Choice Hotels International Inc (CHH) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotels International second-quarter 2008 earnings conference call. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session, and further instructions will be given at that time. (Operator Instructions) As a reminder, today's call is being recorded.

During the course of this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the Company and its results, which constitute forward-looking statements under the Safe Harbor provision of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as Choice or its management believes, expects, anticipates, foresees, forecasts, estimates, or other words or phrases of similar import. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Please consult the Company's Form 10-K for the year ended December 31, 2007, and other SEC filings for information about important risk factors affecting the Company that you should consider. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.

We caution you -- do not place undue reliance on forward-looking statements, which reflect our analysis only and speak only as of today's date. We undertake no obligation to publicly update our forward-looking statements to reflect subsequent events or circumstances.

You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our second-quarter 2008 earnings press release, which is posted on our website at choicehotels.com under the investor information section.

With that being said, I would now like to introduce Steve Joyce, President and Chief Executive Officer of Choice Hotels International, Incorporated. Please go ahead, sir.

Good morning and welcome to our second-quarter 2008 earnings conference call. With me this morning is Dave White, our Chief Financial Officer.

I am delighted to be here today for my first earnings call as Choice's Chief Executive Officer. Before getting into the second-quarter results, I would like to share some of my initial observations from my first few months here.

Since coming on board at the beginning of May, I've had the opportunity to get up to speed on most areas of the Company. I can tell you that we have a great platform, engaged associates, and a number of exciting opportunities that I believe can fuel our growth in the future.

In May, June, and July, I traveled across the country, staying in our hotels and meeting with associates, existing and potential franchisees, and investors. I've visited more than 10 cities, including stops at our two primary call centers in Grand Junction, Colorado, and Minot, North Dakota. At the call centers, I had the opportunity to listen to great reservation calls from our guests to our hotels, and to hear first-hand how consumers shop for and how we sell our rooms on behalf of our franchisees. I am extremely impressed with the people I have met and excited about the opportunities to grow the Company.

Today, Choice has 10 segmented, well-recognized brands that are appealing to both developers and consumers. For developers, we have brands that are appropriate for the various stages of the long lifecycle of a hotel asset. For consumers, we provide a wide range of high-quality value-oriented lodging options around the globe.

There is a tremendous atmosphere here and a great level of engagement across the Company. We have a very strong management team in place that I think compares favorably to teams at other hotel companies.

I have no plans for any radical departure from our current strategy as a pure franchisor that has limited investments, high return on invested capital, and a practice of returning value to the shareholders through stock purchase and dividends. But there are exciting opportunities to build and expand upon our successful franchise business model that has enabled us to profitably grow over the past decade.

I see a number of opportunities, both in the US and abroad, to profitably grow the business over the long term. Two key areas that I will initially focus on are our emerging brands and our international presence. Our emerging brands present a shorter-term opportunity in addition to strong growth in numbers from the existing brands, while the international opportunity gives us substantial growth potential in the midterm.

First off is Cambria Suites, which is a tremendous select service product that I think has the potential for explosive growth. The consumer loves this all-new construction product which features suites that are 25% larger than standard hotel rooms. It is simply the best-designed product in the space. In fact, all the Cambria Suites hotels that have been open for more than two months are ranked by consumers on TripAdvisor in the top three hotels in their respective markets.

For owners, the brand has a very attractive per-key development cost, and is positioned favorably against both established brands and new market entrants.

I've begun to leverage some of the relationships I've cultivated over the last 20 years in the industry, and I have met with a large number of institutional quality developers. They've been very receptive to Cambria Suites, and I think we will be able to leverage these relationships to spur that brand's growth.

I am also excited about our two extended-stay brands, MainStay Suites and Suburban, and believe they also have significant room to grow. The extended-stay segment is largely undersupplied. And as developers see the types of relative returns our owners are getting from these assets, I believe we will be able to generate strong brand growth in this area.

I am pleased that with the support of our Board of Directors, we will be initiating a sliver equity joint venture, financing, and guarantee programs to support qualified multiunit franchisees of our Cambria Suites and extended-stay in the top markets in this country. This is on top of already strong growth continuing from the established brands.

I expect the capital deployed over the next several years in these programs to generate growth in these brands and solid financial returns. Because of our strong balance sheet and business model, we are well positioned to support these types of programs while also continuing to return significant capital to our shareholders over time through share repurchases and dividends.

On the international front, we have more than 1,100 hotels open with density in some good markets and a growing infrastructure to support these hotels. There are a number of markets in which we aren't heavily distributed today, where we can grow successfully. We will focus on and go to the market areas where we can achieve significant profitable growth. Once we cultivate relationships in these markets in which I've got experience with a number of major developers, I believe we can accelerate our international growth.

In summary, during my short time here, the excitement and enthusiasm that I arrived with for our brands, our people, and our long-term growth prospects has only continued to increase.

Now that I've shared my initial thoughts on the business and the opportunities, let's discuss our second-quarter results, which we reported yesterday after the market closed.

Domestic unit growth was strong for the second-quarter 2008, with the number of units online increasing by 6.2% from June 30, 2007. Domestic RevPAR increased 0.7% and the domestic systemwide effective royalty rate increased 6 basis points for second quarter compared to the same period in the prior year. The improvements in these key drivers was a key catalyst for royalty growth of 8% in the second quarter of 2008.

Our franchise sales results for the quarter were also strong. We executed 198 new domestic hotel franchise contracts in second-quarter 2008, an increase of 13% compared to last year. Overall, year-to-date new domestic hotel franchise contracts executed increased 15% to 331 units compared to 287 in the same period of the prior year.

Adjusted diluted earnings per share for the second-quarter 2008 were $0.49, a 14% increase compared to the $0.43 in the same period of the prior year.

Adjusted diluted EPS and adjusted EBITDA for the second quarter of 2008 exclude a $3.8 million after-tax charge which represents approximately 6 diluted earnings per cent per share, resulting from the previously announced acceleration of the Company's management succession plan. Diluted EPS were $0.43 for the second-quarter 2008 compared to $0.43 for the second-quarter 2007.

Adjusted EBITDA increased 7% to $52.8 million for the second-quarter 2008 compared to $49.5 million for the second-quarter 2007. Adjusted EBITDA for the second-quarter 2008 also excludes the pretax impact of the charge for the acceleration of our management succession plan.

Operating income for the second-quarter 2008 was $44.6 million compared to $47.4 million for the second-quarter 2007.

Looking forward, we expect third-quarter 2008 diluted earnings per share of $0.55 and a full-year 2008 adjusted diluted earnings per share of $1.79.

Adjusted earnings before interest, taxes, and depreciation expense for full-year 2008 are expected to be $196.5 million. These estimates assume domestic unit growth of approximately 5.5% for the full-year 2008, and a 4% decline in RevPAR for the third quarter, and a 1.5% decline for the full-year 2008. They also assume a 5 basis point increase in the effective royalty rate for full-year 2008 and an effective tax rate of 36.5% for the third quarter and full-year 2008. Adjusted diluted earnings per share and adjusted EBITDA amounts also exclude the management succession plan acceleration charge.

As you know and as reflected in our RevPAR guidance, 2008 is turning out to be a challenging operating environment, and we don't see things dramatically improving on that front for at least several quarters. However, we continue to expect 2008 to be an excellent year for unit growth. In fact, it is shaping up to be our highest organic growth rate during the last six years.

Fortunately, one of the strengths of our business model is that unit growth can help offset a negative RevPAR environment. I would also reemphasize that while we have a very efficient business model, we have nevertheless put together some contingency plans that could improve the cost side of the equation over the long term, in the event the environment substantially deteriorates.

I have seen my share of lodging cycles, and I am an optimist at heart, so I believe that like the previous cycles, this portion of the lodging cycle won't last forever. I am hopeful by that this time next year we will begin to see some improvement in the industry fundamentals and the overall economy should be stronger.

I believe we are well positioned for long-term growth and value creation for shareholders. We will continue to execute our strategy of increasing domestic market share, improving brand performance, strengthening franchise relationships, and returning value to shareholders, while seeking ways to accelerate global growth of our brands.

I'm now happy to answer any of your questions.

(Operator Instructions) Steve Kent from Goldman Sachs.

Maybe the first question is, just because it's a little bit out of the ordinary or out of what Choice has historically done, the $20 million to $40 million financing program, how should we think about the returns on that relative to your core business?

Then maybe you could give us some sense for the sensitivity? Last quarter you revised RevPAR down 100 basis points; didn't really change EPS. Now you are lowering RevPAR by 350 basis points, and you've moved your guidance down by $0.08. So -- by the way, your unit growth seems to be pretty good, so I'm trying to figure out the sensitivity to those factors.

Well, let me -- I will have Dave talk about the sensitivity and the impact of RevPAR on earnings. But in general on the capital, the way that you should think about it is, we are going to make some sliver equity investments, sliver debt programs to spur growth in primarily Cambria and extended-stay. It will not amount to significant dollars for the Company's balance sheet.

We put an estimate on it simply to give you some guidance around it. But we are in the process of having discussions with developers and other partners to pull this program together. With the lead time for new construction units, that capital will be going out the door over, say, the next couple of years as the program takes shape.

We don't expect that capital to get to any serious level of investment versus where the Company has been in the past. We believe that we also have significant capacity available to continue with the shareholder repurchase program -- the share repurchase program, as well as our dividend policy.

So in general, for those brands, we believe some investment will help spur the growth, and that the investment return for those investments will be a strong return that is in the realm of what is expected by our shareholders.

Dave, do you want to talk about the RevPAR impact?

Sure, yes. Steve, there's a couple things. One is in terms of RevPAR, we took down kind of our second-half RevPAR guidance by call it 400 to 500 basis points, which translates on a full year to somewhere around $10 million of royalties and EBITDA.

The other thing you've got to keep in mind is from a seasonality perspective, the second half of the year for us represents 56%, 57% of our business. So the second half is a little bit stronger than our first half normally. So that is why the first -- our reduction last quarter didn't have quite as much impact on EPS as you are seeing this time around.

The other piece of it is -- that is also incorporated in our revised guidance is we have seen a little bit of softening on the relicensing side of things. The number of hotel sales transactions fell off in the second quarter. So we would expect, in light of what is going on out there in the environment with sellers being reluctant to transact -- unless they are really forced to, because they have got a financing situation or a fund maturity needs to dispose of the property -- we took down our relicensing revenues a bit as well in the second half, which is the other piece that is impacting EPS guidance for the second half.

Okay, thanks.

Felicia Hendrix from Lehman Brothers.

So just a few questions, one is on your conversion rates. It looks like they were, as a percentage of total new contracts in the quarter, it looks like conversions where about 63.6%. That was up slightly from 61.4% last year. I'm just wondering regarding that, would you expect that percentage to grow over the next few quarters?

Was the rate that you -- the slight increase in the quarter consistent with expectations? Or was that lower than what you would have expected? I am also wondering where that has been in past recessions.

Yes, in the past, what we have seen when we hit a lodging downcycle is a lift in the conversion side of things in terms of executed contracts. So I think we are optimistic that we've got a great package for hoteliers who are looking to affiliate their hotels with brands in the midscale space, where we predominantly compete.

So we are optimistic that if the trends we are seeing in terms of RevPAR continue that you would continue to see some improvement in our conversion brand results. So that's, we think, we think one of the things that is really attractive about our model -- is the fact that we've got brands for new construction and brands for conversion hotels. So we can kind of play both sides of the cycle.

So certainly in the last go-round in the lodging downcycle, we saw a lift in terms of conversions; and we are optimistic that we can see that going forward with our conversion brands (multiple speakers).

Are you seeing anything now that would indicate to you in the second half you are going to see that number be higher?

Well, it's hard to say exactly what will happen in the second half. But I think over the course of this kind of weakness in the lodging cycle we would expect that conversions would be a higher percentage of our executed contract volume than over the past couple years when we have been in the strong new construction environment.

Okay. Then just moving on to royalty rates, Steve explained why those had grown in the quarter. I'm just wondering, as you are negotiating with new franchisees, are you getting any kind of pushback regarding the contract terms that you are presenting to them?

In other words, in this environment, do they have more negotiating power than they have had in the past?

We have not seen any material change in either how we position our brands, pricing-wise, or in the level of pushback. You know, in the end in a lot of cases, this is an opportunity for a franchisee to brand with a stronger -- either coming from an independent or brand with a stronger brand which will provide more revenues to them. Which gives us pricing power.

I assume, given the economic times that negotiations may get tougher. But we don't have any plans on allowing our franchise royalty effective rate to decline. In fact, we've got -- it's a major focus of the Company to try to push that effective rate up.

Great, okay. Then just a final question is on your pipeline. You gave us the specifics on that both in the release and in your prepared remarks. Definitely seems rather robust.

I'm wondering, are you seeing anything that would put your expectations at risk for pipeline growth?

For 2008, Felicia, we are pretty well -- we have a really good understanding of exactly what is going to come online. Because obviously if it's a new construction project, it is pretty far along at this point. And the conversions, we've got -- we haven't seen anything there that has caused us to think our ratio of openings to executed contracts has changed at all in any meaningful way.

So I think we feel very good for the balance of the '08 about that and into '09. If past trends have continued, and we would expect that we can continue to execute on our strategy of growing our market share in the US market through a stronger conversion focus perhaps next year. But we will continue to move along on the unit growth side of things.

We haven't seen anything that has really changed in terms of trends that on the pipeline causes us to have any major concerns about it.

In addition to that, on the new unit growth side, at the upper end of our brands, particularly for Cambria, we are seeing pressure on getting those deals done. Which is why we want to work what multiunit developers who are pretty optimistic about this is the right point in time in the cycle to develop, and give them some minor incentives to do our brands, to help keep those growth rates healthy as well.

Okay, thank you.

William Truelove from UBS.

I've got several questions. The first question is, regarding the $20 million to $40 million in the lending program. Is that going to be an annual $20 million to $40 million? or is that a one-time 420 million to $40 million?

No, that was an estimate of an annual amount that could carry on for a couple of years.

Okay. In terms of spurring growth in the pipeline, we just talked about how strong the pipeline was growing. So what is the big hiccup?

Because I also have here the Cambria Connection letter you guys send out, the June edition. I'm looking at the back of it, and I've got a map of all the new Cambria Suites. There's 50 executed franchise agreements, if I am counting all these dots correctly; and 10 under construction.

So it seems like you've got plenty of growth in the Cambria Suites brand. Why do you need to do this program?

Well, the answer is, there is actually -- there is quite a bit more in the pipeline than that. I think more in the 70s range.

But the answer is that because of financing environments, because of equity requirements, because of the uncertainty in the market, while that pipeline is very strong and we are seeing the openings corresponding to that pipeline begin to come through, the growth rate has slowed given the pressures out there.

So what we want to do is we want to make sure we maintain and build on that growth rate, so that we can build a pipeline that will give us a nationwide distribution, and therefore give us brand identity and the ability to really take on the other brands in that space.

Okay, great. Thanks. That's all the questions I have.

David Katz from Oppenheimer.

I know you made a comment earlier in response to some other questions about holding your royalty rates and your contract terms. Are you seeing any of your competitors that are giving way to that end? That are perhaps undercutting or pricing down any deals? Is that sort of impacting your contract sales at this point?

Yes, we have seen some discounting and some incentives by other development companies. But we believe, given our position and the positioning of the brands, that we do not need to discount to remain competitive.

It's always a discussion in the marketplace. But right now we are focusing on trying to move that effective rate up, not discounting.

Got it. This program that you are doing specifically with Cambria, has there been any thought given to doing something like that internationally, or more of that internationally?

I know there have been some efforts to sort of get your international footprint going. But obviously that is a process over years. Is there anything you can do to move that along a little faster?

Yes, I think what we are going to do this fall is we are evaluating our overall international strategy and where maybe additional resources might provide the right kind of returns and accelerated growth rate that we are looking for.

But right now, my general view is we have got a strong international presence. There has been a great job of kind of moving that program forward. We are having a good year internationally as well, based on both some restructuring and some relationships; but also those markets performing better than the US.

What we want to do is build on that. We will probably be looking late fall, early next year, to put an overall strategy in place and then what resources are required at that point.

Right, perfect. Then one last quick one. Is there any sort of legal reason out there that would cause you to not buy back -- have bought back any stock in the last quarter plus July? Or is that all investment decision?

This is my first call, and you're making me very nervous; but I believe the answer to that is no.

Okay, okay, I'm all set. Thank you very much.

Jeff Donnelly from Wachovia.

Well, Steve, you are doing a good job for your first call.

Thank you.

Actually, you might have touched on this in your opening remarks, I might have just missed it. But I guess I am curious. Are you effectively consciously trying to change like [all] the face of Choice's typical developer through this funding program?

I mean I think the average Choice franchisee typically had one to two units, whereas your former employer I think has long tried to align itself with more multiunit developers.

Well, having helped craft that strategy I am very familiar with it. The answer to that question is yes. Because at the upper end where Cambria plays, that is a significant investment, which is a challenge for a number of our existing franchisees.

In addition to that, the operating level of that hotel is at a higher point than Choice has traditionally done. So yes, we are looking to attract a new class of franchisee to do Cambrias.

Now having said that, we've got a number of franchisees that have done Comfort Suites and other products that are going to do Cambrias with us as well. But we expect to expand our franchise relationship in that brand and also in the extended-stay brands to a larger, more multiunit franchisee that can put us in the top markets. And that is really the goal of that program.

I guess the key money concept is somewhat commonplace in the full-service end of the business. Is that common in the limited service end? Are you seeing that with other guys who are trying to roll out brands, like a Loft and (multiple speakers)?

It's been in and out of use by brands in the moderate and upscale tier. It is typically in times when either the brand needs to be pushed or the economic environment requires some incentive. So it's been done before.

The key to it is, versus a key money investment, this allows the Company to actually earn a return for the money put out. And also to help, which is a big issue, on the financing side; because as you know, the relative levels of leverage have dropped considerably and the developers are struggling to make their cap stack work, given the increased levels of equity required. An incentive of small sliver bids can be a meaningful motivator in this space at this point.

I know this is a simplified way of looking at it, but is that enough to really make a meaningful difference? Because if you -- again, hypothetically -- just spread it across your whole pipeline, it's only $500 per room.

Let's be clear, it is not going over the pipeline. It is going for new deals that are going to go into the pipeline.

Okay.

So, yes, in an environment like today, a 5% or 10% addition to the capital stack can make the difference between making a deal or not.

Just one or two last questions. Maybe to that point, you can help put us in the shoes of the typical developer franchisee today, to understand what they are thinking. Because to your point, on the one hand you have construction costs up, and financing is more restrictive, and you're not getting the profit growth to offset those challenges.

But yet you continue to see I guess contracts grow. I mean, not just at Choice, but some of your competitors as well. I guess, what are we missing that there is a disconnect out there between -- you continue to see the pipeline for construction projects grow; and maybe it's getting backed up a bit. But when does that end? I guess, do you think that there is risk to everybody's 2009-2010 completions because of a challenging financing market for construction?

Well, presumably the '09s are significantly baked, because a lot of those projects would already have to be under construction. But in general, the developer sentiment, at least the folks that I am talking to, they are building for the upturn. They think if they start a project now and it opens two to three years from now, they are going to open into an up market.

You've got historic levels of pipeline across the lodging industry. I think whether or not the rate of actual hotels coming from that pipeline, I think you might see some change to that.

In our pipeline though, because we have a lot of conversions, those are -- we know relatively that those are going to come in and out of that pipeline relatively quickly. And on the new build side, we monitor very closely the construction starts, so we know what will be coming.

I think the general sentiment is, while the financing markets are bad, construction costs -- with the exception of a couple of materials that are important -- have stabilized. The demand for land has stabilized.

So where you were seeing a year ago a developer doing a deal and having to go through five to six value engineering exercises before they could actually begin a project, the relative ability to predict what your costs are today and the relative availability of building service contractors is better.

So the building environment, ignoring the financing arena, is actually better than it's been in a while. While you have to be somewhat of a contrarian at this point to believe that you are building for the up cycle, in terms of the folks that I have been talking to, their general belief is -- hey, if I open a hotel two to three years from now, I think business is going to be strong and I'm going to be able to take advantage of it with a new product.

That's helpful. Just one last question, maybe it's a maybe it is a bit open-ended. But I guess are there any other best practices you might be bringing to Choice in addition to effectively this that you are sort of announcing today?

Well, I think that having spent 26 years at Marriott, there is clearly a number of lessons that I have picked up over the years. Both in terms of how a company should be run, the importance of the talent of management, the importance of strong brands, the importance of staying disciplined and focused. Marriott, in spite of a couple of big deals is a unit-by-unit growth company.

All of those things I am happy to report I have found inherent in this Company. So my view is I am simply sort of picking up on what has been done in the past, and utilizing my Marriott experience though, which doesn't require significant changes here because most of those principles are already deployed here.

Great, thank you.

Joe Greff from JPMorgan.

Good morning. From the developer's perspective, what are the anticipated returns for Cambria? How does that compare to some of the other brands? How does that expected return compare to say two years ago?

In this space, typically they are looking for unlevered returns, sort of in excess of 10% to 10.5%, and usually above those levels it starts to get their interest. Cambridge is well within those ranges.

Mr. Greff, anything further?

I'm all set, thank you.

Michael Millman from Soleil Securities.

I guess following up on a number of questions, I was wondering to the extent that you are getting larger, maybe more sophisticated builders and talking about top markets, are you creating a force for negotiating better deals that you haven't had a deal with in the past?

Secondly, are you creating more volatility by having more concentrations in the same markets where everyone else is?

Sort of related to that, maybe you could talk about RevPAR on a comparable or same-store sales basis. It looks to me that RevPAR is being in fact hurt, if you will, by conversions growing the lower RevPAR properties faster than the higher RevPAR properties.

Well, let me start with the first question. Yes, our belief is that as we build Cambria as a strong brand, that will increase our leverage with developers.

As it relates to the RevPAR changes, that is not the way the Company views the opportunity. The way we view the opportunity is brand by brand in that space to grow market share. If the mix shifts somewhat, all of our brand positionings provide profitable growth, because of our base of royalties.

You do get more royalties, obviously, out of a bigger, high RevPAR hotel. But the Company's position over the years -- and will continue to be -- is that we've got brands that perform in a number of the segments. And growing them all to increase market share while maintaining the strength of the brands is what makes Choice special.

Now you had two or three others in there, I didn't think I caught them all.

I think you kind of captured it, which is making sure that these brands stay properly segregated from a RevPAR perspective relative to each other and relative to the competition where they compete against.

Could you also talk a little bit -- the pipeline. It looked, if I did the arithmetic properly, it looked like there was a major deceleration of growth. It was only up about 6%. I'm not sure if I did that number correctly. But maybe you can comment on that.

And related, international looked like in fact the number of rooms and hotels actually declined. Maybe you can comment on that.

Yes, I'm going to take the international side first. That decline in the number of hotels internationally is consistent with what we saw last quarter. That primarily had to do with some things that we did with the brands down in Australia, where there were some -- a fairly large number of smaller hotels that left the system.

Plus there was a little bit of cleanup in Europe as a result of our changes in our franchising structure there.

Now, on the flip side, we did open, I think, last quarter, two very large hotels in Europe with one of our -- our Scandinavian partner. Which I think -- one in Prague and one in Stockholm. So they are two of the largest hotels in those cities.

So in terms of the other question in terms of the pipeline, what I would say is the rate of growth in terms of the number of executed contracts has probably decelerated a little bit from what you've seen over the last couple of years. But still strong growth.

The pipeline obviously reflects a number of different things. It reflects the contracts that get executed as well as the hotels that opened. We have had a strong year in terms of gross openings this year relative to last year, so you've got a lot of gross openings that are coming out of the pipeline.

Obviously the other factor is kind of the falloff of transactions that ultimately don't open, which that has probably been a little bit higher than it was last year.

But on balance, we think it is still a great pipeline and really supports our belief that developers value our brands and want to affiliate with our distribution channels.

Finally, on the $20 million to $40 million per year incentive, do you look to get a good return on that separate from the benefit of boosting up your growth in Cambria Suites and extended?

Yes, we do.

And what return, pure financial return are you expecting?

I think it's going to depend frankly on a deal-by-deal basis and whether or not it's an equity participation, or a debt guarantee, or debt type participation, mezzanine type participation. So it's just going to depend deal by deal.

Obviously, we are going to be really careful and really choosy about who we do those types of programs with. They are going to have to be able to demonstrate the ability to do multiple units in these kind of upper-end brands. Obviously, we are going to have to feel very good about the underwriting of each of these folks.

In most cases it is probably going to be people that either Steve has done business with or the company has done business with in the past. But there will be, obviously, returns on the equity and the debt deployed there.

Thank you.

(Operator Instructions) David Katz from Oppenheimer.

I think all of mine have been generally answered, but if I can just follow -- no, I think I am all set and I will catch you off-line. Thanks very much.

Alex Lieblong from Key Colony Funds.

One, I am just kind of curious. When I first started following this story, and we bought in about a year ago, some of the discussion came about, about the balance sheet and that somebody might be comfortable with 3-to-1 ratio debt-to-EBITDA. And also about the aversion to owning properties.

I just feel like the current has changed, and did I miss something.

No, there has been no change. That is exactly our position today. None of that is at question or in terms of strategy change. The only thing we are doing as rather than key money and some other incentives that we put out, we are putting it more into a formalized program that is attractive to these multiunit developers.

Okay. Thank you.

Speakers, there are no further questions. You may continue.

Thank you very much for your time and attention. We will look forward to talking to you about future progress in the next quarterly call.

Ladies and gentlemen, this conference is available for replay after 11.30 a.m. Eastern Time today through August 29 at midnight. You may access the AT&T executive replay service at any time by dialing 1-800-475-6701 and enter the access code of 929522. International participants may dial 320-365-3844. (Operator Instructions)

That does conclude your conference for today. Thank you for your participation and for using AT&T executive, conference. You may now disconnect.