Choice Hotels International Inc (CHH) 2008 Q3 法說會逐字稿

Good morning and welcome to the Choice Hotels International third-quarter 2008 earnings conference call.

At this time, all lines are in a listen-only mode and later there will be a question and answer session with further instructions will be given at that time.

As a reminder today's conference is being recorded and 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 express or implied by such statements in.

Please consult the Company's Form 10-K for the year ended December 31st 2007 and other SEC filings for information about important risk factors effecting the Company that you should consider.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activities, performance, or achievements. We caution you, do not place undo reliance on forward-looking statements, which reflect our analysis only and speak only 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 in our remarks as part of our third-quarter 2008 earnings Press Release, which is posted on our website at choicehotels.com under investors 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 third-quarter earnings conference call.

I have with me today, David White our Chief Financial Officer as well. Before covering the third quarter results in detail, I would like to spend a couple of minutes talking about the current environment, the capital market conditions and highlight how they are likely to impact Choice in our model.

Obviously, a slowing economy, weakening consumer confidence is clearly having a negative impact on travel demand and on RevPAR performance.

Since Labor Day we've seen significant declines in hotel occupancies and moderating ADR growth, which has turned down since the jewish holidays and the crisis on Wall Street in the financing markets to impact our overall RevPAR performance.

Based on the internal data points we've seen in September and October to date, we expect RevPAR declines to accelerate somewhat into the fourth quarter and we expect a negative RevPAR environment to continue into 2009.

We just completed a series of fall regional meetings with our franchisees and both the franchise association leadership and our management team has encouraged our franchisees not to drop rates as dropping rates does not induce demand.

We've told them dropping rates induces lower revenues. So far, the ADR results to date have implied that for the most part these folks are holding that line and that our advice is being heeded.

I would also like to point out that we have a different electronic intermediary environment in this downturn. The third-party sites are not in a position to negatively impact the big lodging companies like Choice as they did in that last downturn.

Another positive note, we've noticed recently is the level of request for us to participate in corporate RFPs in 2009, where we've seen a number of customers that have not done business with Choice and those are up roughly 25% compared to last year, which can only help us on the RevPAR front as people trade down in this environment to continue their travel but to save on T & E.

Unlike RevPAR industry while supply growth has remained strong to date in '08 and we have certainly benefited from this trend. The number of units in rooms in our domestic system have increased 6% and 5.4% respectively.

We continue to believe that 2008 will be one of the strongest net domestic unit growth years we've had in our ten-plus years as a public company.

However, it is clear that the lending environment is going to have a meaningful, curtailing impact on supply growth and potential conversion opportunities in the industry in 2009 and 10 including our new construction brands.

Seeing a number of negative factors in this area, many financial institutions have stated definitively that they are out of the hotel lending business or reducing capital allocated to hotel lending for indeterminate periods, while others are reducing loan to cost and loan to value ratios in a manner seriously reducing potential developer returns, financial institutions are increasing credit spreads and tightening covenants, all of which are effecting supply growth.

We expect the impact of new construction projects to be in at the latest in the third or fourth quarter of next year, as we have most of the new projects that are underway will open in that year, obviously, and we expect the current climate to be begin effecting the latter part of '09 and into 10 and 11.

Interestingly enough, the construction environment is one of the most positive we've seen in years, both for the availability of labor and the slowing of the growth of material costs. So if the lending environment improves, we expect to be able to benefit from that. The impact of financing on our franchise development. We obviously beginning to feel that impact on our development activities.

We are coming off, however, three straight record franchise sales years and we still expect 2008, as said, to be a very good year but the application flow for our new hotel franchises have slowed for both new construction and conversion. New construction being hit a little bit more. Not surprising for the new construction, but trend for conversions are different than we've seen in the last downturn in 2002 and 2003, where we saw a significant uptick in conversion activity.

This, as we believe, is related to the lack of liquidity in the markets and the lack of financing as hotels are not trading hands and are down significantly year-over-year in terms of hotel sales, which then leads us to have fewer opportunities conversions. As this scenario improves, however, we are uniquely in one of the strongest positions in the industry, we believe to take advantage of that conversion activity as the financing improves. Relicensing activity is also down significantly due to the same reasons as deal volumes have declined as a result of this tighter credit environment.

Despite the current negative macroeconomic backdrop, I remain extraordinary optimistic about the long-term ability to grow Choice profitably and I strongly believe that we're in uniquely position -- we are uniquely positioned to weather this downturn.

We have an exceptional franchise business model, which includes great brands, size, scale and distribution, high operating margins and low capital requirements. An extraordinarily strong balance sheet. Net debt is less than one times of our expects adjusted EBITDA for 2008.

We can concentrate on a number of exciting opportunities here in the US and abroad to grow our business for the the long-term, as well as to continue to return excess capital to shareholders over time. As you've seen recently through our dividend increase and our opportunistic share repurchases. Getting to Q3 '08 results. Obviously a strong quarter, despite the softer RevPAR environment.

Robust domestic unit and growth continued with a number of domestic units rooms online increasing by 6% and 5.4% respectively from the September 30th, 2007 levels. Our royalties increased 5% for Q3 '08.

This is driven by system growth, by an effective royalty rate increase of seven basis points and it particularly was offset by domestic RevPAR decline of 1.6% for Q3 '08.

In previous soft RevPAR environments Choice has historically been less impacted than other public lodging companies due to our pure franchising business model and the strong appeal of our conversion brands in downcycles.

Franchise sales coming off of six consecutive years of growth in executed domestic contracts. 2008 will be another strong year. Not quite as strong as last year, but still strong nonetheless. The more challenging new construction environment, particularly new construction in the new term will be a challenge for us to overcome.

We have executed 160 new domestic hotel franchise contracts during Q3 '08. A decrease of 12% compared to 182 for the same quarter last year. Year-to-date, we have executed 491 contracts, which is a 5% bump over the previous year.

Adjusted margins remain very strong at 69% for the third quarter, and 63.5% for year-to-date. Diluted earnings per share for Q3 '08 were $0.57, which exceeded our guidance by $0.2 compared to $0.59 for the same period last year.

Looking forward, we expect fourth quarter '08 diluted earnings per share of $0.40 and a full-year adjusted diluted earnings per share of $1.76. Adjusted EBITDA for full year 2008 is expected to be $197.5 million. Adjusted EBITDA and adjusted diluted EPS figure for full year '08 exclude, I previously discussed $6.1 million, which is $0.6 diluted EPS resulting from acceleration of the Company's management succession plan earlier this year.

These estimates assume domestic unit growth of roughly 5.5% for full year 2008. A 6% decline in RevPAR for the fourth quarter, and a 1.5% decline for the entire year. It also assumes a six basis points increase in the effective royalty rate for full year 2008 and an effective tax rate of 36.25% for the fourth quarter and 37% for the full year 2008.

We remain very optimistic about brand growth opportunities over the next several years. We believe that we are well positioned for long-term growth and value creation for our shareholders on account of our strong brands, our proven business model and our very strong balance sheet. Now, I would like to open up for any questions you may have.

(OPERATOR INSTRUCTIONS) Our first question will come from the line of Steve Kent of Goldman Sachs. Please go ahead.

Hi, a couple of questions, Steve. First off, I have forgotten if you give guidance or give some thoughts on '09 at this point or whether you wait until the fourth quarter to do that?

We fortunately wait until into the fourth quarter to give that guidance.

Obviously that will give us a little better insight into where we've been tracking and in today's environment, you see such a wide range of forecasts. I'm actually glad we're not giving it until development.

Then may be you could talk a little bit about two points. One on the royalty rate increases. It looks like that is -- what's behind that royalty rate increases? Is it mix or is it that you're able to get better rates from the people you are signing on? And then on the pipeline, when we dug a little deeper, it looks like the economy hotels like EconoLodge and Rodeway are declining more than the more moderately priced hotels in your brand circle.

Hey, Steve, this is Dave White, I'll take those. On the royalty rate, I think what you have to look at there is over the last several years, we've had a pretty good track record of gradually increasing that effective royalty rate and there's a couple of key reasons for that.

The first one is one of our sales strategies over the past four or five years has been to discount the effective royalty rate in the early years of these contracts. Obviously, this is a contract business. Where we have very long-term contract for virtually all of the brands and that effective royalty rate is set at the time of the initial contract.

One of our sales techniques in terms of customer acquisition has been to discount the early years. So as those ramp ups -- as those discounts burn off, that's having an impact on the effective royalty rate and you couple that with the relicensing.

Although they've been weaker this year than they have the past two or three years. Those relicensing events are also opportunities to essentially reset the effective royalty rate on these contracts and more aggressively eliminate those discounts. You're seeing the burnoff of discounts over time.

In terms of the pipeline, I think what you're seeing on the conversion brands and the economy conversion brand is that frankly those are predominantly conversion brands. EconoLodge and Rodeway and so when the contract enters the system, it comes online faster than a new construction hotel does. And couple that with the fact over the third quarter here you saw the number of conversion contracts getting sold declining. Really those two factors playing out in the pipeline.

Okay, great, thank you.

Sure.

Thank you. Our next question will come from the line of William Truelove at UBS. Please go ahead.

Hey, guys. Can you give us an update on Cambria Suites pipeline and lending program and all of that stuff that you talked about in the second quarter?

Sure. In general, we've got I think very strong developer interest in that product. We've been out talking to a number of multi-unit developers who are folks that moved off a lot of units when the opportunity presented from the seller sitting on significant piles of equity and looking to redevelop. They're very interested this that product.

The issue remains that financing is becoming very difficult, particularly at that price point for Cambria development. We've got in our other brands where the average deal might be $5 million. We're still seeing lending activity but in that sort of $15 million and up category from Cambria, we've really seen lenders becoming more and more scarce and their terms are tougher to deal with as they drop leverage. That's impacting our overall deal flow.

The deal pipeline for Cambria is still very strong. I mean we've got probably somewhere in the neighborhood of 70 plus deals that we're working. A number of those are underway already in terms of construction. A number of them are looking for financing, which we are going to help try to obtain by bringing in support to find the lenders that are actually lending.

The other thing about Cambria is we continue to get rave results from our guests. Guest satisfaction is probably the highest I've seen of any brand I've been involved with. We're getting great notice in terms of awards from different people. People tend to love the design. The franchisees are very excited about the opportunity to do that.

It's just a real tough environment to get those deals done. However, I do think with our efforts that we're going to start seeing an uptick in that pipeline sometime early next year as I think sort of the credit crisis begins to loosen somewhat.

Okay. One followup question then is when you talk about conversions impacted by the credit markets. What is the typical expense a hotel owner goes through for your -- just an average conversion activity. How much does that cost them?

It can range widely. For a hotel that's in good condition, it can literally be signs and systems, which is 50/$60,000 to a hotel that's a complete gut of their rooms where they're going to spend $40,000 or $50,000 a key which could be $5 million.

If you looked at the average across the board, it's probably somewhere in the several hundred thousand dollar range but it depends totally on where that property's been, how it's positioned currently, what the view of the owner is in terms of are they upgrading it or are they just try maintain it.

The great thing for us though is I think we have in terms of conversion brands, the brands that provide the most value in terms of business generated and in addition to that, I think, as we work with our franchisees, they sort of see us as a strong franchiser for their products regardless of where they are in the life cycle.

So unlike hotel companies I've been associated with before, we've got a brand that suits a hotel that may be well conditioned but is on the downside of its life cycle and functionality, as well as brands that suit for a new build upscale product.

So the great thing about our model is we can help a franchisee not only with their existing inventory but we can help a hotel through their various life cycles and in fact, we actually move hotels through our brands as they age and become less functional.

The example I like to give is, we can take a Comfort Inn that may not be functionally equivalent to what we're doing with Comfort Inn today and if that hotel is well conditioned and well run, we will move the hotel into quality. That franchisee will see real business support and real results for the money that they pay for to us.

As a result, that puts us in a really strong position to not only maintain our contracts that we've got even as those hotels age but also to offer opportunities in a conversion environment to others that are looking to generate more business for the brand their paying for.

Great, thank you for that answer. Appreciate it.

Sure.

Thank you. And next will go to the line of Jeff Donnelly of Wachovia Securities. Please go ahead.

Thanks guys. Actually Steve, I would like to build upon that question. I'm curious, do you know anecdotally how owners of hotels typically pay for, finance that conversion and is there anything specific that may be you guys can and do right now to make that transition easier for folks?

The answer is, we typically have not seen a need for us, for our brands to step in and help with conversions because in the normal lending environment there's two ways of that owner going at it.

They are either in a refinance scenario and repositioning where they will fold that incremental PIP cost is into a first mortgage or a combined first and second tranch. There are also those who will take out a second to do that PIP. The issue for us today with conversions isn't that they don't have the incremental dollars to do that conversion. It's that they don't have the first mortgage to buy the property or sort of do a refinance which allows them the reposition.

If that -- if it was just a sliver position we might look at that but we have historically not had to get very involved in PIP dollars. We at some point will incent them to do that PIP. as Dave mentioned through a discounted franchise fee in a couple of years. And incentive notes from time to time. But in general, the conversion activity that we've been so successful with usually doesn't require a lot of capital from us in the normal environment.

We'll obviously look if that would make a difference but the environment today, is it's not the sliver that's making the difference. It's the first that they need in order to either buy a hotel or to do a repositioning of one is difficult for them to obtain.

In your old shop and down the road is I think them saying they would expect conversion activities to increase in this type of environment, which totally makes sense in most normal downturns.

I guess I'm wondering because of the risk of disruption to revenues during a transition and obviously the credit markets are closed.

Do you think we're less apt to see as much conversion activities than historically because of owners more comfortable -- they need to pay the mortgage, et cetera?

I think in today's environment, I think there is somewhat of a relicense on owners to do something significant until they think they see something stabilizing but I'm actually hopeful within the next several months there's at some semblance of a lending market that will support this activity. And normally when you see this downturn, you do see the big uptick in conversions primary because they're not comfortable with the devil they are with.

This they think their brand is underperforming and think if they reposition to a higher caliber brand, which is shown to demonstrate and generate business for them that they'll be better off and so that's the typical pattern but what is effecting this one that's different is that lack of liquidity out there to be able to obtain money to do that.

And so we're still -- when we look at guidance for next year and look at the deals, I think what we'll be looking at is when do we think there will be some liquidity in the markets and then at that point, we would begin to focus an uptick in conversions because we still think they're coming. It's a question of when the market stabilizes and allow that to occur.

Great. Thanks, guys.

Thank you. Our next question will come from the line of David Katz of Oppenheimer. Please go ahead.

Hi, good morning,.

Good morning, David.

Could we talk about how much of your pipeline or what percentage or in some relative term, how much of your pipeline is actually under construction at this point?

Sure. David, you want to do that?

Sure. In terms of where footers have been poured on the new construction side of things, that was around 165 units where footers had been poured. As of the past day or so.

On the conversion side obviously those hotels are already open and operating hotels, so they're in various stages of converting into our system.

We feel pretty good about what our opening scenario will look like obviously for the fourth quarter but for next year, because we're in relatively good shape in terms of the hotels we were counter counting on are obviously financed if they're pouring footers. And we expect a good level of conversion activity.

The question will be if it's a great level of conversion activity then that will push our numbers further.

Right, this maybe sort of a dark question that we haven't had a chance to look at, but how closely do you or how regularly do you follow sort of the financial standing of your owner/operators? And what kind of scenario analysis could we or should we be looking at. If heaven forbid, some of your hotels wind up going out of business or shuttering up?

That's the great thing about our model and we've seen this in other downturns that is not a significant risk for us. Primarily because if you think about our properties, we're sort of at mostly at -- well almost primarily at the modern tier and below.

Those property because of who does those properties with us typically are not highly levered and in addition to that, those properties can survive on a much lower level of occupancy than say full-service hotels. My experience in -- my previous experience where we had a lot of properties that had higher levels leverage and were also needed higher levels of occupancy to break even. In our scenario, we've got a group of properties and owners that are not highly levered and can live off much lower occupancies.

Having said that, we're monitoring closely. But we have an extraordinarily low days credit sales outstanding, which has not moved appreciably in the last nine months and in previous downturns, there is somewhat of an uptick in properties that you have to deal with in terms of delayed payments.

It is extraordinarily minor in the scheme of things to us, and if this a little deeper, we'll obviously continue monitor closely but that is one of the great things about the group of franchisees we have and the hotel we've have is, as we turn down, one of the things that we're not -- we will monitor but that we're not really, really concerned about is a huge increase in defaults or properties going under.

Perfect. Thank you very much.

Thank you. And our next question will come from the line of Joseph Greff of JPMorgan. Please go ahead.

Good morning, guys. Steve, sorry if you mentioned this and I didn't get. What percentage of the development pipeline has committed financing now?

The number we talked about was around 165 of the new construction hotels in the pipeline have footers poured.

So we look at that as a pretty good indication that financing is in place. Then on the conversion side, essentially those hotels are already opened operating hotels so their capital structure is already fully in place.

Great. And what percentage of the new units added this year relates to new construction?

It's been about 30% or so of the gross openings for new construction.

It's interesting. The deal flow earlier for deals that will open in the 10 and 11 was a really strong year for new development.

That's tailing off somewhat, but the openings this year and next year will still be predominantly conversion, which is why that gives us pretty high level of confidence that we're going to hit sort of pretty strong supply numbers, even given the environment.

Great, where do you think unit growth next year in the pipeline?

We're going to wait until December to do that. I think we'll have a much better idea.

I could give you a number but I think it will be a lot more meaningful. I think at this point, given sort of where everything is, people throwing numbers out isn't particularly meaningful.

Okay, and the earnings release last night, you mentioned that the financing program to the multi-unit franchise developers will start to hit more in 2009 and is that something that you think could exceed that 20 to 40 million range given some of the things that you're talking about? And how do you view that now say versus three/four months ago when you kind of conceived this initiative?

Actually given the environment, if you consider where we were three or four months ago, I would say it may actually go out a little slower. A lot depends on -- that money is not going to go out until those hotels are well underway. Typically, if you're doing a mez deal, you're talking about doing it at opening which push it's way out.

If you're doing a JV deal with the one that we announced with Oxzif, that will include some investment up front but because you will fund your equity sort of as you start that project off. But even as we do deals early next year, those dollars aren't going to go out because they're not going to be ready to actually start construction for quite a period of time.

I mean in today's environment the typical new build scenario that goes well is a year of predevelopment. 15 months of predevelopment and then 15 to 18 months of construction.

So if anything given sort of where we are today and the delays that all of this is causing in the pipeline and projects starting, I would say it's probably later that those dollars will go out and than we originally anticipated in.

We've got strong interest in it but the environment's tough. We've bot a number of folks that are contrary in their nature. This is a great construction environment.

I mean -- I haven't seen a construction environment this good for holes in ten years. The issue is while that's great, financing is either really hard to come by or nonexistent and so as that evolves and we get some more clarity and some sort of albeit lower levels, but some lending into that marketplace, I think you'll see the deals pick up but I think what you'll see is our participation in those sort of upscale environment, where we've got multi-unit partners doing first tier cities, which is what we are trying to incent, that will begin to happen but it's going to happen slower than I originally was hoping.

And so as a result, you won't see those dollars probably go out at the same pace that we would have thought three months ago.

Great. That's helpful, thanks, Steve. And David, as you kind of look at controlling costs, which is primarily in SG&A, How do you view that and what other leverage you can pull and how do you think about SG&A growing over the next several years given this downturn that we're in?

I would say that if you look at where we were for the first nine months of the year in terms of SG&A growth and then where we ended up for the third quarter with 6% SG&A growth. We've certainly got the trend of SG&A growth moving in the right direction and we're very focused on the cost side of the business. Having said that, the operating margin in this business are very high. The franchising margins are very high.

So I don't want to overcommit but we're certainly looking at all avenues of cost. Looking at the infrastructure very closely to make sure that the investments we're making make sense for the long run. So Steve mentioned, we'll give some more definitive guidance on SG&A growth for '09 when we get to the middle of December here but we're very focused on on the levavage that we have at our disposal. Great. Thanks, guys.

Next we'll go to the line of Michael Millman of Soleil Securities.

Thank you, I guess starting with the last comment, should we assume that the operating leverage, the high margin will work on the downside in the same ways it works on the upside? Or can you do something about that quickly?

I think in a down RevPAR environment, a lot is going to depend up on where we end up from a supply perspective, right. Our track record has been in the last downcycle that we were able to grow the system at a pace that was sufficient to essentially offset the RevPAR designs that we saw in '01, '02, and '03.

And that flowed through to our franchising revenues and our EBITDA and we generated growth in those scenarios. So that's certainly what we're -- we're aware of that history and focused on trying to repeat it by managing the costs as makes prudent sense.

Having said that, we've made investments, particularly in the second of ha of last year, and kind of continuing on into the first half of this year in our emerging brand and you would think those emerging brands will really, over the mid to long-term provide us some excellent growth opportunities and to create some strong franchising businesses in markets where we're not -- we don't have great supply at this point.

We're going to continue to make those investments because we think they're prudent for the long-term health of this business.

But I think what you'll see from us is you will see particularly given the environment, strong control over SG&A growth, but which is as Dave mentioned, sort of maybe augmented by investments in future growth that we think is warranted.

So I've mentioned international before and some other places where we want to invest in future growth, but what you will see from us is on the base SG&A level, an appropriate response to the environment we're in.

And following up on Dave said what happened in the last downcycle, can you give us some idea of how to look at the licensing or relicensing fees relative to the conversions, relative to new construction?

Yes, the way we looked at that, Mike, is if you look back in '01, '02, '03, the number of relicensing transactions in each of those years, averaged roughly 5% of the proceedings years domestic system side. And that was kind of the low point over the last ten years in terms of licensing transaction volume. So the past two or three years it's been around 8% -- 7, 8%. And in the last downcycle it fell to 5% and you're certainly seeing that in the revenues so far this year that the relicensing volumes have slowed considerably, which we think is attributable primarily to the financing environment being pretty weak.

The Marriott, if I heard them correctly, said they were seeing sales were between hotelliers were down 85%. Which certainly boded very ill for -- or maybe even more ill than you're suggesting for conversions.

Yes, I can speak to that having some first-hand knowledge of that. What you've got is, you got a strong falloff between 78% falloff in overall transactions. The biggest place where that occurred is more at the upper end. There's still some transactions going on in the lower end. That's where we tend to play more. So as a result, while our relicensing held up longer during the year than anybody else's did.

Ours began to get effected sort of third quarter and what that is, is the result of that credit crisis and the lack of transactions even started hitting the lower end, where typically they're less susceptible to swings in lending because it's the bigger loans that go first, and so what happened is over time, eventually that lending situation even began to effect the lower end, which is a little unusual given -- so that's where it tends to continue even if times are tough.

That's what we're seeing today so you relicks are off as a result of that. But we also think based on that we'll be the for the pick up as those credit markets ease up somewhat and we'll see more normal levels of relicensing and so in our model we're typically last to fall off in relicensing and we'll be first to pick up.

And are you seeing it get down to as kind of 70/80%.

No.

What we've seen so far year-to-date, the number of transactions -- relicensing transactions it down about 7% but if you look at the third quarter's it's down about 35/36%. There was a pretty significant drop in the third quarter but that's not really unexpected in light of what is going on in the environment?

We're significantly less than the overall drop of the transaction number out there.

Could you make a comment on the international one. When you look at your room supply international was down.

Right, and I think that's primarily a function of we reacquired the master franchising rights in Europe last year and early this year and so what you're seeing there is some level of, which we expected, some level of cleanup of some of the properties that weren't really fitting in with the brand standards. Kind of the primary reason.

Great, thank you very much.

Thank you. And next we'll go to the line of Mike Grundell of Key Colony Funds. Please go ahead.

Yes, thanks guys. I noticed you started buying back a little bit of the stock back in the month of October here. Was that just based on price because your outlook for maybe that development got pushed a little bit. Can you just give a little bit of color into that?

Yes. I was going to respond, somebody characterized it last night as something I didn't agree with, but yeah, we are an opportunistic buyer of our stock when we think it has hit a significant discount and we think that there is not more discounting to come a significant way.

So you have seen us enter the market in previous years in that scenario. You can characterize our buying as similar to that and you can expect the same from us going forward.

Okay. Thank you.

Thank you. And next we'll go to the line of Jim Bradshaw of Bears Capital Management. Please go ahead.

Thank you. Good morning. I was wondering if you could go back to the international and speaking of the weeding out of the units that don't fit for you.

How is that going and how do you feel overall about your international units?

I think we've worked through most of the units that we were not happy with and there may be a couple of remaining that are still working out of -- it was basically a venture that we were in with another entity that we've separated ourselves from.

So we're pretty encouraged by where we've ended up as a result of that and then we've got some reasonable growth planned from our partners out there and then as I've mentioned previously, that's one of the areas I'm interested in terms of putting some resources against a drive, additional unit growth. Particularly in a couple of markets that I think we can do more in and that our brands are well suited to.

Okay. Thanks for your time.

Thank you. And next we'll go to the line of Harry Curtis of Chilton Investment Company. Please go ahead.

Good morning. I have two questions and the first one relates to a comment you made earlier about third-party sites not impacting you. Can you walk us through the difference between say 2002 and 2008? And -- because it does seem that the third-party sites are getting more inventory. So what's the difference?

The real difference is that most of the lodging companies did not have some form of rate guarantee in place and so there was a definite view and in fact, the truth was that you were getting deals on third-party sites that were not available to you on the hotel sites.

Consumers learned that pretty quickly and as a result, you had hotels that were giving up significant chunks of their inventory to those third-party sites without any form of a guarantee of use and so those sites could turn those rooms back over unsold with no consequence to them.

While you're seeing, I think a little bit a pickup in some of their activities, I had not seen anything that's even remotely resembling what happened in '01 and '02, where you actually had some brand companies having to go to those sites to buy their inventory back to sell it it. It was a complete dysfunctional effort on part of the industry.

I think they learned a huge lesson and I don't think you'll see anything like that as a result and so that, plus the fact that the consumers are now aware of and if there was a need to, it would be re-enforced. Sort of this rate guarantee, if you're not getting lower rates on those sites and by the way, there's also some reasons not to book on those sites in terms of points and other things you get. You're note going to see anything like what happened in that last downturn.

And the second question relates to your comments about corporate RFPs up 25%.

To what degree have you gotten some sense or commitment from corporations that you didn't have in the past 12 months? Do you have any significant number of occupied rooms that are now on the books and so that's the first part of the question. And the second part of the question is to the extent that you had companies that were in your fold last year, is there any comparison that you can give us on the rate that they're being offered in '09 versus '08?

Obviously, I'll do the second one first because that's the easier one. Obviously there is pressure on rates. I have not yet seen an overall result from the company's year-over-year, but I think in general, we are pushing to hold the line on rates and not discount. I do not think we're getting significant price increases in those contracts.

So I think you can see -- you probably see in that rate environment a neutral to slightly negative view of the rate in there in return for maintaining their inventory in our system.

On the uptick in RFPs, that season is sort of now coming through to a close and so I don't think a lot of numbers to share with uptick, other than given the number of new agreements that we are putting out there. We are anticipating an uptick in that business and we'll look to see what we can report to you sort of next call in terms of that activity. But we're expecting to get that.

I will caution though, to say that, we're also seeing trade out. So in addition to trade down, which will help us, we're seeing trade out of people sort of pulling out of the travel market and so it is a positive factor, but it's not one that's going to eliminate the negative RevPAR environment.

To what degree is -- or what percentage of our occupied room nights is it?. In other words, when you see a 25% increase is that off a really low base.

It's off of a low base.

Okay.

So we're getting some corporations that before weren't using our brand and now they're saying we're going to and so we're getting in people's books and we'll see what we get in terms of travel from them.

Okay, thanks.

Thank you. And at this time speakers, there are no further questions in queue.

Excellent, well thank you very much for joining us on this call. We believe that even in this environment, our model continues to demonstrate our ability to do well in a downturn market. And we'll look forward to sharing more results with you on our call.

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