Choice Hotels International Inc

NYSE:CHH

Earnings Call Analysis

Strong Q2 for Choice Hotels with Promising Growth Prospects

In Q2 2024, Choice Hotels reported a 14% rise in revenues to $258.9 million and a 6% increase in adjusted EBITDA to $161.7 million, driven by the Radisson Americas portfolio integration and stronger royalty rates. Domestic unit growth was 1%, with an 11% pipeline increase. For 2024, the company targets 2% unit growth and raised its adjusted EPS guidance to $6.40-$6.65. Internationally, room counts tripled, aided by new agreements in France and Japan. Despite a modest RevPAR guidance reduction to -1.5% to -3.5% for 2024, effective cost management and higher ancillary revenues ensured financial stability and ongoing shareholder returns.

Strong Revenue Growth and Record Earnings

In the second quarter of 2024, the company's revenues, excluding reimbursable revenue from franchised and managed properties, increased by 14% to $258.9 million. Adjusted EBITDA grew 6% to a record $161.7 million, while adjusted earnings per share reached a record high of $1.84, marking a 5% increase year-over-year.

Key Levers for Franchise Fee Growth

The company achieved domestic unit growth of 1% year-over-year in revenue-intense segments such as upscale, extended-stay, and mid-scale portfolios. The domestic pipeline expanded by 11% year-over-year, setting the company on track to achieve its full-year growth target of approximately 2%. Additionally, domestic franchise agreements for revenue intense brands increased by 8%, and hotel openings surged by 10% year-over-year, with 118 new hotels in the U.S.

Expansion of Upscale and Extended-Stay Brands

In the upscale segment, the domestic rooms pipeline nearly doubled year-over-year. The extended-stay unit system size grew by 14% year-over-year, with a long-term average annual growth target of 15%. The mid-scale portfolio also saw a 27% increase in domestic franchise agreements, and the pipeline reached over 23,000 rooms. The effective royalty rate increased by 5 basis points to over 5% year-over-year, generating approximately $5 million in incremental royalties annually.

RevPAR Performance and International Expansion

RevPAR growth accelerated by 540 basis points sequentially. Compared to pre-pandemic levels, the company increased RevPAR by 11% and improved average daily rates by 15.1%. The international portfolio grew, with a notable agreement involving over 4,000 rooms in France and 2,200 rooms in Japan. The company's global pipeline now stands at approximately 115,000 rooms, a 22% increase year-over-year.

Financial Health and Capital Allocation

The company generated nearly $114 million in operating cash flow in the first half of 2024. Year-to-date through July, $347 million was returned to shareholders, including $43 million in cash dividends and $304 million in share repurchases. The company also closed a $600 million 10-year senior unsecured notes offering, reducing the cost of borrowings. With total available liquidity of approximately $530 million, the focus remains on reinvesting in growth and returning excess cash to shareholders.

Outlook and Guidance Revision

Despite moderating expectations for domestic RevPAR, the company expects adjusted EBITDA to grow by 9% at the midpoint of the outlook range for 2024. Full-year adjusted earnings per share guidance has been raised to $6.40 to $6.65. Long-term business and leisure trends remain favorable, especially with the increasing number of retirees, flexible work arrangements, and infrastructure rebuilding.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's Second Quarter 2024 Earnings Call. [Operator Instructions] I will now turn the conference over to Allie Summers, Investor Relations, Senior Director for Choice Hotels.

[Allie Summers, executive]

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 a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our second quarter 2024 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section.

This morning, Pat Pacious, President and Chief Executive Officer, will speak to our second quarter operating results. While Scott Oaksmith, Chief Financial Officer, who will discuss our financial performance and 2024 outlook. Following our prepared remarks, we'll be glad to answer your questions. And with that, I'll turn the call over to Pat.

[Patrick Pacious, executive]

Thank you, Allie, and good morning, everyone. We appreciate you taking the time to join us. I'm pleased to report that in the second quarter, Choice Hotels drove our adjusted EBITDA to $162 million, our adjusted EPS, 5% higher year-over-year, and raised our full year adjusted EPS guidance.

Over the past several years, we have created a stronger, more versatile company with multiple earnings drivers and a proven growth strategy. The increased versatility of our business model, combined with projected unit growth acceleration, provides us the confidence to achieve our expected adjusted EBITDA growth of 9% at the midpoint of our outlook range for 2024 even as the domestic RevPAR environment has started to normalize.

By increasing our system size, network of franchisee relationships and customer reach, we have significantly increased our future growth opportunities. Importantly, we continue to grow our portfolio of revenue-intense hotels with domestic franchise agreements, up 8% year-over-year. These agreements are expected to continue to fuel a significantly higher RevPAR premium in our pipeline compared to our existing base of hotels.

Our global pipeline of approximately 115,000 rooms set a record for the second quarter and represents a 22% increase year-over-year. We also accelerated the velocity of moving hotels from our pipeline to open hotels, executing 20% more global openings year-over-year in the second quarter.

At the same time, we expanded our international portfolio by increasing the number of rooms by 1.6%. As we had anticipated, we saw a sequential improvement in domestic RevPAR performance in the second quarter versus both the prior year and pre-pandemic levels.

In line with the industry, the pace of acceleration was slightly slower than we had previously expected. And therefore, our outlook for the remainder of the year has moderated. As the travel trends normalize when compared to 2019 levels, we expect our domestic RevPAR performance for the second half of the year to maintain the pace with the first 6 months of the year and exceed 2019 levels by approximately 10 percentage points at the midpoint of our guidance.

Importantly, long-term business and leisure trends remain favorable. Our proactive strategic investments and more versatile business model have meaningfully enhanced our company's growth profile, and we remain confident in our ability to deliver sustained growth. The successful execution of our strategy continues to drive strong earnings, and I'm pleased with the progress we have made on each of our key priorities during the second quarter.

In terms of driving more valuable growth, since we embarked on our distinct unit growth strategy of enhancing our franchise business with more revenue-intense hotels 5 years ago, we have expanded our mix of higher revenue-generating hotels by 6 percentage points. This mix shift now comprises 87% of our domestic hotel room portfolio, and we expect it to continue to increase in the coming years.

These new revenue-intense franchises are more accretive to our earnings and have resulted in an upscaling of our portfolio. Importantly, they are a key driver of future growth as hotels within a brand, on average, generate royalty revenue over 20% higher than hotels exiting the brand.

Our strategic focus on more revenue-intense hotels means that the pipeline continues to be a significantly higher value than the current hotel portfolio. This higher revenue contribution is driven by a few factors: one, the hotels in our domestic pipeline represent a RevPAR premium of more than 30% and compared to our existing portfolio; two, they have higher average effective royalty rates driven by our strengthened value proposition to franchisees; and three, they have, on average, more than 40% higher room count per hotel than our current domestic system.

With this positive momentum, we are very encouraged by our existing and future portfolio prospects. In the current hotel development environment, our core competency of a best-in-class hotel conversion capability, which moves projects rapidly through the pipeline is a key differentiator for winning new franchise agreements. In fact, of the domestic franchise agreements we executed for conversion hotels over the trailing 12 months, we opened 134 during the same period, a 14% increase over the same period of the prior year.

Our conversion competency also allows us to successfully and quickly launch new brands. This is evidenced by our recent relaunch of Park Inn by Radisson, an innovative conversion brand that delivers a premium value lodging option at a low affiliation cost. With a compelling value proposition relative to peer offerings, and a focus on ensuring the franchisees' success, we have had a strong initial reception.

Specifically, we have already executed 19 global franchise agreements, of which 5 are open across the U.S. and Canada as of the end of June. With a total addressable market of more than 20,000 potential conversion properties for this brand, we believe there is a meaningful opportunity for this offering in the coming years. We expect this conversion core competency to continue to be a key growth driver throughout this year.

In fact, as of the end of June, we grew our global rooms pipeline for conversion hotels by 5% quarter-over-quarter. In addition to the continued momentum in conversions, we are pleased to see increasing developer interest for our extended-stay and mid-scale new construction brands.

We are very proud that for the second year in a row, J.D. Power ranked our WoodSpring Suites brand, #1 in guest satisfaction among economy extended stay hotel brands. This strong guest reception is translating into increased interest from developers and attractive unit growth as the WoodSpring Suites brand grew nearly 10% in units year-over-year in the second quarter.

In fact, the WoodSpring Suites brand represents over 2/3 of all the rooms under construction in the economy Extended Stay segment. Additionally, we are seeing particularly strong traction with our newest extended stay brand, Everhome Suites, with 4 hotels now open and 65 domestic projects in the pipeline including over 20 under construction.

This ongoing demand reaffirms our belief that our strategic commitment and continued investments in this cycle resistant segment are driving a competitive advantage. In the mid-scale space, we increased the number of new construction projects in the pipeline for our Country Inn and Suites by Radisson brand by over 1,800 rooms.

While applications for new construction Comfort brand hotels grew 25% year-over-year in the second quarter. With construction costs starting to normalize, our footers poured for new hotels are higher than expected. If interest rate cuts occur in the near future as anticipated, we expect to return to a more robust new construction and transaction environment, which will translate to acceleration in our development pipeline.

Fueling our success is our ongoing commitment to strengthening the value proposition we provide to our franchise owners. This is supported by our investments in creating and continuing to enhance our best-in-class franchisee success system. The enhanced value proposition we continue to deliver is among the reasons why our existing owners choose to expand their hotel portfolio with Choice Hotels and contributes to our industry-leading voluntary franchisee retention rate.

Over the past 2 years, we have grown the direct online contribution to our franchisees by over 8% in the first half of the year. And for Radisson Americas hotels, we continue to drive higher traffic and conversion rates, which translates to lower customer acquisition costs and higher margins for our franchisees.

Specifically, since the digital integration back in August last year through June of this year, we drove an over 30% increase in reservations through our domestic direct online channels for the Radisson Americas brand year-over-year with particularly strong results for the country and Suites by Radisson brand, which grew by over 40%. Thanks to our portfolio being better positioned and the more compelling value we now offer to our guests, we have meaningfully grown the size of our rewards program.

Over the past 5 years, we added nearly 25 million Choice Privileges members, reaching over $66 million in total at quarter end. Specifically, subsequent to the Radisson Americas acquisition, our elevated hotel portfolio has enabled us to realize incremental organic growth of our rewards program, which was 9% higher this quarter. We also continued to enhance our rewards programs redemption offerings.

Our partnership with the world's largest independent hotel brand, preferred hotels and resorts, is now providing expanded opportunities for our rewards members to redeem their Choice Privileges points at a number of luxury domestic and international Virgin Hotels properties. Also, for the first time, we're offering our rewards members the ability to exchange their loyalty points for airline miles with several key international airlines, including Air France, KLM and Turkish Airlines.

Another benefit of our broader and higher-quality portfolio hotels is that it allows us to attract more blue-chip national travel brands, and it strengthens our existing strategic partnerships. As we announced last quarter, we are excited about the long-term prospects of our partnership with AAA. In particular, AAA members now have the opportunity to automatically earn a Choice Privileges gold status which expands our reward membership base with our most loyal travelers. Additionally, with more than 5,000 Choice Hotels within 2 minutes of a highway, we are ideally positioned to benefit from the ongoing affinity for Drive 2 vacations and the exposure to a $64 million AAA and its Canadian counterpart CAA member base.

Another tailwind is our recently revamped partnership with AARP, which allows us to better tap into an attractive demographic that represents over 70% of all wealth in the United States. Since the relaunch of our partnership in September last year through the end of June this year, we have driven a sevenfold increase in stays booked with the AARP rate.

I'd like to turn now to our international business, where we have more than doubled our international EBITDA over the past 2 years. We delivered another strong quarter with a 3% increase in RevPAR performance year-over-year, including a 5% growth in the EMEA region. At the same time, we expanded our international rooms portfolio by 1.6% year-over-year, highlighted by a twofold increase in openings.

And we continue to see a significant opportunity to further gain international market share in the coming years as evidenced by our rooms pipeline, which has more than tripled compared to the prior year. We are making progress in onboarding the more than 4,000 rooms in France under our franchise agreement with Xenitude residential hotels.

In fact, just in time for the Olympics, we opened a 400-plus room property at Paris Charles DeGaulle Airport. This strategic agreement will double our hotel footprint in the country. We're also pleased to have recently executed an agreement in Japan for over 2,200 rooms to be converted to our flagship Comfort brand portfolio.

We expect all of them to be onboarded in the next 2 months as inbound demand in Japan is at an all-time high. In closing, even in the normalizing domestic RevPAR environment with our multiple levers, we believe we have positioned choice to deliver sustained earnings growth and create long-term value.

We continue to generate attractive free cash flow annually, and our priority use of this capital is to reinvest in our organic growth. particularly in initiatives tied directly to driving the revenue intense growth of our brand portfolio while returning excess cash to shareholders. We have positioned the company to capitalize on favorable long-term trends for Pelling travel, including the increasing number of retirees, the continuation of flexible work arrangements, and the rebuilding of American manufacturing and infrastructure, all of which expand the pool of our target travelers.

We are confident that these long-term trends that favor our brands will allow us to attract and capture an even larger share of leisure and business travel demand and enable us to maximize growth opportunities well into the future. I'll now turn the call over to our CFO, Scott?

[Scott Oaksmith, executive]

Thanks, Pat, and good morning, everyone. Today, I will discuss our second quarter results, update you on our balance sheet and allocation of capital and comment on our outlook for the remainder of 2024. For second quarter 2024 compared to the same period of 2023, revenues, excluding reimbursable revenue from franchised and managed properties increased 14% to $258.9 million, and our adjusted EBITDA grew 6% to a record $161.7 million.

This was driven by a combination of the successful integration of the Radisson Americas portfolio, organic growth in more revenue intense segments and markets, strong effective royalty rate growth and the robust performance of our non-RevPAR-dependent programs. Our second quarter adjusted earnings per share also reached a record reporting $1.84 per share, a 5% increase year-over-year.

Let me first discuss our key levers for franchise fee growth, which include our unit growth, royalty rate and RevPAR performance. In terms of unit growth, our strategic goal has been to accelerate quality room growth across more revenue intense brands and markets while simultaneously growing our effective royalty rates, which ultimately results in an outsized increase in royalties.

For the second quarter, we reported domestic unit growth of 1% year-over-year across our more revenue intense, upscale, extended-stay and mid-scale portfolio. Supported by our expanded domestic pipeline, which has increased 11% year-over-year, we expect to see an acceleration of our growth for the remainder of the year and continue to anticipate achieving our full year growth target of approximately 2%.

At the same time, we increased the number of domestic franchise agreements for our revenue intense brands awarded in the second quarter by 8% over the prior year. We also executed new hotel openings at an impressive pace. Through June, we averaged over 4 openings per week in the U.S. This resulted in a 10% increase in domestic openings year-over-year with 118 hotel openings.

Our deliberate decisions and strategic investments in our franchisee tools, brand portfolio and platform capabilities are delivering solid results across our company. First, we strengthened our upscale franchise business. For the second quarter, we nearly doubled our upscale domestic rooms pipeline year-over-year. We expect to see continued strength in this segment over the coming years, fueled by strategic investments in transforming our upscale brands.

Second, we accelerated our growth across the extended-stay brands portfolio. For the second quarter, we grew our domestic extended-stay unit system size by 14% year-over-year and we remain on track to achieve a long-term average annual growth of 15%. And third, we continue to invest in our mid-scale portfolio.

For the second quarter, we increased the number of domestic franchise agreements for our mid-scale brands awarded by 27% year-over-year and opened 30 new domestic mid-scale hotels. Our overall domestic mid-scale rooms pipeline increased 7% quarter-over-quarter, reaching over 23,000 rooms. Our effective royalty rate also continues to be a significant source of revenue growth.

Our domestic system effective royalty rate for second quarter 2024 increased 5 basis points to over 5% year-over-year, representing approximately $5 million of incremental royalties on an annual basis. We continue to expect our full year effective royalty rate to increase in the mid-single digits, driving significant growth in our overall adjusted EBITDA.

This performance demonstrates the positive impact of our strategy to drive the growth of our revenue intense brand portfolio and our enhanced value proposition to franchise owners. We are optimistic about the continued upward trajectory of our effective royalty rate for years to come given that the contracts in our domestic pipeline have, on average, a 70 basis point higher effective royalty rate than those in our current portfolio of open hotels.

The third revenue lever I will discuss is our RevPAR performance. Our domestic RevPAR growth accelerated in the second quarter, improving 540 basis points sequentially for the portfolio and has meaningfully exceeded our prepandemic levels. In fact, compared to 2019, a the company increased RevPAR by 11%, improving average daily rates by 15.1% and achieving domestic occupancy levels of 96% of pre-pandemic performance.

While our second quarter domestic RevPAR accelerated from first quarter, the pace of acceleration was slower than anticipated. And as a result, our RevPAR was down 50 basis points year-over-year, reflecting a 10 basis point increase in our occupancy levels, offset by a 60 basis point decline in average daily rates.

For the second quarter, our overall domestic upscale portfolio delivered RevPAR growth led by our Radisson upscale brand increasing 12.2% year-over-year. Notably, our Radisson upscale brand outperformed STR's upscale segment by 9 percentage points and achieved RevPAR index share gains versus competitors.

Based on the recent trends of normalizing domestic travel and in line with the industry, we are lowering our U.S. RevPAR guidance and now anticipate full year domestic RevPAR to be in the range of negative 1.5% to negative 3.5%. We continue to build on the strong momentum of our platform business.

Our ancillary fees benefit from expanded offerings to our franchisees and guests, increased transaction volume with our qualified vendors and the broader reach of our initiatives. These fees more than doubled year-over-year in the second quarter. Continuing to expand our platform business and increase the number of products and services we offer is one of our key initiatives, and we believe that we can drive this strong revenue growth in the years ahead.

In terms of capital allocation, we will continue to prioritize investing in our growth while also returning capital to shareholders. Our well-positioned balance sheet and growth trajectory, coupled with the significant valuation discount, provide us a very retractive return opportunity through the reasons of shares.

During the 6 months ended June 30, 2024, we generated nearly $114 million in operating cash flow, inclusive of franchise agreement acquisition costs, providing significant cash flow to both invest in profitable growth opportunities and provide substantial returns to shareholders.

Year-to-date through July, we returned $347 million to shareholders, including approximately $43 million in cash dividends and over $304 million in share repurchases. We repurchased 2.5 million shares, representing over 5% of our outstanding share count and we had approximately 4.3 million shares remaining in our authorization as of the end of July.

In addition to the significant cash flows generated by our operating model, in July, we closed on a $600 million 10-year senior unsecured notes offering, which allowed us to pay down our $500 million term loan that was maturing at the end of the year and a portion of the borrowings on our revolving credit facility, reducing the effective cost of our borrowings.

Importantly, we achieved the tightest credit spread in the company's history and upside of our offering from $500 million to $600 million. The offering was oversubscribed by 4.6 times, a powerful endorsement of our business model and its performance. We further enhanced our liquidity by upsizing our revolving credit facility to $1 billion and extended our maturity date to 2029.

Subsequent to quarter end, we also fully divested the remainder of our holding in the Wyndham Hotels and Resorts. With a strong cash position and a total available liquidity of approximately $530 million at the end of the second quarter, our capital allocation priorities remain unchanged. We intend to build on our long record of delivering outsized value by accretively investing to further expand our business.

I'd like to now turn to our expectations for the remainder of the year. For the full year 2024, we are maintaining our adjusted EBITDA guidance while lowering RevPAR expectations, reflecting primarily disciplined discretionary investment spend as well as better-than-expected performance from our ancillary revenues. In addition, we are raising our adjusted earnings per share guidance to range between $6.40 and $6.65 per share, which is a 7% year-over-year growth at the midpoint to reflect our increased share repurchase activity and lower-than-expected interest expense.

Our ability to continue to deliver attractive earnings growth in light of the normalizing RevPAR environment demonstrates the increased versatility of our model. This outlook does not account for any M&A repurchase of the company's stock after July 31 or other capital markets activity. We remain confident in the long-term growth of our franchise business with continued organic growth across more revenue-intense hotels and markets, the incremental contribution from Adison Americas, robust effective royalty rate growth, continued earnings stream from our co-branded credit card, international business expansion and other factors.

We have made notable progress in executing on our strategic plan and creating a company with an expanded scale, a versatile model and a compelling value proposition for franchisees and guests. With this enhanced growth profile, we remain confident in our ability to deliver value for all of our stakeholders over time. At this time, Pat and I would be happy to answer any of your questions. Operator?

[Operator]

[Operator Instructions] Your first question is from Dany Asad from Bank of America.

[Dany Asad, analyst]

I just wanted to like start with the outlook change. So if we just look at your back half implied RevPAR based on the new guide, kind of implies a sequential downtick from the RevPAR growth we saw in Q2. So can we maybe just start by walking through the puts and takes of what got you to this new outlook, please?

[Patrick Pacious, executive]

Sure. Thanks, Danny. When you look at our second half of the year, we effectively looking it's going to be very similar to the first half. We're going to see sequential improvement from Q3 into Q4. But because we're seeing the travel behaviors in the first half of the year, it looks pretty similar to what we saw in 2019, our expectations for the second half of this year are pretty much influenced by that pattern. So when we step back and look at kind of the long-term trend of what performance has looked like since 2019, we're really right in line with that long-term historical trend of an average, call it, yearly RevPAR growth of between 2% and 3%. And that's really a factor of the normalization that we talked about in our remarks. The day of week travel that we're seeing over the last couple of years with the pandemic has sort of reverted back to the normalization that we saw in 2019. The booking window is closer in similar to what it looked like in 2019. And we're really seeing a reversion of locations where urban was sort of the last market to come back, and that has come back significantly. And that's just an area that we -- our portfolio under indexes. We're also seeing some different regions of the country that outperformed where we under index. So it's -- a lot of it is driven by what we saw in the first half of the year and the similarities we see to the 2019 travel patterns that consumers were exhibiting back then. And that's why we sort of described this as more of a normalization back to what it looked like prior to the pandemic and the sort of ups and downs we've seen over the subsequent years.

[Dany Asad, analyst]

Got it. And in your prepared remarks when you're talking about the -- like the international like conversion agreements that you've been signing. Can you maybe just dig on the unit economics there? And how do these contracts look relative to your existing contracts that you have?

[Patrick Pacious, executive]

Yes. So I think as you're well aware, we go to market with 2 models, a direct franchise business, which has really changed since the Radisson acquisition. We have a much larger footprint and a new capability in the Americas region. We have a direct business now in Canada, which we didn't have before. It was just a joint venture. We still have that as well. And then we have a much more robust direct franchise business and the rest of the Caribbean and Latin America. The unit growth that we're seeing there and then the unit growth that we mentioned in France, these are direct franchise markets that are driving some of that growth. We're also seeing in our MFAs, we mentioned the Japanese partnership, which has been a long-standing really successful partnership for us over the years, adding units there as well. So it's really coming in both flavors. But I would say the vast majority of the weight of that is coming in the direct markets.

[Dany Asad, analyst]

Got it. And just one last one follow-up. But can you just remind us of the current mix of your -- in your pipeline today, what's new build versus conversion?

[Patrick Pacious, executive]

Yes, I think that's really a pretty remarkable story. I mean if you look at our current pipeline, about 36% of the domestic pipeline is conversion. And that's really been the key driver during a time where interest rates are elevated. 80% of our openings this year year-to-date have been conversions, 84% of the agreements we sold in Q2 were for conversion. And when you look at the conversion agreements in mid-scale in particular, those agreements are up 31% year-to-date. So it's a pretty significant driver. And that's why we really want investors to understand the importance of velocity because a lot of these hotels, they might stay in the pipeline for 3 months because we have a pretty good capability of getting new conversion agreements into our pipeline and then ultimately open in a very, very quick period of time. We're seeing that also as we mentioned in the remarks in the park in by Radisson, with 5 open already when we effectively relaunched that in May. It's -- and that's 5 open in the quarter, by the way. It's really a reflection of the speed of the velocity we can push through there. The exciting thing about the remainder, the other 6% of the pipeline, the new construction is. As we said in our remarks, we are seeing some green shoots. We're seeing interest in getting new construction contracts. We're seeing construction costs starting to moderate. And the last piece that needs to fall into place is hotel financing, which is a function of interest rates coming down. So if we do see that in the coming months, we do expect we'll see that new construction pipeline start to move more rapidly than we've seen over the last 18 months.

[Operator]

Your next question is from Stephen Grambling from Morgan Stanley.

[Stephen Grambling, analyst]

I guess I'd love to have a little bit more color on free cash flow and how investors should be thinking about some of the discrete factors that might be impacting that in the first half. And then I guess an unrelated or maybe it is a related comment, it's just really around, I think you have the affiliate sales in your I guess, is there still capital that's outstanding that can be recycled or sold? And is that -- or should there be any expectation in the second half for that to come to fruition?

[Scott Oaksmith, executive]

Thanks, Stephen. I'll take that one. In terms of free cash flow, we were really pleased with what we saw in the second quarter. So our operating cash flow for the full year was about $114 million and a strong second quarter, delivering that. We still feel we're on target on our general free cash flow conversion that we talked about on our last call. Excluding key money, the way we measure it, which is operating cash flows, less our maintenance CapEx. The last couple of years, we've been about about 65%, and we're still targeting that for the full year of 2024. In terms of recyclable capital, when you do look at those numbers, we we had about $74 million gross investments in that during the quarter in terms of some of the hotel development we're doing, JV investments and mezzanine financing. And as you mentioned, we did recycle about just under $18 million for the sale of one of our joint venture interest. Currently, supporting both the Cambria and the Everhome program. We have about $0.5 billion outstanding in a mix of owned assets, joint ventures and loans. And as we have been doing since we started those programs, we are active recyclers of that capital. In fact, since we started the program, we've recycled over $300 million. So we're opportunistic in that recycling. We are not long-term holders of that real estate. Really, the idea of those programs is to accelerate the growth of our brands. And so as those opportunities come available, we will look to recycle that. Typically, our hold periods are 3 to 5 years. Some of them have been a little bit elongated given the impacts of the pandemic and some of the financing environment. But we are seeing, as Pat mentioned, some green shoots from the financing environment. And if that occurs, we'll find more opportunities to recycle that capital.

[Stephen Grambling, analyst]

And I think you touched on this a little bit, but as a follow-up, just to be clear, I guess, since free cash flow, you're excluding key money, what are you seeing in terms of key money, both for new development and conversion deals? And what's the expectation as we go forward throughout this year and maybe even looking longer term into next year?

[Patrick Pacious, executive]

Yes. As we've talked, our key money is up slightly year-over-year, but it's really more a reflection of where openings are. So our key money is up about 13% year-to-date and our openings are up pretty similar to that. So it's really a reflection of openings accelerating. We talked in our previous calls about our key money being slightly higher than where we were last year. Last year, we were about $90 million. We think it will be slightly over $100 million this year. We are seeing more opportunities as we talk to more developers as the development environment improves. So to the extent that there are opportunities in the back half of the year, that could go up. But at this point in time, we're still in line with the guidance we previously gave.

[Operator]

Your next question is from David Katz from Jefferies.

[David Katz, analyst]

I wanted to just go back to the international domestic split. And if you could color in just a little bit more around the sort of fee intensity or revenue intensity of international versus domestic becoming more important with international growth continually growing a bit more.

[Patrick Pacious, executive]

Yes. It's an area that we're -- I would just say we've renewed our focus post-Radisson acquisition, David, and it's -- I think the one thing that's a key differentiator in the revenue intensity of the international hotels versus domestic is the room size of what we have internationally. These are generally larger hotels. So that sort of revenue intensity, as we've mentioned before in our domestic business, and we talk about what's in the domestic pipeline, 40% higher rooms versus the current system base. we're definitely seeing that on the international front as well. So whether it's our direct markets or our master franchise markets, those hotels are generally sort of larger hotels the effective royalty rate really depends on direct market versus MFA. And I think the mix, Scott, is currently at...

[Scott Oaksmith, executive]

Yes. MFA is about -- now 2/3 of it is MFA and about 1/3 and it's direct for us. When you think about the effect of royalty rate versus direct -- when you think about the effective royalty rate on those direct markets, it's about a percentage or so below where we are in the U.S. I think the other thing I'll point out is when you look at the portfolio mix of where we are in terms of chain scale segments, the international portfolio is much heavier weighted to our revenue intense brands. So really about 96% of the portfolio is in the mid-scale and above.

[Operator]

Your next question is from Daniel Hogan from Bird.

[Unknown Analyst]

So I guess just looking into 2025, where the drivers there? I know it's early to talk about. But in terms of controllables besides changes in RevPAR what looking out, whether it be further Radisson Lyft, the credit card fees, where controllables are there that could be growth tailwinds?

[Patrick Pacious, executive]

Yes. I mean, as you mentioned, it's kind of early. We just kicked off our planning process here in the coming weeks. But when I look at the macro -- we did see in the U.S. GDP growth last quarter and RevPAR reflect -- usually has a bit of a kind of 6-month lag on that. So a positive GDP result in the second quarter generally translates into a healthy RevPAR environment. I think secondly, and it's so interesting because a lot of people focused on last week's job support. The really positive news in there was labor force participation rate went up. So again, this is reverting back to the norm. When we look at our consumers, when consumers have a job they tend to travel. They have more confidence to travel, sometimes they travel for business, but that definitely drives leisure travel. And labor force participation rate is 1 of the most highly correlated factors we look at with regard to RevPAR lift. So as we are thinking about 2025, as long as those trends continue, I do think you're going to continue to see the RevPAR and the travel environment continue to be supported.

[Unknown Analyst]

Great. And then just quickly then on the follow-up for 2Q, it looks like G&A was higher in the quarter adjusted G&A. Was there any onetime in that? Any drivers there?

[Scott Oaksmith, executive]

Yes. In terms of our SG&A, we're still on track for our full year target of being up about mid-single digits. In terms of year-over-year comps, we did have some credit recoveries in the prior year quarter, which made the SG&A look a little elevated quarter-over-quarter. We also during the second quarter have our annual franchisee convention. Costs were a little bit elevated on that, but they were offset by additional revenues during the quarter. So really just a comp issue. We still remain on track for our full year targets for SG&A.

[Operator]

Your next question is from Robin Farley from UBS Securities.

[Robin Farley, analyst]

I just wanted to understand a little bit better with the RevPAR guided down in EBITDA unchanged. You mentioned some non-RevPAR drivers. If you could give a little bit more color on that.

[Patrick Pacious, executive]

Sure, Robin. I'll start and then Scott can kind of fill in the color. I mean, effectively, a lot of this is really just a reflection of the versatility of the business model that we have created and its ability to drive growth. The key driver here is effectively the unit growth in this more revenue intense brands is accelerating. On top of that, you put the effective royalty rate growth that we talked about the robust performance of our non-RevPAR dependent programs. And then effectively, the outperformance that we're seeing or above expectation performance that we're seeing on the revenue synergies that we are realizing from the Radisson integration. And those things are really now embedded across the company. So they're showing up in our co-brand credit card. They're showing up in some of our strategic partnerships as well. So it's -- we've created a business that's effectively less reliant on U.S. RevPAR only. The business or the system mix from the standpoint of larger room count hotels, higher effective royalty rate hotels is really a factor that's continuing to sort of support the financial performance of the company and making us as a business less sensitive to U.S. RevPAR, it's still a key factor, but it's not as large of a factor as it has been in the past.

[David Katz, analyst]

Yes. Just to add to that, as Pat mentioned, we shared with our building blocks before how we got to that midpoint of our guidance of being around 9% growth. And really everything other than RevPAR has remained intact, and we've seen the acceleration, as Pat mentioned. So -- on the core royalty fees, we still are growing our effective royalty rate mid-single digits and our unit growth of 2%. So that's effectively driving about 3% of EBITDA growth. Our platform and procurement businesses on our core business continue, which this includes our co-branded credit card continue to perform well. That's producing about a 2% growth in EBITDA. Our international and owned hotel portfolio continues to be aligned with our original targets of growth about 2%. And really, where we've seen the outperformance to offset the RevPARs are is really the acquisition of Radisson -- it continues to provide significant growth to our EBITDA in our initial guidance, we had thought that, that would be about a $20 million lift, which is accretive to our EBITDA by about 4%. Given our success in unlocking some of those revenue synergies, we're now revising that estimate up to contributing about 6% EBITDA. So that outperformance there is offsetting anything on the RevPAR side.

[Robin Farley, analyst]

Great. That's very helpful. And then just one quick follow-up. Just looking at your -- the adjustments you made to get to adjusted EBITDA. Is there -- it looks like more franchise agreement acquisition costs like compared to last year. Is there anything you'd call out there is different than what you said about key money?

[Scott Oaksmith, executive]

No, it's really just a reflection, as we talked about since the pandemic, seeing openings return to more prepandemic levels as our key money is tied to opening of hotels. So as we see that increase, the key money gets issued to match the fee stream. So that amortization just follows the flow of he cash flow that's been going out.

[Operator]

Your next question is from Joe Greff from JPMorgan.

[Joseph Greff, analyst]

You'd mentioned that the reduction in RevPAR growth in the guidance and its impact on EBITDA was offset, I think you mentioned less discretionary investments and better ancillary revenues. I was hoping you can quantify that amount of incremental EBITDA benefit from those 2 items. And then how sustainable are those levels of lower investment spend and ancillary fee generation? How sustainable they are going into next year?

[Scott Oaksmith, executive]

Yes. So as I was just saying with Robin's question, so when you think about that, taking about 4% EBITDA growth on the Radisson piece, up to 6%, really that's about $1 million to $2 million there of what we're seeing better flow-through from being able to plug the Radion franchisees into our overall services and things like growing our co-branded credit card. So really, we should be able to continue to grow those revenue streams as we continue to grow the size of the portfolio. So I would expect those to kind of grow in line with both RevPAR and unit growth going forward. In terms of the discretionary investments, it is a minor amount of discretionary investments, as I mentioned, we're still on track for the mid-single digits. So given a little bit softer environment, we've trimmed a few discretionary investments we had if the market gets better in RevPAR returns, we can add those back. But really, the majority of it was the the better performance on the synergies we're seeing from the Radisson integration.

[Operator]

Your next question is from Patrick Scholes from Truist Securities.

[Charles Scholes, analyst]

I know in the past, you've talked about expectations for high single digits EBITDA growth, I believe, next year and possibly beyond. Still feel comfortable with that expectation?

[Patrick Pacious, executive]

Yes, Patrick, I think at this point, it's kind of too early to start talking about 2025. I think when we look at the back half of the year and the sort of uncertainties in the economy and uncertainties in the forecasting that you see from both economic forecasters, STR and the like. we kind of want to get a read into how the next 6 months is going to play out. I mentioned some of the key factors that will be drivers at the macro level of new development, particularly as everybody knows, it's interest rates will eventually lead to more hotel financing. But that's really the kind of key question, I think that we'll get a lot more clarity between now and the end of the third quarter.

[Charles Scholes, analyst]

Okay. I mean I guess a little bit of pushback. I mean, I understand that, but that was a forecast that you gave several quarters ago. I mean, do I sense that there's some hesitation in maintaining that?

[Patrick Pacious, executive]

No, I would just say we haven't -- I'm not sure we've given you 2025 before. But if you look at the long-term trends, as we've spoken about in the past, we do expect to kind of continue over time to deliver the type of EBITDA growth that we've delivered in the past, which has been that sort of high single digits. There have been years where we've taken investment years to kind of accelerate that growth and had double-digit EBITDA growth percentage years like we've done in the last couple of years as well. But our long-term strategy and when we look at our long-term strategic plan, it's expected to drive that sort of high single digits EBITDA growth in the coming years.

[Operator]

Your next question is from Brandt Montour from Mark

[Brandt Montour, analyst]

So one clarification in the actual 2Q report. If we look at the marketing and reservation system revenue and expenses, and see the delta there and then look at that line and the adjusted EBITDA walk, it applies like a $15 million good guy for the quarter, you had $12 million last quarter. So that step up, I'm assuming is what you're calling out in terms of the better ancillary, which is what improved. So I guess my question is, is that -- is that for all -- is that revenue ancillary services for all of your system? Or is that just specific to Radisson? Anything else you can tell us about that line because that is higher than I think you were looking for $10 million to $12 million for the rest of the year and that quarterly for that line.

[Scott Oaksmith, executive]

Yes. It's reflective of the entire system. But I would say the growth that we're seeing is plugging the Radisson hotels into that. Our system has outperformed where we had thought. So as we talked about in the previous calls, being able to integrate the Choice and Radisson platforms at the beginning of the fourth quarter of 2023. We had that opportunity to unlock some ancillary incremental revenue streams. And so as we kind of work those in and take a look at how those roll out, we have been able to drive more revenue than we expected. You have to -- it's not quite $15 million. There are a couple of puts and takes to that, but it is slightly higher than where we thought when we gave the guidance of $8 million to $10 million on the last quarter. So probably this quarter, we were closer to about $12 million on that. and we would expect something similar in the third quarter. And then we did start this program change in the fourth quarter of last year, so we'll then start lapping the comps in Q4.

[Brandt Montour, analyst]

Okay. That's super helpful. And then your share repurchases accelerated to a pretty meaningful number in the 2Q. Can we -- should we read into that as sort of like a signal that large M&A isn't something that's immediately available to you or -- and/or just a reflection of what is out there that you think you can go after on the M&A front?

[Patrick Pacious, executive]

I think it's a reflection of the attractiveness of the shares. Historically, and this continues to be our policy. We've been more opportunistic in share repurchases. We effectively look to buy in the shares when we see a market dislocation. And certainly, we believe that's been the case for the first 7 months of the year. I would say, from an M&A perspective, everything we look at comes with EBITDA, so its ability to be financed and is something that we're not looking to actually go out and purchase something that we then have to start from scratch and grow. I mean if you look at the 2 acquisitions we've done in the last 5 years, we've gotten them at very attractive prices, and we've certainly returned a lot to shareholders in significant growth as a result of both. But I'd look at the health of our balance sheet, as Scott mentioned and walked everybody through in his remarks, it puts us in a very healthy place in the kind of lower end of the 3 to 4 times, which gives us dry powder to do acquisitions. There's not a lot of transformational acquisitions out there that are in significant size, mostly what's out there are things we could either do on our balance sheet or do it in a very measured way with regard to leverage.

[Unknown Analyst]

So kind of intermediate-term question here as we're entering a more normalized RevPAR growth of about 2% to 3% historically. Anything different this cycle with the industry or your competitive positioning, U.S. infrastructure, your revenue intense mix that otherwise that we should think about from an intermediate term standpoint, like where maybe you guys might end up within that 2% to 3% range, positive drivers, maybe headwinds, just to think about...

[Patrick Pacious, executive]

Yes. I think one of the positive drivers and that's really reflected in sort of when you look at the revenue intensity of the brands that we're selling, it's beyond RevPAR. It's the effective royalty rate and the room counts in these hotels are driving higher royalties as a result. So I think you have to be thoughtful about kind of where the mix shift is going. It's why we're super excited and Scott walked through the numbers about the extended stay segment. There is a huge amount of supply and demand imbalance there where purpose-built supply is significantly under the demand for extended stay room nights.

Audio Gap]

brand is effectively 70% of the new construction that's going on across the industry in that economy extended-stay segment. So we feel really good about the value prop we have there, the brand we have there, which is a proven model, proven prototype, proven operating performance and proven exit for a developer. So those are the things that we see long-term trends continuing to fuel growth in extended-stay. And then secondly, upscale continues to be real positive trend line for us, both in our development pipeline and in our openings that we're seeing. And I think the Radisson acquisition is going to really help fuel that growth because those are brands that are sought after in the upscale segment and above. So we're -- as we look at sort of the next 5 years of growth, those 2 growth vectors in addition to our traditional core segment, give us a lot of confidence that we're really playing into the areas that are going to grow from a consumer demand perspective in the next 5 years.

[Operator]

Your next question is from Alex Brignall from Redburn.

[Alex Brignall, analyst]

Just 2 pieces. Firstly, on the Japan deal. Could you talk about the royalty rates you expect to get that broader international business if there's another thing special or different about it. And then in your comments, you talked about not doing some discretionary cost spends this year and that to help protect the EBITDA. Discretionary content are not doing the costs yet. So could you just talk about what they are and whether we should then think about them being part of the cost base for next year that sort of being pushed back.

[Scott Oaksmith, executive]

And on the Japan deal, those are part of our master franchise agreement. So there -- when we have those deals were the master franchise partnership works is we do sublicense our brands to local partners and then grow them. So the royalty rates will be slightly lower than where you would see both in the U.S. and the direct franchising market, but there are no cost to support it. So the EBITDA flow-through was quite higher. So thinking kind of the 1% to 2% range on the royalty rates for those hotels. But as I mentioned, no cost, so straight to an EBITDA flow-through on those. On the SG&A piece, really, it wasn't, as I mentioned earlier, a material from the SG&A, really just matching up some of the initiatives that we had to the environment we're in. As Pat mentioned, we do see some green shoots on new construction and I think that's coming up. That's probably a little bit longer to come back than we thought earlier in the year. So we just pared some of our spending related to when hotels are going to open. Our opportunities are to sell more deals. So I would say if there are more SG&A coming in the future period still be offset by incremental revenues. So shouldn't affect the margins of any incremental spend. But largely, we remain in in line with where our overall SG&A targets were for the year.

[Alex Brignall, analyst]

Okay. Maybe as a follow-up, the net unit growth or total reported basis was a little. I know that's not a focus of yours. But do you kind of have any idea of where that might end up and how we should model existing? And then part of that is obviously Radisson where the number of runs just drop down again quarter-on-quarter and what we should expect for that?

[Patrick Pacious, executive]

Yes, I'll start with Radisson then Scott can speak to the broader net unit growth trends. You look at Radisson, as we said on prior calls, we underwrote into the acquisition, a number of hotels that either were already on a path to terminate or ones that we looked at and said they don't fit with the brand anymore. What we've said in past calls and we continue to stick to that guidance. We expect the Radisson GreenSign brand to to return to unit growth next year and Country Suites, which is primarily a new construction brand to be a 2026 unit growth story. We're seeing the -- as we mentioned in our remarks, the applications and the interest in the brand and the value prop improvement, attracting developer interest. So we feel pretty good when we look at what's in our pipeline and what we're seeing from an application perspective to stick to those time frames for both the rates and Green side and the country and it SuiteBison brand. I also would include Park Inn, which is a Adison brand we acquired, and that's just in its early stages. And I think as we get to 2025 and start putting out guidance there, we'll have a clearer picture of what kind of contribution that brand can deliver on unit growth.

[Scott Oaksmith, executive]

In terms of the pace of overall net unit growth, we're right along the plan that we had for the year. We had expected more of our openings to come in the back half of the year. So we're still feeling very confident or approximately 2% of our revenue intense brands that we talked about. And as a reminder, those every 1% growth on those revenue intense brands is about $4.5 million of incremental royalties to us. So we're pleased with what we're seeing there in line with where we thought. But it was always a more back-end weighted of those openings throughout the year.

[Operator]

There are no further questions at this time. I will now hand the call back to Pat Pacious for the closing remarks.

[Patrick Pacious, executive]

Thank you, operator. Thanks again, everyone, for your time this morning. We'll talk to you again in November when we announce our third quarter results. Have a great rest of your day.

[Operator]

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines. Goodbye.