Choice Hotels International Inc

NYSE:CHH

Earnings Call Transcript 2020-Q3

[Operator]

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

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

[Allie Summers, executive]

Good morning, and thank you for joining us today. Before we begin, we'd like to remind you that during this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results. Actual results may differ materially from those indicated in forward-looking statements, and you should consult the company's Forms 10-Q, 10-K and other SEC filings for information about important risk factors affecting the company that you should consider.

Moreover, we'd like to acknowledge that there continues to be significant uncertainty as to the duration and severity of the impact of the COVID-19 pandemic on our occupancy levels and future results. These forward-looking statements speak as of today's date, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of the first quarter 2020 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section.

This morning, Pat Pacious, our President and Chief Executive Officer; and Dom Dragisich, our Chief Financial Officer, will speak to our third quarter and year-to-date operating results and financial performance. They will be joined by Scott Oaksmith, Senior Vice President, Real Estate & Finance. Following Pat and Dom's remarks, we'll be glad to take your questions.

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

[Patrick Pacious, executive]

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

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

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

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

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

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

And finally, there are signs that consumers' risk tolerance is climbing, even before a vaccine is available. According to a recent survey, the perception of travel safety is up, and Americans likelihood to take a domestic leisure trip and stay in a hotel during the next 6 months is the highest since mid-March. As a result of these trends, we've seen a rise in our weekday occupancy quarter-over-quarter, on top of the existing base of weekend leisure demand we've historically enjoyed. In fact, our weekday RevPAR index is up 8 percentage points year-over-year in the third quarter. Our year-over-year RevPAR change continued to improve month-over-month in the third quarter. At this time, we remain optimistic that we will see sequential month-over-month improvements related to our year-over-year RevPAR change.

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

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

I'll now provide a brief update on our segments. Our upscale portfolio once again achieved impressive year-over-year growth in the third quarter, where we increased our domestic upscale room count by 33%. The Ascend Hotel Collection is the industry's first and largest soft brand. Now with nearly 300 hotels around the globe and fast approaching its 200th domestic location, Ascend Hotels achieved the following performance in the third quarter: RevPAR change outperformance by over 26 percentage points versus the upscale segment; RevPAR share gains against local competitors of nearly 19 percentage points; and average daily rate index gains of approximately 9 percentage points. In fact, for the past 6 months, Ascend has significantly outperformed the upscale soft brands as well as the segment as a whole in terms of year-over-year RevPAR change.

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

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

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

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

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

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

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

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

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

[Dominic Dragisich, executive]

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

Let's now take a closer look at our results. For the third quarter of 2020, total revenues, excluding marketing and reservation system fees, were $103.6 million. Adjusted EBITDA totaled $74.9 million representing an adjusted EBITDA margin of over 72% and adjusted earnings per share were $0.66. Our domestic system-wide RevPAR for the third quarter outperformed the overall industry by nearly 20 percentage points, declining only 28.8% from the same quarter of 2019. In addition, our results exceeded the primary chain scale segments in which we compete as reported by STR by 6 percentage points. We've long focused our brand strategy on driving growth across the higher value and more revenue intense upscale, extended-stay and mid-scale segments, and it's paying off.

In the third quarter, all 3 segments achieved year-over-year RevPAR outperformance against their respective industry chain scales and gains versus their local competitors. Specifically, the RevPAR change of our upscale portfolio exceeded that of the overall segment by 14 percentage points, and our upscale portfolio outperformed its local competitive set by over 9 percentage points. With average domestic system-wide occupancy rates of 74%, our extended-stay portfolio outperformed the industry's RevPAR change by an impressive 40 percentage points beating its local competitive set by 14 percentage points. And finally, RevPAR change for our mid-scale portfolio exceeded the segment by nearly 8 percentage points. This RevPAR outperformance is the result of both continued occupancy gains and our franchisees' ability to maintain rate.

Our domestic system-wide occupancy rate has seen improvements since the trough of 28% that occurred back in early April. Since the week of June 21 through late October, our average weekly occupancy rates have consistently exceeded 50%. In addition, we continue to see gains in our average daily rate index, which was up 1.7 percentage points against local competitors in the third quarter. Our owners have succeeded in maintaining rate integrity, thanks to the support of our experienced revenue management consultants. These experts have been advising our franchisees on the best use of tools to maximize their pricing strategies and provide sophisticated market intelligence and channel management.

Despite the challenging environment, we expanded our system size, growing the number of domestic hotels by 0.7% and rooms by 1.9% year-over-year. Across our more revenue intense brands in the upscale, extended-stay and mid-scale segments, we experienced even greater growth, increasing the number of hotels by 2.1% and rooms by 3.4% year-over-year. We're especially pleased that Comfort, our flagship brand, continue to experience positive unit and rooms growth in the third quarter following its brand transformation. Comfort's development success, amid unprecedented circumstances, is perhaps the clearest endorsement of the brand's value proposition. Comfort now represents nearly 1/3 of our total domestic pipeline, which will fuel revenue intense growth for years to come.

In addition, the brand's conversion pipeline increased by nearly 50% in the third quarter year-over-year. We are particularly pleased with the company's performance-related to our effective royalty rate, which is driven by the attractive value proposition we provide to our franchisees, their continued desire to be affiliated with our strong brands and our current pipeline. Our royalty rate remains a significant driver of our revenue growth. The company's domestic effective royalty rate increased 7 basis points year-over-year to 4.91% in the third quarter and has increased 9 basis points year-to-date compared to the prior year. We expect to observe continued growth of this lever for the remainder of the year as owners seek a shelter of a large proven franchisor that delivers strong top line results to their hotels and helps them maximize their return on investment.

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

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

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

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

Second, despite entering fall when demand is historically lower, we are pleased that our fourth quarter domestic RevPAR change has continued the pattern of sequential quarterly improvement through the week of October 24. In fact, we expect our October 2020 RevPAR to decline by approximately 25% from the same period of 2019. The final reason we are optimistic is the nature of the current environment. Unlike the Great Recession, which was caused by underlying fundamental economic problems, the current economic downturn is tied to the course of the COVID-19 pandemic, which we believe could contribute to a faster recovery. We will continue to evaluate the impact of COVID-19 across the business, and we'll provide further updates in February during our next earnings call.

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

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

[Operator]

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

[Dori Kesten, analyst]

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

[Dominic Dragisich, executive]

Yes. When you take -- go ahead.

[Patrick Pacious, executive]

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

[Dominic Dragisich, executive]

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

[Dori Kesten, analyst]

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

[Patrick Pacious, executive]

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

[Dori Kesten, analyst]

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

[Patrick Pacious, executive]

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

[Dominic Dragisich, executive]

And the only thing I would add, Dori, is when you take a look at the upscale segment in particular, Ascend, obviously, a lot of those conversions come from independent boutique hotels just given the nature of the soft brand collection. The further down market you go, you typically do see share shift from 1 competitor to the other as well as some level of those independents convert again.

[Operator]

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

[Dany Asad, analyst]

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

[Dominic Dragisich, executive]

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

Last quarter, we guided to something closer to $10 million to $15 million. We're actually looking like we're going to come in at the low end of that range as well. So call it about $10 million of deferrals. Again, back to that program, it was very, very surgical, certainly targeted those customers who were struggling at occupancy levels below breakevens, et cetera, versus peanut butter spread. So we feel very good about the approach that we took there as well. And so obviously, Q4 tends to be a slightly lower demand quarter, so we'll continue to monitor it. We still feel very good about the fact that, again, it's not a waiver. It's a deferral that would essentially be paid back over a 3-year period. So you defer in the first year and then pay it back over the next 2. And so again, lower end of that guidance is well around $10 million.

[Dany Asad, analyst]

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

[Dominic Dragisich, executive]

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

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

[Operator]

And our next question comes from Michael Bellisario with Baird.

[Michael Bellisario, analyst]

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

[Patrick Pacious, executive]

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

[Michael Bellisario, analyst]

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

[Patrick Pacious, executive]

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

[Dominic Dragisich, executive]

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

[Operator]

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

[Jared Shojaian, analyst]

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

[Patrick Pacious, executive]

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

[Dominic Dragisich, executive]

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

[Jared Shojaian, analyst]

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

[Patrick Pacious, executive]

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

[Dominic Dragisich, executive]

And then the only 2 points I was just going to say, Jared, as you look at the proprietary channel contribution, you're continuing to see gains there. Obviously, that has been really nice catalyst for some of these RevPAR index gains and where you're seeing additional gains, and we think it's going to be long term, is those brands that have been refreshed like Comfort. In particular, I mentioned Comfort was above that 100% in terms of RevPAR index. You combine some of those refresh -- the refreshed rooms, some of the transformation activities that we did for that brand and then layer on new tools such as revenue management, loyalty program enhancements, et cetera, we think that given where that brand sits today and, obviously, a big chunk of our revenue right now that we'll be able to sustain some of those RevPAR index trends that we've seen.

[Operator]

And our next question comes from Robin Farley with UBS.

[Robin Farley, analyst]

Great. I mean the business model is so resilient in this environment. I guess I'm just thinking about the decrease in franchise agreements year-to-date. Because I know any 1 quarter that can always be lumpy. But kind of looking at that year-to-date down 38%, even with conversions making up a slightly higher percent, it seems like the absolute number of conversions is down as well versus last year. And I guess just how should we think about that? Because it seems like conversions would be up in this environment. And so just wondering why we may not be seeing that, even though they're -- again, they're higher as a percent of the pipeline, but the new franchise agreements decline is more than that gain. So just how should we think about that?

[Patrick Pacious, executive]

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

[Dominic Dragisich, executive]

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

[Robin Farley, analyst]

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

[Patrick Pacious, executive]

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

[Robin Farley, analyst]

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

[Patrick Pacious, executive]

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

[Operator]

And our next question comes from David Katz with Jefferies.

[David Katz, analyst]

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

[Patrick Pacious, executive]

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

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

[David Katz, analyst]

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

[Patrick Pacious, executive]

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

[Operator]

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

[Thomas Allen, analyst]

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

[Patrick Pacious, executive]

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

[Thomas Allen, analyst]

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

[Patrick Pacious, executive]

With regard to the case counts, so we saw a pickup in case counts in the months of July and August, and we did not see a correlation between that and bookings going down. We actually saw bookings increase. So the 2 don't appear to be correlated. And this is in specific areas of the country where the cases were rising. We continue to see travelers build travel demand month-over-month. It's always hard to know what the next 2 months or the next year is going to entail with regard to the virus. But as I said, as we look back at the last 8 or 9 months, as case spikes have gone in a higher direction. Other than that initial shock in March, we haven't seen a correlation between that and travel demand.

[Dominic Dragisich, executive]

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

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

[Operator]

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

[Alton Stump, analyst]

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

[Patrick Pacious, executive]

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

[Alton Stump, analyst]

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

[Patrick Pacious, executive]

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

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

[Operator]

And our final question comes from Dan Wasiolek with Morningstar.

[Dan Wasiolek, analyst]

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

[Patrick Pacious, executive]

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

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

[Dan Wasiolek, analyst]

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

[Patrick Pacious, executive]

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

[Dan Wasiolek, analyst]

Congrats on a solid quarter.

[Operator]

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

[Patrick Pacious, executive]

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

[Operator]

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