Choice Hotels International Inc

NYSE:CHH

Earnings Call Transcript 2019-Q3

[Operator]

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

[Oscar Oliveros, Director, IR]

Thank you, operator, and welcome, everyone. Before we begin, we would like to remind you that during this conference, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results. Actual results may differ materially from those indicated in forward-looking statements and you should consult the company's Form 10-K and other SEC filings for information about important risk factors affecting the company that you should consider.

These forward-looking statements speak as of today's date and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of the third quarter 2019 earnings press release, which is posted on our website at choicehotels.com, under the Investor Relations section.

This morning, Patrick Pacious, our President and Chief Executive Officer, will provide an overview of our third quarter 2019 operating results; Dominic Dragisich, our Chief Financial Officer, will then review our third quarter 2019 financial performance and provide an update on expectations for 2019. Following their remarks, we'll be happy to take your questions.

With that, I'll turn the call over to Pat.

[Patrick Pacious, President, CEO & Director]

Thanks, Oscar. Good morning, everyone, and thank you for joining our third quarter 2019 earnings call. We're pleased to report another quarter of strong financial performance and remain confident that our long-term growth strategy is working. This morning, we announced earnings per share that exceeded the top end of our previous guidance and raised our full year earnings per share and EBITDA guidance despite a softer RevPAR environment. Don will share more of our financial results in just a bit.

I'd like to begin this morning by highlighting our long-term strategy to grow in higher value segments and higher value geographic markets. We continue to strengthen our presence in the higher growth and more revenue-intense upscale, mid-scale and extended-stay segments where our brands reported a 3.1% increase in domestic unit growth as compared to the third quarter of 2018. Growth in these segments comes even as we transform Comfort, our largest brand. Our other midscale brands grew 4% in the quarter.

Simultaneously, we continue to expand our presence in the high-value upscale segment with 13% domestic rooms growth for the quarter. We also grew in the extended-stay segment, where we drove a 10% increase in open hotels in the third quarter. We are also awarding a greater share of franchise agreements in more revenue-intense markets. In fact, the anticipated total rooms revenue of a hotel in our pipeline today is over 40% higher than that of the average hotel in our system today. As we'll share this morning, Choice's upward momentum in high-value geographic markets and segments is paying off for our hotel owners and shareholders alike.

I'll begin with upscale, where we are successfully growing the Cambria Hotels brand. In the third quarter, we drove a 20% year-over-year increase in Cambria's room count by expanding the brand in major business hubs nationwide. For full year 2019, the brand is expected to break its record with the opening of a dozen Cambria hotels, which together represent nearly 1,900 upscale rooms. Through today, nine of these hotels have already opened in high-value markets, such as Boston, Houston, Dallas and Milwaukee. I'm also pleased to share that we expect Cambria will welcome the 50th hotel to its system just before Thanksgiving.

The brand recently received recognition from three important groups. The first is guests, who ranked Cambria in the highest tier for guest satisfaction among all upscale brands in the J.D. Power 2019 North America Hotel Guest Satisfaction Index. The second group Cambria is resonating with is corporate travel buyers, who recently rated Cambria a top brand for business travelers in Business Travel News. Notably, Cambria placed first in 7 of the 13 categories, the most of any upscale brand. In the third quarter, Cambria's business travel revenue grew by 17% year-over-year. Cambria's high placement is notable, considering it was the brand's first year included in each of these surveys.

The third group showing solid enthusiasm for Cambria is hotel developers. Thanks to the brand's robust pipeline of 79 hotels, nearly 1/3 of which are active construction projects, Cambria was also recognized as one of the top hotel brands expanding in North America by Top Hotel News. We now have upscale Cambria hotels open or under development in 34 of the top 50 RevPAR markets. These accolades are a welcome recognition of Choice's ability to grow our share of business travel by capturing more room nights from corporate accounts, while still maintaining our strength in leisure travel. Not only is the Cambria brand rapidly growing, it's also performing for owners. In the quarter, Cambria's same-store RevPAR grew 2% year-over-year, which beat its competitive set by 250 basis points. Cambria same-store hotels also grew RevPAR index by 100 basis points versus their local competitors in the third quarter year-over-year.

Our upscale soft brand, the Ascend Collection is also seeing success in helping drive our international growth. Year-to-date, we have opened nearly 60 Ascend hotels and surpassed 300 hotels in the brand's global system. This means Ascend remains the industry's largest soft brand by far. Ascend's global development pipeline is now over 100 hotels strong, which means we can expect it to fuel our upscale rooms growth well into the future. As we expand into upscale, our midscale core remains stronger than ever. This is led by our flagship Comfort brand, which is progressing with its system-wide transformation. Only 1/4 of the Comfort system will be undergoing renovation through the remainder of the year and 1/3 of the domestic Comfort system, or 530 hotels, has already installed new exterior signage with the modern brand identity, more than a year ahead of our deadline. Our owners are eager to signal to guests on the outside of the hotel that something is new on the inside.

Comfort hotels that completed their renovations by the end of the second quarter saw RevPAR growth of 50 basis points and outpaced the upper midscale chain scale by 60 basis points. Hotels that completed their renovations also increased their RevPAR share against competition in their local markets. Through the third quarter, Comfort new construction openings are already the highest of any comparable period in the last five years. During the fourth quarter, we expect to open one new construction Comfort hotel per week on average. Taken together, the Comfort hotels opening this year are expected to generate 10% higher total rooms revenue than the brand average.

Developer demand for Comfort also remains strong, with a domestic pipeline of nearly 280 hotels, 83% of which is for new construction hotels. Part of what's driving demand for Comfort is our proven value proposition. More than 65% of the rooms revenue delivered to Comfort hotels in the third quarter comes from choice-generated channels.

Further, Comfort isn't our only midscale brand seeing success. This quarter, Clarion Pointe celebrated its one year anniversary with the brand's debut hotel reporting stellar guest satisfaction ratings. Year-to-date, we have awarded 25 Clarion Pointe franchise agreements, bringing the number of Clarion Pointe hotels open or awaiting conversion to 45 hotels in cities like Louisville, Kentucky, Charleston, South Carolina and Salt Lake City.

We are pleased with our Sleep Inn midscale brand, which recently opened its 400th domestic hotel. In the third quarter, the Sleep Inn brand grew its system size by 2.6% and saw a 10% pipeline growth, bringing the total Sleep Inn domestic pipeline to 150 hotels.

I'd now like to turn to extended-stay, where we continue to drive growth. In the third quarter, we drove a 10% increase in the number of domestic extended-stay hotels bringing the total number to nearly 400 hotels open across the segment. We also grew the extended-stay development pipeline by 11% to over 250 hotels.

Like Cambria and Comfort, our new construction WoodSpring brand is another important lever to accelerate Choice's future revenue growth, due to higher room counts and occupancy rates, each WoodSpring commands higher revenue than the average Choice-branded hotel.

We're also seeing strong development demand for both WoodSpring and MainStay Suites whose domestic development pipelines increased by 9% and 18%, respectively, in the third quarter. We attribute this robust extended-stay development growth to several factors. Not only are our proven brands attracting developers and guests alike. The extended-stay segment is seen as cycle-resistant and a smart investment.

Finally, we believe our extended-stay growth is proof of hidden demand for long-term stay options in both the business and leisure markets. WoodSpring has fueled our growth in the Western United States, which has a dense concentration of high RevPAR markets and is a region where Choice brands have significant geographic growth opportunity.

For the third quarter of 2019, our total Western hotel pipeline grew by 11% year-over-year. This growth was led by California, where our pipeline increased by 23%.

I'd now like to say a few words about how Choice's powerful business delivery engine is paying off for our franchisees. Overall, our strong royalty rate growth and development pipeline are signs that Choice continues to deliver a strong value proposition to current and future hotel owners.

One important way we're helping boost their bottom line is by increasing the amount of business delivered to their hotels via our award-winning loyalty program. Choice Privileges now has over 43 million members who drove a 180-basis-point increase in our loyalty contribution in the third quarter. This loyalty growth suggests long-term revenue growth for our hotels and for Choice for several reasons. On average, Choice Privileges members book more stays and spend more over the year than non-members.

In closing, we continue to successfully execute on our strategy. This has led to strong third quarter results and positions Choice well for the future. As we look to the remainder of 2019 and beyond, we're committed to maintaining a long-term view and driving value for our hotel owners and shareholders. One way we'll achieve this goal is by growing in key segments and markets as we continue to improve the value proposition for our owners.

I'd now like to turn it over to our CFO, Dom Dragisich, who will share more specifics of our financial results. Dom?

[Dominic Dragisich, CFO]

Thanks, Pat, and good morning, everyone. We are happy to report our third quarter results, which built off the great progress we have made year-to-date. Our financial performance continues to be driven by the power of our franchise business model and growth across higher value segments, markets and brands. Overall, a combination of solid revenue growth and disciplined cost management resulted in a 7% increase in our adjusted EBITDA. Strong operational performance, coupled with the implementation of tax strategies that lowered our effective income tax rate, resulted in a 10% increase in our adjusted diluted earnings per share, which exceeded the top end of our guidance by $0.08 per share.

Our franchise business model provides multiple levers to drive top line revenue growth. These include increasing RevPAR, expanding the number and revenue intensity of the hotels in our system, improving the pricing of our franchise contracts and continuing to expand our procurement services revenue by providing more value-added programs to our platform of over 7,000 hotels and other travel partners. Overall, third quarter revenues grew by 10%, excluding marketing and reservation system fees to $153.7 million.

Let me drill down into our four revenue levers beginning with RevPAR. Overall travel demand during the third quarter with softer than industry expectations. As a result, our domestic system-wide RevPAR results for the third quarter fell below our expectations, but was generally in line with our competitive set, declining 70 basis points versus the third quarter of 2018.

Despite the softer RevPAR environment, we are pleased that the initiatives we have implemented to improve the guest experience at our hotels and the tools we provide to our franchisees to maximize their top line revenues are working. This is especially true for our renovated Comfort hotels, which experienced share gains from our competitors. As Pat mentioned, the positive 50 basis point RevPAR growth of our renovated Comfort hotels outperformed the upper mid-scale segment by 60 basis points. As guests continue to experience the Comfort portfolio and as the brand's future growth is fueled by our robust new construction pipeline, we are confident that the RevPAR performance for the Comfort brand and Choice will continue to strengthen in the long term.

Another long-term driver of performance is our increasing presence in the higher RevPAR upscale segment, led by the continued expansion of our Cambria brand. In the third quarter, we grew Cambria same-store RevPAR growth by 2%, which exceeded its competitive set by 250 basis points. We also increased the number of Cambria rooms by over 20% compared to the third quarter of 2018. This impressive performance was driven by the opening of five new Cambria hotels in the summer of 2019 alone. Even more impressive is that we continue to grow the brand in top RevPAR markets, which will be a catalyst for continued RevPAR expansion, both for Cambria and Choice, overall, in the long term.

We believe that our investment in Cambria will continue to accelerate the brand's development, increase the revenue intensity of our portfolio and drive strong financial performance.

In extended-stay, WoodSpring's third quarter RevPAR performance was strong with a 1.9% year-over-year increase. In fact, all three of our extended-stay brands: WoodSpring Suites, MainStay Suites and Suburban, have recorded positive RevPAR gains year-to-date.

Our second revenue lever is system size, which benefits not only from the absolute size of our portfolio, but also the revenue intensity of its hotels. Through the end of the third quarter, we opened 219 hotels in our domestic system, representing over 18,000 new rooms. This is an average of 84 rooms per property compared to our current system average of 77 rooms. We expect that the growth of our portfolio through our focus on the upscale and midscale segments, higher RevPAR locations and our expansion in the extended-stay segment with its larger average room counts will continue to accelerate our revenue growth at a faster pace than the size of our franchise system.

In the third quarter, the overall number of units in our domestic system increased by 1.8% to reach nearly 5,900 hotels. Furthermore, as Pat mentioned, we reported a 3.1% increase in domestic hotels for our upscale, midscale and extended-stay brands, which are more revenue intense and have been the focus of our investments. More specifically, growth across our key segments was highlighted by our midscale quality brand, which grew its hotels by over 4%; our extended-stay WoodSpring brand, which grew its hotels by approximately 8%; and our upscale brands, which experienced double-digit rooms growth. Ascend grew its room count by nearly 10%, while Cambria grew its room count by over 20%.

In addition, we continue to successfully execute against our international strategy and are pleased to report that the number of units and rooms opened outside of the U.S. increased by 4.1% and 4.5%, respectively, over the same period of the prior year.

The growth of our domestic development pipeline is fueled by developers, both existing and new, who recognize that their profitability is at the core of our operations. During the third quarter, we awarded 100 new domestic franchise agreements, increasing our overall domestic pipeline of hotels awaiting conversion, under construction or approved for development to 975 hotels at quarter end. We are pleased that our new construction development pipeline, which represents over 3/4 of our total pipeline increased 5% year-over-year to 741 hotels.

The hotels in our pipeline represent over 82,000 rooms or 18% of the current room count of our domestic system. Cambria is a great example of the success we're seeing with new construction. You heard about our year-to-date progress opening Cambria hotels. We're seeing even greater success in starting new projects. Since the beginning of 2019, we have broken ground on eight different properties and now have 25 active new construction Cambria projects.

Another development success story is our drive to open new construction Comfort properties in parallel to our efforts to refresh existing hotels. As Pat mentioned, our new construction properties are also more revenue intense. This is largely driven by hotels in higher RevPAR locations as well as improved franchise agreement terms.

Comfort and Cambria are leading the way in our high-quality system expansion. We're pleased with the quality of our overall unit growth and the impact the composition of our pipeline can have on future revenue. As such, we're maintaining our net domestic unit growth guidance of approximately 2% for full year 2019. Our third lever, the price of our franchise agreements, continues to be a significant driver of our revenue growth. In fact, our royalty rate grew by 12 basis points in the quarter and has increased 11 basis points year-to-date. Our ability to increase the effective royalty rate, while simultaneously increasing demand to enter the Choice system, is proof of our focus on maximizing franchisee profitability.

We remain confident in our value proposition and believe that we can simultaneously continue to increase both the size of our franchise system and pricing of our franchise agreements for the foreseeable future.

Based on our performance year-to-date, we have raised the lower end of our effective royalty rate guidance by 1 basis point and now anticipate it to increase between 9 and 12 basis points for full year 2019.

Our fourth key revenue driver is our ability to continue to provide value-added products and services to our platform of over 7,000 hotels and other travel partners. In the third quarter, our procurement services revenues increased 27% to $14.8 million compared to the same period of the prior year. Furthermore, we are optimistic that we can continue to drive outsized procurement services revenue growth over the next several years.

In closing, I'd like to comment on our commitment to making long-term investments in the business and return excess cash flow to drive shareholder returns and our earnings outlook for the remainder of the year. Year-to-date, we returned $81 million back to our shareholders. These returns came in the form of $36 million in cash dividends and $45 million in share repurchases. Additionally, our Board of Directors recently approved an increase in our share repurchase authorization by approximately 2.3 million shares, bringing the total program to 4 million shares authorized as of September 30, 2019. Our strong cash flows and debt capacity position us well to continue to grow the business and return excess cash flow to shareholders well into the future.

Finally, I will spend a minute on our earnings outlook for the remainder of the year. As a reminder, our guidance now includes the owned hotel operations we discussed with you last quarter. Our outlook assumes our fourth quarter domestic RevPAR to range between a decline of 2% and flat and full year domestic RevPAr to range between a decline of 1% and flat.

For the fourth quarter 2019, we expect adjusted diluted earnings per share to range between $0.82 per share and $0.86 per share. We expect our full year diluted adjusted earnings per share to now range between $4.21 and $4.27, representing an increase of $0.05 at the midpoint versus our previous guidance.

Lastly, we now expect our full year 2019 adjusted EBITDA to range between $362 million and $365 million, representing an increase of $3 million at the midpoint versus our previous guidance. Choice is in a strong position, and we remain optimistic that this performance will continue as we drive results through our long-term focus.

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

[Operator]

[Operator Instructions]. The first question today comes from Thomas Allen with Morgan Stanley.

[Thomas Allen, Morgan Stanley]

Good results in a tough market. So just talking about the market, overall. It felt like, this quarter, the economy to upscale chain scales, which you're focused on, really underperformed largely in upper upscale, much more than it has in prior quarters. What's going on there, do you think?

[Patrick Pacious, President, CEO & Director]

Thomas, I think that's a segment that depends a lot on corporate travel, which I think, as you look across the industry, that has softened somewhat. Where we're focused in Cambria is really in the upscale segment, not necessarily upper upscale. But I think it's a softening in that corporate travel environment. What's impressive for us or hopeful is what we're seeing on our Cambrias themselves, our ability to win more corporate account business, which has not been sort of where we've been focused in the past where, historically, we've been 2/3 leisure, 1/3 business. But when you look at the corporate accounts we're capturing in both Cambria and some of our other brands, we feel really positive. So while it is softening, we're taking share at a time when things are not growing, which is actually a strong indicator for us about the brand's strength.

[Dominic Dragisich, CFO]

I think one of the other things - sorry, Thomas. But I think one of the things - go ahead, please.

[Thomas Allen, Morgan Stanley]

No, I just had to clarify. I was saying this economy through upscale. So I wasn't calling out upscale, specifically. I was just saying, it seems like the lower to mid-tier underperforming the higher tier right now in the market. Is that a - that's what the data is kind of implying.

[Patrick Pacious, President, CEO & Director]

Yes, I think - yes, I think you're seeing a broader trend of light on both the leisure side and on corporate, so the industry itself is softening somewhat. I mean, when we look into our system, in particular, the softest area geographically is the sort of the oil and gas markets, think Texas, Oklahoma, Louisiana. That segment in and of itself, really, we would have been flat from a RevPAR perspective if you back out what's going on in those oil and gas markets. So there is some softening in that part of the country that I think is adding to - is a driver rather of the softening.

[Thomas Allen, Morgan Stanley]

Helpful. And then just my follow-up. You guys made a statement that you expect procurement revenues to continue to drive outsized growth over the next several years. Can you just remind us what's really driving them and what's driving your optimism there?

[Patrick Pacious, President, CEO & Director]

Yes, I think it's a number of things. One is the growth in the number of rooms, obviously, across our system. What's in there are - when our hotels buy everything from sheets and towels to soaps, those types of things. The other thing that we've added for our owners is access to things like cyber insurance and some other things that really discounted rates. So there's a lot of things that we can, through the scale purchasing that we as an organization can bring to our individual hotel owners, that's very attractive. So that's added to it as well. So it's both the system size growth and then also new programmatic things that our owners are asking for that we're able to bring to them at a discounted rate.

[Operator]

The next question comes from Shaun Kelley with Bank of America.

[Unidentified Analyst]

This is actually Danny [ph] on for Sean. My first question is on your SG&A. So it did come in a little bit lighter than what we were modeling for or we were looking for in the third quarter. And if you look at it kind of year-to-date, it's running sub-3% year-on-year. So if we like ex out all the onetime stuff, but what is like sustainable trajectory going forward? Is that something that we've seen so far? Is that normal?

[Dominic Dragisich, CFO]

Absolutely. So historically, we've grown our SG&A right around, call it, 4% to 5% mid-single digits or so. At the beginning of the year, we talked about guiding to a much higher SG&A growth as a result of some of the investments that we're making in the business. What we found is we were able to do a lot of those investments at a lower cost. Obviously, there's some timing implications as well. So we expect a slight tick up in Q4 in terms of our SG&A spend. But when we take a look at the full year, we're still looking at probably about a 4% growth year-over-year for the full year. We do anticipate that being our normal run rate as we progress into the future as well.

[Unidentified Analyst]

Yes. That's really helpful. And then just for my follow-up, how - then this is more on the royalty rate side. Maybe at a high level, are you guys able to maybe think about - or walk us through maybe like any of the big pluses and minuses looking to next year? Just the moving pieces between moving further up the chain scales, how new construction would impact? And then to the extent you're able to give any color, whether there's a meaningful difference between domestic royalty rates and international since international is actually - there is some traction there, too?

[Patrick Pacious, President, CEO & Director]

Yes. I think just to answer your second question, first, the international relative to what we do domestically. It's about half. So it's in the 4s domestically and in the 2s internationally. A lot of that is really a result of two things. One, master franchise agreements. And then also, in a lot of the countries where we do, do direct franchising, the franchise model there is not as robust, if you will, from a business delivery perspective. So it is a lower effective royalty rate marketplace.

As far as what will drive it in the future, I think what - you got to look at two things. One is the amount of new construction we are doing, where we're not discounting the effective royalty rate. If you look at brands like Cambria and Comfort, WoodSpring, a lot of our new construction brands. Those are the value proposition that owners are looking for, they're willing to pay full rates for those. So we're not having to discount to drive unit growth on that front. And I do think some of the discounting that had to be done way back during the downturn as those hotels ramp to full rates, you're seeing the burn off of those discounting that had to be done back 6, 7 years ago.

[Dominic Dragisich, CFO]

Yes. And we've run an analysis internally, if you think about just the long-term potential for that effective royalty rate line item, we basically say that there's probably about 70 basis points or so over the course of the long term, if every one of our contracts is actually issued at rack rate. And so we still do see, when you take a look at our historical averages of, call it, mid-single digits. We see that being sustainable over the course of the next several years.

[Operator]

The next question comes from David Katz with Jefferies.

[David Katz, Jefferies]

Nice quarter. I just wanted to go back to one thing that I wasn't quite sure about from the comments versus the text around Cambria's RevPAR. I know it's still relatively small. Was it plus 2% or was it - what - we were seeing minus 2%, we thought.

[Patrick Pacious, President, CEO & Director]

No. On a same-store basis, it's plus 2%, which when we look at the segment, it competes in, it's 250 basis points of bare where the segment came in. So that - because we've got hotels that are ramping, we wanted to look at same-store to provide an apples-to-apples.

[Dominic Dragisich, CFO]

It's a math equation, David, with how successful we've been in terms of opening new properties and those properties that open towards the tail end of last year as well. All of those hotels are in ramp so the RevPAR stats that we issue are on a portfolio basis versus a same-store basis.

[David Katz, Jefferies]

Right. And just more broadly speaking, you're obviously getting some solid momentum here. But just given the landscape out there, where, from our perspective, we see public companies putting up pretty strong unit growth across the board. And we always ask ourselves the question - or trained to ask ourselves the question, can everyone win here or someone has to lose? How should we think about that matter? Can everyone continue to add unit growth at the rate that they have?

[Patrick Pacious, President, CEO & Director]

It's interesting, David, I've got a couple of slides that I look at that came out of the hotel data conference a couple of months ago, that just talk about the 30-year trajectory of consumed room nights per capita across the U.S., and that number continues to accelerate. So if you look at the long-term trends, population growth, you look at the retiring baby boomers who are living longer, have more discretionary spend or spending it on travel, the long-term trends are for greater demand. And so when we look at that environment, there is an opportunity for a lot of companies to participate in this segment or in this industry. I think for us, in particular, the unit growth that we're looking at and the strategic segments that we're focused on are really those higher demand segments. The upscale limited service segment is where developers want to build and consumers, be they boomers, GenXers or Millennials want to stay. And so when we look at those demand and supply trends, those are positive trends for not just our brands, but for others in the industry. So we feel pretty confident about our ability to take share, but also as the pie itself is getting bigger for us to be successful on those segments.

[Operator]

The next question comes from Robin Farley with UBS.

[Robin Farley, UBS Investment Bank]

Great. First, I wanted to ask on your unit growth, which is unchanged for the year. Kind of implies that the fourth quarter would be the biggest increase, sequentially, in unit growth. And just wondering if there's any risk to that, given some other companies have talked about construction delays because of labor shortages. Just how comfortable you are that Q4 will sort of get you to the full year number?

[Dominic Dragisich, CFO]

So when you take a look at Q4, it's obviously our strongest quarter in terms of new openings. When we take a look at the pipeline, both in terms of the conversions as well as new constructions, we are confident in that approximately 2% guidance. Now a 5 or 10 hotel push into January could shift that 10 basis points either way. And so from that perspective, we expect to be pretty close to that 2% unit growth number.

The only other thing I would add is if you take a look at our rooms growth, in particular, we expect our rooms growth to actually outpace our unit growth this year, and this goes back to the prepared comments where growing in higher revenue segments, larger room counts, especially on the extended-stay side of the house. And so we do anticipate from a room's perspective, probably coming in slightly above that 2%, but units, we - best guess right now is approximately that 2% range.

[Robin Farley, UBS Investment Bank]

Okay, great. No, that's helpful. And then just wondering if there are any other ownership situations like the JV that you bought in those 4 units. When you look out and you're taking measures to grow the brands, are there other sort of temporary ownership situations like that, that you're considering?

[Patrick Pacious, President, CEO & Director]

So that joint venture was actually our largest from the standpoint of open hotels and assets. We don't have anything similar to that. We - from a development perspective, have, call it, a handful of joint ventures. We also put, obviously, key money out and are doing some lending. So from the standpoint of using multiple vehicles to grow the brand, we're going to continue that strategy. But we don't have anything from a joint venture partner that is of similar size.

[Dominic Dragisich, CFO]

Yes, Robin. And if you take a look - because we've gotten a couple of questions on this, so I think it's important to share it. When you take a look at that $555 million that's out there, that's not all key money and recyclable, call it a couple hundred million or so, that's really those owned assets that we talked about. Couple of hundred million are in the form of JV and loans, and then everything else, about $75 million or so, is key money, because it is a question, we've got in terms of that decomposition of that $555 million that's tagged towards Cambria.

[Robin Farley, UBS Investment Bank]

And then just last thing on that point. I think you - the way you described, you're willing to commit up to $725 million, so there's a little bit under $200 million left to go. Is there a time frame we should think about that being put to work by? Is that sort of like in the next 12 months, you'll have that full amount put to work or is it a longer term?

[Patrick Pacious, President, CEO & Director]

Yes, I think on the current pace we're at, you're probably looking at another two years is where we would expect to reach that ceiling. But keep in mind, there is the opportunity to recycle. And so it's a - while there is a ceiling there, this is not a buy-and-hold strategy. This is a recycle the capital in order to continue to grow the brand in the strategic markets that we're focused on.

[Dominic Dragisich, CFO]

So year-to-date, Robin, if you take a look at what we've put out in terms of capital and what we recycled back in, we've made about $90 million worth of investments. We've actually recouped $45 million from previous investments. So it's showing that, that recycling - those recycling efforts are already actually paying dividends, asset-light, hotel open and we're monetizing through a franchise fee.

[Operator]

The next question comes from Alton Stump with Longbow Research.

[Alton Stump, Longbow Research]

I just have two questions. First off, as you mentioned, if it were not for oil and gas, you have probably been flat in the quarter. Could you remind us kind of ballpark what percentage of your properties are in oil and gas markets? And secondly, as to your point about a breakout mix as you look at leisure versus high corporate travel, and just kind of look out 4 to 5 years in a row, what would be your ideal mix between those two versus where it is now?

[Patrick Pacious, President, CEO & Director]

It's about 7.5% of our inventory is sitting in the oil and gas markets. And on the business leisure travel, we're really looking at it more from a segment perspective. So as the upscale brands, both Cambria and Ascend, grow I would expect that to be 2/3 business, 1/3 leisure. Our Comfort brand were really targeted to be more of a 50-50. So when you think about those - the heaviness of those three brands, in particular, that will skew our segments in those particular brands more towards business travel. But that's - those are sort of our internal targets on what we're looking at from a brand perspective.

[Operator]

The next question comes from Jared Shojaian with Wolfe Research.

[Jared Shojaian, Wolfe Research]

So last year, at this time, you gave us some color on the forward year in terms of net unit growth, RevPAR and royalty rate. You touched on the royalty rate earlier in the Q&A, but anything you can share on early thoughts on 2020 for net units in RevPAR? And I guess, are the trends that you're seeing for this year, is that kind of a fair extrapolation into next year in terms of low single-digit net unit growth, flattish to down RevPAR? Is that kind of how you're thinking about next year?

[Patrick Pacious, President, CEO & Director]

Yes, I think there's a couple of factors that - I mean, obviously, the industry itself is on trend to continue to soften. But when I look at our brands and our performance, there's a couple of positives for us. The first is that Comfort renovations are really moving, as we talked about on the script from a headwind to a tailwind. We expect that to continue to accelerate into 2020. And then just across our system, we've been closing the gap against our segments. So from the standpoint of catching up to fair share of our segments, that gap has closed each quarter, and we expect that trend to continue. That's being really driven by a greater share of business travel, as I mentioned. And then there's also the revenue potential of hotels that we're opening in those higher RevPAR markets. So I do think there's opportunity for us to exceed or, at a minimum, meet where the industry is headed as we move in on RevPAR.

[Jared Shojaian, Wolfe Research]

Okay. And then, Pat, I think you gave some stats in the prepared remarks on the Comfort renovations, which I may have missed, but can you just give us an update on where you stand in that transformation? What percent of the hotels still need to be renovated? What's the time line for those renovations? And then you just mentioned that you expect to flip from a headwind to a tailwind on the RevPAR side. What quarter is that next year, if you had to pinpoint where you think you start to outperform the industry on RevPAR?

[Patrick Pacious, President, CEO & Director]

Yes, Jared. That occurred in Q3. So that occurred this quarter, which was our expectation at the beginning of the year. The first two quarters would be a headwind and it would flip to a tailwind in the second half of the year, so Q3 demonstrated that. Those hotels that finished the renovation in the second quarter had a 60-basis-point increase in RevPAR above the industry, so we feel really good about that.

The other question about how many are left to do, there's really about 25% that remain to be done in the fourth quarter. If you remember, the type of business we run, a lot of seasonality here. So owners waited to get through the summer. They don't want to renovate during the summer, which is their peak season. So there are some who schedule their renovations to begin in the late third quarter and into the fourth quarter. So we do expect those folks to get the bulk of that work done this year. And what we're seeing is the longer the renovations in place, that once the sign goes on, and then the ad campaign that we kicked off this summer to really introduce the brand to the customer, all of those are having a positive impact, both on overall RevPAR, but more importantly, at the local RevPAR index level as well. So the hotel owners are really seeing the benefit of the investment. And we, as a brand, are accelerating that through our additional advertising.

[Jared Shojaian, Wolfe Research]

Okay. So just to clarify then on that comment. Like I know the hotels under renovation, I think you called out the 50 basis points RevPAR growth, outperformed the industry by 60 bps. But in your entire portfolio overall, the minus 0.7% RevPAR contraction in the third quarter. Are you saying that, that number outperformed the industry that you gained RevPAR index share in the third quarter?

[Dominic Dragisich, CFO]

I think what I was saying was for Comfort, specifically, there were RevPAR index share gains for the entire portfolio, or for all intents and purposes, we track pretty close to the industry in terms of the comp set in terms of those segments in which we compete, and it's, call it, 10-basis-point gap against the industry. I think, more importantly, when you take a look at the Comfort renovations and the progress that we've made for the overall portfolio, for all intents and purposes, it was a net neutral in Q3. You were seeing a tailwind for the Comfort brand. As we head into next year, we expect the tailwind to accelerate and for it to become even a broader tailwind for the overall portfolio.

[Patrick Pacious, President, CEO & Director]

Yes, it's about 45% of our revenue is that brand, which is why it has such an outsized impact.

[Operator]

Next question comes from Joe Greff with JPMorgan.

[Richard Sunderland, JPMorgan Chase & Co.]

I'm Rick Sunderland for Joe. Just one question on the pipeline. The domestic pipeline of hotels grew on a year-over-year basis, but can you give color of the growth on a rooms basis, both on a year-over-year and a sequential basis, please?

[Dominic Dragisich, CFO]

So I think when you take a look - I don't have the data point right off hand, but when you take a look at the overall portfolio of Cambria, when you take a look at WoodSpring, it looks like it's around 10% or so higher than our historical averages in terms of room growth rate. Now, we're at 70 - our average room size in terms of those units that are in the pipeline, it's about 77 versus 67, so seven additional rooms. So I think that you could probably take about a 10% premium, but we can get back to you on the exact data point.

[Operator]

The next question comes from Michael Bellisario with Baird.

[Michael Bellisario, Robert W. Baird & Co.]

Just with RevPAR growth down this year on your chain scales, are you sharing anything differently today from franchisees that might slow the pace of new signings going forward or change the way they're thinking about new investments?

[Patrick Pacious, President, CEO & Director]

Yes. I think it's really two stories, Michael, on the new construction side. Those are owners who are looking at if you sign an agreement today, you're going to be opening your hotel three years from now. So these are long-term investors, and most of our sales that we do are to existing owners, about 2/3 of the new franchise agreements we sell are to existing owners. So these are long-term holders, and there - many of them are multi-unitholders as well.

I think on the conversion side of the house, that's where you get a little bit more of, I would call it, lumpiness. If I look at this year, our development has been a little bit more - we've had spikes, if you will. We had a record month in June. But I think you have to really kind of look at where those individual owners are looking for a value proposition. And I do think, as the environment softens, you're going to see more independent hotels and you're going to see owners of weaker brands want to join our system. That's historically what's happened in - as the environment softened somewhat. So those - the conversion brands of ours generally pick up share during times of softening.

[Michael Bellisario, Robert W. Baird & Co.]

Got it. That's helpful. And then just one kind of housekeeping question. Aside from the oil and gas market weakness that you referenced, do you guys have any meaningful impact from the hurricane in September that affected your RevPAR growth?

[Patrick Pacious, President, CEO & Director]

It was minimal. The timing of it wasn't good because it did hit during the Labor Day weekend, so there may have been some demand that was out there that didn't show up. But it was really hard to measure any meaningful impact here in the domestic United States.

[Operator]

This concludes our question-and-answer session. I would now like to turn the conference back over to Patrick Pacious for any closing remarks.

[Patrick Pacious, President, CEO & Director]

Thank you, Operator. Thanks, everyone, for your time this morning. We wish you have a great holiday season, and we will talk to you again in the new year. Have a great day.

[Operator]

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