Choice Hotels International, Inc.
Q1 2019 Earnings Call Transcript

Published: 12 May 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's First Quarter 2019 Earnings Call. At this time, all lines are in a listen-only mode. I will now turn the conference over to Oscar Oliveros, Investor Relations Director for Choice Hotels.

[Oscar Oliveros:]

Thank you, operator, and welcome, everyone. Before we begin, we would like to remind you that during this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results. Actual results may differ materially from those indicated in forward-looking statements. And you should consult the company's 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 first 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 first quarter 2019 operating results. Dominic Dragisich, our Chief Financial Officer, will then review our first 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:]

Thanks, Oscar. Good morning. It's been a rewarding and successful start to the year. Just last week, we hosted more than 5,000 franchisees, Hotel General Managers and industry suppliers at our 65th annual convention. This event is a success every year, thanks to the hard work of our Choice associates, as well as the commitment of our franchisees who attend convention annually to learn about the great things happening with our brands and the new resources we have for them to drive profits. The tone at convention was very optimistic with several exciting announcements, including the rollout of redesigned logos for four of our brands

[Dominic Dragisich:]

Thanks, Pat, and good morning, everyone. We are pleased to once again report strong financial results, and we are confident in our outlook for the remainder of the year. We also remain optimistic for our long-term growth prospects in 2020 and beyond. Our first quarter performance highlights the strength of our asset-light business model, which allows us to deliver strong operating results and generate substantial cash flow through multiple growth levers. While our first quarter domestic RevPAR results were slightly below our expectations, the strength of our business model enables us to deliver continued revenue, adjusted EBITDA and adjusted earnings per share growth. As a result, we are raising our full year adjusted diluted earnings per share guidance. Additionally, our strong cash flows allow us to invest for the long-term, while still returning significant capital to our shareholders. Let's review the first quarter in more detail. All increases are relative to the first quarter of 2018, except where noted. Total revenues for the first quarter increased 4% to $218 million, and adjusted EBITDA increased 8% to $72.4 million. Our adjusted operating margins increased 120 basis points, driven by top-line revenue growth as well as our ability to drive key initiatives in our day-to-day operations at lower-than-expected costs. Lastly, adjusted diluted earnings per share were $0.84, a 25% increase that exceeded the top end of our guidance by $0.08 per share. Our longstanding commitment to our franchisees profitability continued to drive strong franchise operations results. First quarter revenues, excluding marketing and reservation system fees, increased 6% to $108.3 million. Our largest revenue source, domestic royalties, increased 5% to $75.6 million, highlighted by the addition of 119 hotels to our domestic system, which translates to a 2.1% increase year-over-year and a 12-basis-point increase in our effective royalty rate. Our domestic systemwide RevPAR decreased 0.7% for the first quarter, which was slightly below our guidance of approximately unchanged. Excluding onetime impacts, our Q1 RevPAR would have increased by approximately 1%. We predominantly attribute the Q1 softness to our Comfort transformation, which saw more hotels under renovation during the quarter than forecasted; the multi-week shutdown of federal agencies and national parks across the country, which depressed occupancy at many of our hotels; and tougher comparables, which in the first quarter of 2018, benefited from lingering hurricane activity in the South Central and Southeastern United States. These challenges are short-term. In the long run, we are optimistic that our RevPAR growth will benefit from our strong pipeline in high RevPAR markets like California and the strategic investments we are making to fuel our long-term growth. One of our most successful initiatives has been growing our share in the upscale segment. We believe that our strategic focus on upscale will continue to evolve our portfolio and drive top-line growth, because of the revenue-intense nature of the brands. As Pat said, our largest brand, Comfort, is ahead of schedule to finish its multiyear transformation. The Comfort hotels that completed their renovations by the fourth quarter of 2018 saw RevPAR growth of nearly 1%, and outpaced the upper midscale segment by 40 basis points in the first quarter. We expect the majority of the system to have completed their renovations by midyear and expect the Comfort system to be a positive contributor to systemwide RevPAR in the second half of the year. In addition to having a fully transformed system, we have over 230 new construction Comforts in the pipeline, giving us further confidence that the newly refreshed brand can command upper midscale rates and drive RevPAR growth well into the future. Based on our first quarter results, the accelerated refresh of the Comfort portfolio and the other onetime headwinds expected to impact the second quarter, we now expect domestic RevPAR to increase between 0% and 1% for the full year 2019 and expect domestic RevPAR to range between negative 1% and positive 1% for the second quarter of 2019. Additionally, based on economic forecasts and our ongoing strategic initiatives, we anticipate continued growth in our domestic RevPAR and a likely acceleration in 2020. As previously mentioned, our business model has multiple avenues to drive revenue through our other growth levers. We continue to open new hotels and increase the size of our development pipeline, improve our value proposition to franchisees, which allows us to drive the growth of our royalty rate and leverage the scale of our platform to grow other emerging revenue streams through offerings within our platform, such as procurement services, which increased 20% in the first quarter. Our system size set a good pace for 2019. In the first quarter, the number of units in our domestic system increased over 2%. This was driven by our great success in hotel openings. In fact, we have the highest number of hotel openings in the first three months of the year since 2014. We are particularly pleased with the strength of upscale, where our domestic room count grew by 12% year-over-year for a total of almost 21,000 rooms. For full year 2019, we expect net domestic unit growth to continue to range between 2% and 3% compared to full year 2018. The growth of our development pipeline also remains strong. During the first quarter of 2019, we awarded 79 new domestic franchise agreements. We were pleased with the uptick in domestic franchise agreements awarded in our midscale segment, especially for our flagship Comfort brand, whose contracts were up 80% year-over-year. Over 60% of these deals are for new construction Comfort hotels. At quarter end, our overall domestic pipeline of hotels awaiting conversion, under construction or approved for development was 976 hotels, a 7% increase from March 31, 2018. The hotels in our pipeline represent nearly 78,000 rooms or 17% of the current rooms opened and operating in our domestic system. Our new construction domestic pipeline grew by 10% in the first quarter, and new construction openings were the highest at any first quarter in almost a decade. These developments give us a solid foundation for continued long-term unit, rooms and RevPAR growth. Our international pipeline also saw tremendous growth this quarter as we tripled the number of hotels awaiting conversion, under construction or approved for development. We now have over 125 hotels in our international pipeline, demonstrating that our international growth strategy is working. Our final lever, royalty rate, is driven by the pricing of franchise agreements. Our domestic effective royalty rate for the first quarter grew by 12 basis points. Our focus to maximize franchisees profitability by delivering incremental business and providing them with the resources to better manage their hotels drives our effective royalty rate. We are confident in our value proposition, remain committed to continuous improvement and expect continued growth in our effective royalty rate, with a forecast of an increase between 8 basis points and 12 basis points for full year 2019 over 2018. Our commitment to both long-term investments in the business and shareholder returns is a priority. During the first quarter of 2019, we returned approximately $44 million back to our shareholders. These returns came in the form of $12 million in cash dividends and $32 million in share repurchases. Our strong cash flows and debt capacity position us well to continue to grow the business and return excess cash flow to shareholders. Finally, I will spend a minute on our earnings outlook for the remainder of the year. For the second quarter of 2019, we expect adjusted diluted earnings per share to range from $1.11 to $1.15 per share. For full year 2019, we continue to expect adjusted EBITDA to range between $354 million and $363 million. We are increasing our full-year adjusted diluted earnings per share guidance to a range of $4.06 to $4.18 per share, as a result of our outperformance this quarter. Choice had a strong start to the year, and we remain optimistic that our strong 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 you have. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question today comes from Shaun Kelley with Bank of America. Please go ahead.

[Shaun Kelley:]

Hi, good morning, everybody.

[Patrick Pacious:]

Good morning, Shaun.

[Shaun Kelley:]

Just maybe wanted to start with, I think you mentioned that your kind of industry convention, which I assume is when all your major franchisees show up, was recent. So could you talk a little bit about maybe the feedback from that? I'm particularly interested in the new development conversations, because as we poll around the industry, I think people continue to remain impressed by just the level of new industry development at the mid- and lower-end chain scales, given kind of a lackluster RevPAR environment we see out there. So can you just tell us about sort of what franchisees are looking for and what they're telling you right now, that's driving some of the development activity in your pipeline and signings that we're seeing?

[Patrick Pacious:]

Sure. Thanks, Shaun. Yeah, what happens at our convention is it's really three things. It's a massive education opportunity to inform them what we're doing with our brands. It's a selling opportunity. And I'll talk about that in a minute. To answer your question, where we have the opportunity to get franchisees who are doing other of our brands to come and look at what we're doing that's new, Clarion Pointe, WoodSpring, Cambria and the like. And it's also a massive trade show, where our owners are buying a lot of supplies, but also planning renovations and those types of things as well, so it's a really fantastic week for us to get a good pulse on our business. What we're seeing on the development front is the reaction to the transformation of Comfort is really leading to a significant uptick in new construction contracts for the brand. As Dom mentioned, that's up 80% in the first quarter with Comfort contracts. The Cambria interest, we have a lot of our franchisees who came to our Cambria brand sessions and some of the education we do around that brand, a lot of interest in our upscale segment and in doing more Cambrias with us. With only 42 hotels opened, we have a really clean palette in the upscale select-service segment across the country to develop Cambria. And so, we're seeing a pickup in that as well. And I have to tell you, the WoodSpring and extended-stay segments in general, those sessions had a lot of people from outside that segment looking at that segment now. Owners of ours who are doing upscale and doing Comforts with us were crowding into those sessions to learn about that business model. If you look at that segment, in particular, extended-stay, the industry fundamentals are really strong. And so, we're seeing a significant amount of interest in the extended-stay segment across all three of our brands, WoodSpring, MainStay and Suburban.

[Shaun Kelley:]

Thank you very much.

[Operator:]

The next question comes from David Katz with Jefferies. Please go ahead.

[David Katz:]

Hi, good morning, everyone.

[Patrick Pacious:]

Good morning, David.

[Dominic Dragisich:]

Good morning, David.

[David Katz:]

I wanted to ask about, just to follow up on the point about data analytics and improving franchisee profits, right, can you just elaborate a bit more about sort of how that plays out and how we think about in the context of our models in a low-ish RevPAR environment? And I suppose, the point of the question is we'd always thought about a certain RevPAR level, which is earnings neutral, either at the hotel level, more so at the hotel level than yours. But help us calibrate what that means.

[Patrick Pacious:]

Yeah, so the way data analytics and then technology is helping us, help our owners is we are finding new ways to help them run their businesses. So what I mean by that is there are a lot of labor-intensive things that go on at a hotel, setting your rates, answering RFPs for group business and corporate accounts, staying within the parameters of a government program like FedRooms. There's a lot of effort that hotels have to do to make sure that their product and their inventory and their rates are showing up in the right places and are staying consistent with the program rules that a company may have or the government may have. Technology is allowing us to help our owners find out where they're missing opportunity, whether that's on the revenue management front, whether that's on the channel management front. And technology is really helping us, as a franchisor, identify for them where they're missing and how we can help them, so that's the top line piece of it. The things that we've rolled out this past quarter, Virtual Pay, which allows a company that does not have people who travel with credit cards to book their people into our hotels. You can do that through a virtual credit card. We now have an opportunity to work with companies like that. We're the only hotel company in the industry to have it, and it's really beneficial, and it's adding new business into our hotels through a piece of technology we're able to deliver essentially. The other side of the coin is the cost side of the house. So using technology and data analytics, we're actually able to help our owners now compare their cost line items to other like hotels in similar markets. And so whether it's your labor costs, and I mean down to the shift level and the workman's comp you're paying, the insurance costs, we're really able to help our owners now calibrate where they can find cost savings, and particularly in an environment like today where labor costs are rising. A lot of our owners are crowding into these brand sessions and education sessions, where we're telling them how to use these tools, and we're getting a lot of positive feedback that those are ultimately boosting their bottom line. So that, at the end of the game, is not just about driving RevPAR and gross room revenue. It's also about the return on investment and the unit economic improvement that we're able to achieve through the use of centrally delivered technology tools.

[David Katz:]

Got it. Perfect. And If I may ask about WoodSpring, which has been - we've been seeing a lot of announcements out there. How do you think about kind of the opportunity set or the addressable market for that specific brand? Where could that turn out to be at some - from a longer-term perspective?

[Patrick Pacious:]

So I think, where we look at it today, it's at just north of 250 properties. We expect to be at 300 by the end of 2020. It's easy to see us doubling that footprint and likely to see us triple the footprint. We do think there is probably close to 1,000 markets, where something like WoodSpring would be in demand or the demand drivers are there. And so when I think if you look across the industry, and you look across the extended-stay segment, you see brands that have gotten to sort of double the size of where WoodSpring is today. What's interesting, too, David, is there's a lot of extended-stay demand sitting in transient hotels today, because there is no extended-stay in the marketplace. And so that's another driver of demand that's not necessarily visible, but our owners see it, and our owners are looking at a product like WoodSpring, where the GOP performance is significant and saying to themselves, this is a great asset to build, because the demand generators are already in those markets.

[David Katz:]

Got it. Perfect. Thank you very much.

[Patrick Pacious:]

Thank you.

[Operator:]

The next question comes from Gregory Miller with SunTrust. Please go ahead.

[Gregory Miller:]

Thanks very much. I'm on for Patrick Scholes. First question I had, at this stage in the lodging cycle, what is your interest today in brand acquisitions? And do you have any bias towards domestic versus international brands today? Are there certain regions, where you can see yourselves underrepresented that are particularly good opportunities for growth?

[Patrick Pacious:]

Yeah. So I think as we look at acquisition opportunities, it's primarily we would look at segments that would be additive to our current portfolio. So if you think about where we don't have product today, that's in upscale, full service and above, that's in upscale extended-stay. And so those are two key gaps, if you will, in our portfolio domestically. There's also opportunities that we see in our existing segments that would probably be more of a niche type opportunity that is addressing a little bit more different stay occasion, so we have looked from time to time at either launching brands or at acquiring brands that might fit that profile. On the international front, clearly, Europe is where our focus has been. We have some - we've been doing more deals with multiunit hotel brands or hotel owners. We added about 12 Comforts in Paris, or just outside of Paris and in France, generally, last year. So we do see more a multiunit acquisition opportunities, maybe not by a brand, but by a group of hotels. But Europe sets itself up nicely for our platform and our brands, where you have 450 hotels in that market, so there's certainly opportunity there. And then Asia is a big market. And with our platform in Australia, we have the opportunity to do more in the Asia-Pac region. So we have looked at things from time to time, but this always comes back to two key litmus tests

[Dominic Dragisich:]

Yeah. Greg, and the only thing I would add on the balance sheet side of the house is our leverage levels remain at very low levels, frankly. We're at about 2.35. Historically speaking, Q1 has always been our highest leverage levels. And so just given where we are in our target range between that 3 to 4 times, we do have capacity, whether that's inorganic, but again, always wanting to prioritize those organic strategic investments for us like what we're doing with Cambria.

[Gregory Miller:]

Good to hear. And then I had another question. This is about the Indian company, OYO, seems to be emerging. What are your thoughts about OYO and its level of competitiveness for you for attracting and retaining franchisees? And do you have any initial indications that impact from a customer and market share perspective as it appears that there are some hotels stateside today?

[Patrick Pacious:]

Yeah. It is something we are looking at and watching. We're not seeing an impact on our brands and in the segments, where we operate today. Domestically, it is having a larger impact on the international market, mostly in markets where we don't have a lot of product today anyway, India, in particular. So it is something we're watching. They appear to be approaching the market in multiple ways as well, so everything from providing technology and revenue management services to what looks to be franchising. So it's a bit of a multifaceted approach they appear to be pursuing. But at this point, we're not seeing a threat to our core franchise business here in the U.S.

[Gregory Miller:]

Okay. Thank you. That's all from us.

[Patrick Pacious:]

Thank you.

[Operator:]

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

[Unidentified Analyst:]

Hi. This is [Jay Quest] [ph] calling on for Robin. Just quick question, so if renovated hotels saw business travel revenue doubling in the quarter, and RevPAR was up 1% for them, how did leisure travel do? Was it negative?

[Patrick Pacious:]

No. Leisure travel was a little bit positive to flat, I think was up something like 0.3%. So it's a - that's continued to be a strength of ours. It's had a lot of growth over the last several years, leisure travel, and that strength is still sitting there. But the real growth in the industry, call it, in the last six months has been in business, particularly group. And so when we looked at the Comforts, that one-third of our Comforts, who got the renovations done at the tail end of last year, those hotels in particular are benefiting from that pickup in business travel and group.

[Dominic Dragisich:]

The only thing I would add is, when you take a look at those Q1 results, it - not an apples-to-apples comparison. I mentioned it in the prepared remarks, three major onetime headwinds that we saw. So when you take a look at where we're going to be in Q3 and Q4, that will be returning back to normalized levels. But in Q1, in particular, you had those Move to Modern renovations. You had Texas, in particular, with the lag and the hurricane, the headwinds there and then finally, the government shutdown, as what I alluded to on the call as well.

[Unidentified Analyst:]

Great. Thank you, guys. And one more question regarding - so WoodSpring RevPAR came in pretty strong in the quarter. In Q2 is kind of the first quarter lapping a full quarter of the acquisition? So I guess how should we think about WoodSpring RevPAR going forward? Like how much of that strength in RevPAR over the last year was coming - like more onetime from the benefit being plugged into the Choice system? And I guess how much of that's more underlying growth?

[Patrick Pacious:]

Yeah. Let me address just WoodSpring. WoodSpring has a significant presence in Texas, which was the largest - the state impacted the most by the hurricane. So when you look at that year-over-year comp, they have a lot of business a year-ago from the FEMA work and the hurricane response that was occurring there. So I think, you have to make sure that you're looking at that. We will be providing - Q2, you're right, will be the first quarter, where we have really good year-over-year comps. If you recall, we closed on that acquisition the 1st of February last year, so it was partially in and partially out of the Q1 number. Dom, do you want to add to that?

[Dominic Dragisich:]

Yeah. Just getting into the specifics. WoodSpring in Q1 was about 0.9% positive. That does include those hurricane headwinds that Pat alluded to. If you remove those impacts, it actually grew at about 7.3%. Historically speaking, we've also included, just in that RevPAR exhibit of the press release, we've always included WoodSpring as if it was in the portfolio in January. So you're always seeing that apples-to-apples comp. If you remember last year, WoodSpring was still growing at 7%-plus. So on a normalized basis, it's still sustaining that 7%-plus RevPAR growth, and we expect to see that in the future.

[Unidentified Analyst:]

Great. Thank you.

[Patrick Pacious:]

Thank you.

[Operator:]

The next question comes from Jared Shojaian with Wolfe Research. Please go ahead.

[Clyde Singleton:]

Good morning. It's Clyde Singleton on for Jared.

[Patrick Pacious:]

Good morning, Clyde.

[Dominic Dragisich:]

Good morning.

[Clyde Singleton:]

I believe last quarter, you mentioned that you did not have much see through into February and March. How much visibility does your business model typically give you? What trends, data sets do you usually track? And how are those trends looking so far in 2Q?

[Patrick Pacious:]

Yeah. I think if you think about our business, the booking window, particularly on leisure travel in the midscale segment, is not as long as you would have if you were a player in that sort of upper upscale and meetings and conventions business that type of thing. So relative to most of our competitors, our booking window is a little bit shorter. So our visibility into that sort of world, that six weeks out and beyond, is a little bit more limited. I think, when you think about the industry metrics that we track closely to, insiders of the industry forecast of STR and PwC and CBRE. And historically, we have trended really along with how those segments are, particularly when you think about some of the segments, where we're a significant player with a lot of products, midscale in particular. So those are the metrics that we tend to trend closest to. I think, it's interesting, when you think about that, if you look at economy today, the economy segment, you see its growth is high. What's fascinating about what's going on in economy is the supply is actually shrinking, so you're actually seeing a year-over-year RevPAR growth, but it's off lower base. And that's also in the area, where a lot of new construction is coming from extended-stay. A key contributor of that is our WoodSpring brand in particular. So that's an interesting segment to look at where you can't just look at the growth rate in economy without truly understanding the underlying fundamentals.

[Dominic Dragisich:]

Okay. And the only thing I would add is the tools that we do have really allowed us to isolate those onetime impacts that I talked about in Q1. Three impacts that we see ahead in Q2, really continue to seeing - continuing to see that Move to Modern impact, probably alleviating just a little bit in Q2 versus what you saw in Q1. You still have a bit of a hurricane lag, and then you have the Easter shift, obviously. And so what we talked about in Q1 was when you remove all those impacts, you were probably somewhere in that 1% RevPAR range. If you remove those impacts actually in Q2 as well, you're also right around that 1% RevPAR. And we actually expect that to accelerate as the guidance would imply for the full year in both Q3 and Q4.

[Clyde Singleton:]

Very helpful. Thank you. Also, do you have any updates on SkyTouch? We noticed you haven't mentioned it for several quarters and just want to see if anything's changed there. Is it still a drag on EBITDA, or anything you can speak on that? Thank you.

[Patrick Pacious:]

Yeah. I think, it's - as we said in the past, it's continuing to grow. As a fast business, you have to pay upfront on the marketing expenses, and then you benefit from the long-term monthly payments that you get as a subscription software service. The division is at about - I think is about 750 hotels now that are on the platform. And from a financial performance perspective, we're essentially breakeven this year. So we're very positive on the continuing momentum that SkyTouch has had. But at this point, the reason we don't bring it up is it's not really a material contributor yet to the business.

[Dominic Dragisich:]

Which is the reason why we no longer are guiding to both franchise and non-franchise results. The reality is the non-franchising results are immaterial to the financial statements at this point, to Pat's point, fairly breakeven.

[Clyde Singleton:]

Got you. That makes sense. And one more quick housekeeping, if I may. How much do you expect to spend on CapEx and key-money this year?

[Dominic Dragisich:]

Historically speaking, our CapEx has been right around $25 million to $30 million. Obviously, key-money is somewhere in that ballpark as well. Just with what we're doing with Cambria and the $725 million that we have authorized, that does include our key-money disbursements as well. So when you take a look at where we were last year, key-money was closer to about $50 million. But the majority of that was through the Cambria investment program.

[Clyde Singleton:]

Helpful. Thanks so much.

[Patrick Pacious:]

No problem.

[Operator:]

The next question comes from Anthony Powell with Barclays. Please go ahead.

[Anthony Powell:]

Hi, good morning, everyone. Your midscale competitor, [Reving] [ph], re-launched their loyalty program and they're advertising pretty heavily. Have you seen or do you expect to see any kind of competitive impact from that re-launch in your result this year?

[Patrick Pacious:]

Which midscale competitor?

[Anthony Powell:]

Wyndham, Wyndham, Wyndham.

[Patrick Pacious:]

Oh, no. I mean, I think we tend to compete more with Holiday Inn Express. That's another brand, that's why I was getting some clarity on the midscale segment. We haven't seen any impact from the loyalty program or advertising from our competitors set. What we're getting ready to do this summer, we talked about it actually a lot at our convention, is reintroduce a new ad campaign ourselves to really focus on the Comfort renovations, reintroduce the brand to the midscale traveler, and also highlight the fact that the signage on the exterior is changing as well. So we do expect that additional marketing spend to help us, as Dom mentioned, in the second half of the year, as we do expect Comfort to turn from the sort of headwinds they're in right now with renovations towards more of a tailwind.

[Anthony Powell:]

Got it, thanks. And the other large brand, companies have done really well with their credit card, co-brand credit cards. Is that an opportunity for you to maybe increase your contribution from that segment? I think for Hilton [Amira] [ph], it's close to 10% of fees or more. So is that something that you could maybe grow even faster?

[Dominic Dragisich:]

Yeah, I would say today it's fairly immaterial to the overall financial results. If you take a look at the mid-term to long-term, we do see this as an opportunity, especially as you continue to grow that loyalty program. We talked about this on several calls in the past, where our loyalty program is now growing at $5 million per year, if not more, frankly. And so, just given where we are with that, we do see that as an opportunity to leverage and ultimately add additional value top-line revenue growth through one of those programs, but as of today, fairly de minimis.

[Anthony Powell:]

Got it, thanks. And one more on the non-franchisee business side, I think you were doing some vacation ownership, I guess, test a year ago or two years ago. How is that progressing? And do you see that business growing faster in the future?

[Patrick Pacious:]

Yeah, we entered that segment actually three years ago in 2016, with a model that looked more like our franchising model. And in 2018, we pivoted that to be more of a distribution and affiliate model, where we're delivering customers to managed vacation, rental ownership companies. And so we've increased that business now to about 34,000 units spread across 40 markets in the U.S. primarily. We are going to increase those number of markets. And we're feeling pretty good about where we are with that today. It is a bit of test and learn, as you understand kind of how our customer, particularly our Choice Privileges members, want to use that product. But, we're pretty optimistic that over time that will be a nice healthy business for us.

[Anthony Powell:]

Right. Great, thank you.

[Operator:]

Next question comes from Alton Stump with Longbow Research. Please go ahead.

[Alton Stump:]

Hey, thanks, good morning. I just wanted to ask about the pace of conversions and in particular, from independents. You can take back to now versus this time last year. Given the fact that, obviously, costs are going up across the board, most of all there, interest costs or labor, et cetera, cost to bill. And so, is that for rising independents to have more incentive to convert over to your banners?

[Patrick Pacious:]

Yeah, I think if you - you hit on the right things, that independents come to us for. It's business delivery. It is a lower, usually, distribution cost and customer acquisition costs. What we find in particular with, take our Ascend Collection for instance, they come for the top-line revenue. And then once they get into the brand or the soft collection, they realize all the training that's available to them. We have a fantastic online training university that wins significant awards and beats out companies like Salesforce and Google and Facebook. In [eLearn Magazine] [ph], did a sort of Top 100, and we were ranked number 6. So all of that training around how to run a hotel, how to run a small business is available to these independent hoteliers. You layer on top of that revenue management, search engine marketing, a lot of things that are really difficult to do when you're a single-asset owner. But when you can spread those costs across 7,000 units, we were able to lower those costs of those types of things that they're required to run a hotel. So it's not just the top-line piece. Top-line is what attracts them. It's usually that cost savings and bottom-line which keeps them coming back.

[Dominic Dragisich:]

And the only thing I would add is it's really showing up in the results. When you take a look at Ascend in particular domestically, you take a look at the Exhibit 5 that we have with the press release, we actually grew that portfolio 13% on a net unit basis year-over-year. So really reinforcing exactly what Pat had just said.

[Alton Stump:]

Great. Thank you. That's all I have.

[Patrick Pacious:]

Thank you.

[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:]

Thank you, everyone, for joining us today. Our strong performance this quarter lays a solid foundation for a great 2019. We've got a lot to be excited about. And whether it's investing in our core business or pursuing compelling opportunities, we ultimately strive to create lasting value for our franchisees, our guests and our shareholders. So, enjoy your summer. And we'll see you in August.

[Operator:]

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