. And so
it's just a -- it's a more challenging environment if you wanted to do a brand
refresh in that segment.

Secondly, I would say that the -- if you look at our Rodeway brand, in particular,
those are shorter-term contracts. And so owners come in, look at the -- try us out,
if you will, and they have the ability to -- if they feel like they can do better
on their own as an independent, they have the ability to move out of that brand
more easily. And so I think those are some of the drivers of the turnover in that
segment. It's a segment where the franchise fees because of the average daily rate
that they charge are not that significant of a portion of their P&L. But those are
some of the drivers, I think, that as those owners move in and out, they have the
ability to shift contracts at an earlier point in time than are relevant.

Dan Wasiolek

Okay. And do you think that the segment hasn't seen
because maybe it was oversupplied at one point? And
that -- maybe that's kind of more normalized? Or do
the next 5 years kind of continuing as it maybe has
kind of a supply-demand characteristic?
much growth over the 20 years
the supply-demand balance, is
you kind of see this segment as
been the last 20 years from

Patrick Pacious
I would say it's probably going to continue the trend that's been on for some of
the factors that are going on in the economy and just the age of the product. I
would say, though, that the WoodSpring brand that we have is actually, I think, the
only new construction brand in the economy segment, and that is growing
significantly as owners who are looking to build in that rate tier for extended-
stay, it makes a lot of sense because that's really where that model works. But
other than the economy extended-stay segment, there's not much new construction
going on in the economy segment.

Dan Wasiolek

Congrats on a solid quarter.

Operator

And that does conclude our question-and-answer session for today. I'd like to turn
the floor back over to Pat Pacious for any closing remarks.

Patrick Pacious

Thank you, operator, and thanks again, everyone, for your time. As you heard today,
Choice Hotels continued to drive results that significantly outperformed the
industry, and we're positioned to emerge stronger from these trying times. So I
hope all of you stay safe and healthy, and we'll talk to you again in the new year.
Take care.

Operator

And that does conclude today's conference call. We appreciate your participation.
You may disconnect your lines at this time, and have a great day.