Choice Hotels International Inc (CHH) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotels International fourth-quarter and full-year 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. 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 risk 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 the 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 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 fourth-quarter and full-year 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, Inc. Please go ahead, sir.

Good morning and welcome to our fourth-quarter and our full-year 2008 earnings call. With me this morning as usual is David White, our Chief Financial Officer.

Before we get into a discussion of our recent results, I wanted to spend a couple of minutes with you reemphasizing some of the important concepts we talked about in our '09 outlook call that we had in December around the kind of terrific and important characteristics of our business and our model that have enabled us to return value to shareholders over an extended period of time and in, most importantly, a variety of industry and economic climates. Obviously, important today.

And those characteristics include a stable of 10 diversified value-oriented brands that are well known both by consumers and hotel developers and our Ascend Collection portfolio, which we have high hopes for this year, which is a collection and membership program of hotels that are boutique, resort and historic; a strong central reservation system and a rapidly growing global loyalty program that deliver a large percentage of valuable business to our franchisees; hotels; strong relationships with our franchisee community; a highly attractive fee-for-service business model that generates strong free cash flows and high returns on invested capital unseen in the lodging industry.

The business coupled with a disciplined approach to capital allocation has enabled us to put our excess free cash flows to their highest and best use over time, including returning excess cash flows to shareholders over time through share repurchase and dividends. One of the most remarkable things about this model is that, since the inception, the Company has generated roughly $1 billion in earnings and has returned roughly $1 billion to their shareholders through these avenues.

I'll talk a little bit about the current environment. Obviously, the near term remains challenging and visibility is difficult as evidenced by the wide range of opinions on where the hotel business is going. The economic pressures, unemployment, weakening consumer confidence are clearly having a negative impact on the hotel industry and we are not immune to those factors.

Having said that, I would like to highlight a few of the near-term drivers of our business that impact our financial results and review how our model is different than that of other lodging companies. The first and probably the most important is unit growth. We have brands that meet all stages of a hotel's lifecycle. We have successfully grown our core brand units and Choice's marketshare at a faster pace than our competitors and over the past five years, we have been the leading domestic gainer of marketshare amongst the major hotel companies.

We typically convert hotels into our systems in difficult times such as this and add new construction hotels in good times. But I want to reiterate one thing about our family of brands and that is we have a brand that meets all stages of a hotel's lifecycle, which allows us to be extraordinarily flexible in how we grow this Company throughout various cycles in the business. We remain very confident in our stable of brands that positions us for continued unit and room growth and with some help with liquidity in the market, should lead to a great environment for conversions for us later this year and into 2010.

RevPAR, which is another differentiator from other public companies, has been our ability to deliver financial performance that is relatively less volatile than RevPAR fluctuations given our moderate tier positioning, given our franchise pure model and given the way that our brands perform. As you know, the lodging business is a cyclical industry and RevPAR in the segments in which we compete, while still negative, have not been impacted as much as the higher-end segments.

In addition, a higher concentration of our hotels are located on interstate and in small metro locations and over the last year, RevPAR for hotels in these locations have been less severely impacted than urban hotels. So we encourage you to go beyond the industry headlines when it comes to RevPAR as Choice, while not immune to broad macro trends, is very much different than the other lodging companies you are looking at as you examine RevPAR. There are very few companies like ours that can offset negative RevPAR with supply growth on a one for one basis. A1% negative RevPAR scenario and a 1% supply growth scenario equals a revenue-neutral environment for us, which is not matched by other companies.

Talk about a current perspective on RevPAR, and turning the current industry environment, the RevPAR has declined since August. Occupancy declines were experienced through 2008 and they steepened during the summer travel season. In November, we started to see rate declines, which we continue to experience. However, our declines in rate are much less severe than the declines in the luxury, upper upscale and upscale lodging segments.

The RevPAR projections updated by the various prognosticators at the ALIS conference in late January range from a low decline of 5.9% for STR to an 11.2% decline by PWC. The quarter-to-date industry RevPAR had been extremely soft with stars showing RevPAR down 16.5% in midscale with food and beverage and 15.9% down without and an overall 12.5% decline in the economy segments.

The Choice RevPAR numbers lag for one month, so our Q1 reflects rates received by our franchisees during December, January and February. Industry RevPAR for December declined 10% and 15% to 17% in January. For comparison, Choice's RevPAR in December was down approximately 8% and down further in January and February to date. The tightening of the credit markets and global economic uncertainty makes RevPAR very difficult to forecast going forward. However, we do anticipate that RevPAR declines will be the steepest in the first half of the year and then will moderate in the back half in part due to favorable comparisons as last year's results were dropping off.

On the development and unit growth front, the new hotel construction environment obviously remains challenging due to the lack of available credit. Still, we are seeing some smaller deals being financed by local and regional banks, typically in the range of $7 million to $8 million and below, which is our sweet spot for the bulk of our hotel growth. We are hopeful that as credit becomes easier to obtain in the back half of the year, this will provide a rosier environment for conversions transactions and will help our growth of our brands.

During 2008, application flow decreased 12% from 2007 with new construction applications down 19% and conversion applications down 7%. We saw evidence that, in the fourth quarter of 2008, new construction contracts were down sharply to a level of 45% down. On the conversions side, while not as dramatic, domestic franchise agreements were down less than new construction, but they were still down around 20%.

We remain confident that when hotel transaction volumes pick up and credit becomes more available, we will see an uptick in conversions as we have typically seen in other negative RevPAR performances that Choice has experienced.

Let's talk a little bit about franchisees and their operations, which obviously is a critical focus for us. For open and operating hotels, this environment is obviously difficult. We realize that if our owners aren't successful, we aren't going to be successful, both in retaining them and growing our brands. We are committed to allocating and managing the resources we have available to maximize guest delivery and property level success and return on investment.

We are committed to our franchisees that we will not initiate any additional brand standards that require their investment of capital during 2009. We have committed to maintaining our marketing efforts and will allocate a greater part of our marketing spend towards focused transactional efforts to drive greater share of reservations to their hotels. We are focused on growing our Choice Privileges program dramatically. We are looking for a target of 1.75 million additional members, which is a 75% increase over the new members added in 2008 on top of an already very strong program of roughly 7.5 million members.

We are providing, at no cost to our franchisees, additional training that directly addresses how to maximize performance and increase marketshare in the current economic environment. We are strengthening the operational, educational value at our annual convention, which we will maintain, by focusing session content on tools and resources that drive property level success during tough times. We believe that our franchisees generally operate with less financial leverage and can be profitable at lower occupancies than other major hotel chains. So we are not anticipating any significant financial distress issues impacting our revenues and fee collection.

Let's talk a little bit about managing our corporate resources. As you can see in our earnings release, we took a $3.5 million charge related to employee termination expenses. These adjustments to our infrastructure will provide important cost savings in this difficult environment going forward.

We remain extremely cautious about managing our resources. Our run rate currently is below our budgeted levels. We have a hiring freeze in place like many companies and we are taking all the normal precautions watching the relative revenue declines and our ability to mandate that our resources and liquidity stay strong.

I reiterate what I said in December on the call that you will see declines in our Company's expenditures given this current environment. This will represent a departure from our recent cost growth trajectory. Having contingency plans in place in the event the environment deteriorates further to a greater extent than we forecasted are an important part of our ongoing process. However, we are fully committed to our strategic plan, which focuses on our long-term growth. As a company, we will maintain our commitment to items on our strategic agenda, which will facilitate continued long-term growth of the business and returns to our shareholders.

We, as a company, and as a first priority, remain committed to returning excess capital to shareholders over time via share repurchases and dividends. In 2008, we repurchased 2.2 million shares. Year-to-date in '09, we have added another 500,000 shares to that collection. During 2008, we paid $43.1 million in cash dividends to our shareholders and even with all that, at the end of this year, we had very, very low leverage levels. I will note, however, given liquidity in the markets, our borrowing capacity is currently limited to what is available through our current credit facility based on financing markets, which we hope will improve.

Let's talk a little bit about Q4 and 2008 results. Our domestic unit and room growth for 2008 was 6.1% and 5.6% respectively for the full year. This represents the strongest unit and room growth year that Choice has had in its 10 years as a public company. It is really a remarkable accomplishment given the environment in the back half of the year.

Domestic RevPAR declined 7.7% for the fourth quarter and 1.8% for the full year compared to periods in 2007. These declines were primarily occupancy-related and were partially offset by rate increases. While facing headwinds due to the current economic and credit market environments, the Company still executed 698 domestic hotel franchise contracts for the year, down 9% compared to full year 2007, but which actually met our budget for the year.

Adjusted earnings before interest, taxes and depreciation were $200.5 million for the year ended December 31, '08 compared to $198.1 million for that same period in '07. Adjusted diluted earnings per share for full year 2008 were $1.78 compared to $1.74 for full year '07.

Adjusted EBITDA and EPS for the year ended '08, excluding special items, which are described and reconciled to our GAAP results in exhibit 8 of our press release, totaling $17.7 million resulting in an $0.18 diluted EPS impact respectively related to a $6.6 million benefit discussed previously, which related to our acceleration of the Company's management succession plan, $3.5 million related to the employment termination costs just discussed and a $7.6 million adjustment related to an increase in reserves related to impaired notes receivable. Adjusted EBITDA and EPS for the year ended in '07 excludes special items totaling $4.3 million, or $0.04 of diluted EPS also related to employee termination benefits.

A little bit on the outlook. Looking forward, we expect first-quarter 2009 diluted EPS to be roughly $0.24 and a full-year '09 diluted earnings per share of $1.68. EBITDA for the full-year 2009 is expected to be approximately $178 million. These figures assume domestic unit growth of approximately 3% for full year 2009 and an approximately 12% decline in RevPAR for the fourth quarter(See Press Release) '09 followed by a 10% decline for the full year '09, a three basis point increase in the effective royalty rate, an effective tax rate of 36.5% for the quarter and the year.

So in closing, I would like to note that while the current environment remains challenging, Choice's business model is ideally positioned for success in this climate. Our highly attractive fee-for-service business model generates significant cash flow and requires little capital to grow. Our conversion brands have historically demonstrated strong appeal to developers seeking to benefit from our significant distribution system and we remain confident that when the economic and credit environments improve, we will be well-positioned for growth in a variety of segments and geographies. I will now open up the call to answer any of your questions.

(Operator Instructions). Patrick Scholes, Friedman, Billings, Ramsey.

Good morning, gentlemen. On your quarterly RevPAR guidance and your full-year RevPAR guidance, when I look at it, how it is implied for the back half of the year, it looks like you have more conservative expectations than from what we have heard from some of the competitors and their outlooks. Can you just walk me through your thoughts on your expectations for the back half of the year?

Well, let's start with the fact of easier comparisons. So we actually turned negative right after Memorial Day last year and then that relative amount of negative RevPAR declined through the back half of the year to have the fourth quarter at the 7.7% that it was at. So simply by the fact that we were in that negative environment in the year, we believe that, even holding on a current basis, that we are going to see better results.

The other is that, in our markets, we have seen a less sharp decline than is being experienced by the broader industry. And we are also anticipating that, as things turn up, the folks that we service will probably be the quickest to recover.

So based on all of those, we have arrived sort of at the forecast that we have got. Obviously, it is easy in this environment to debate where things will be, but, in general, while we believe the situation is serious and we have seen in the last several months a series of declines, we are also watching very carefully our day-by-day, week-by-week performance and we are reasonably comfortable given the visibility there is that that call is a reasonable call given current performance and then given the comparisons that will be done at the back end of the year.

Okay. I guess that covered most of my question, but I was just curious because basically what I had been hearing or had been implied from other conference calls that fourth quarter '09, some companies were potentially looking for flat RevPAR where, if I back out your first-quarter expectations of negative 12% and match that up with your full-year negative 10%, it would imply that you are expecting worse than flat. Just any thoughts on that?

Yes, I would say that that is primarily based on the fact that we are trying to be conservative in our approach to the RevPAR guidance, both from the standpoint of making sure we are prepared on the cost side in case it does hold that long. And then in the end, if we see an upturn, then we will quickly move to take advantage of that on the gross side. But we are seeing a relatively stabilized downturn at this point, which we think will improve over the year. But we are not hoping for or counting on a dramatic improvement at the back end of the year, which would put us in a neutral standpoint, you are right. Our general view would be we are negative, but less negative than we started out the year.

Okay, great. I appreciate the clarity on that. Lastly, on the previous conference -- or excuse me -- on the October/November conference call, you had talked that you had seen an uptick in -- I think it was some potential request for group business. Any change on that?

Yes, actually we have got some interesting information related to that. David, do you want to cover that?

Yes, I would say that what we have seen is a lot more interest from basically business customers looking to get us engaged in their RFP process. So the number of business customers that have come to us and requested to participate in the RFP process is significantly higher than it was a year or so ago. And our response rate has been strong from our franchisees. They ultimately respond to these RFP requests and it has been strong and higher than prior years. And so we are optimistic that, to the extent there is tradedowns, to the extent that the business travel market is there, that we would hopefully improve our share of that here in the near term in light of what companies are doing on the travel budgets to preserve their cost structures.

And through '08, we did see an uptick that was material in the relative numbers of business rooms booked through the central res system.

And which of your brands seem to be benefiting the most from these requests for RFPs?

(inaudible) kind of the higher-end stuff -- the Comfort Suites, the Cambria Suites to a degree and the Comfort brand.

Great. That's all. Thanks.

William Truelove, UBS.

Hi, guys, good quarter. My only question was about the interest income; it seemed awfully high. Is there something in the press release I am missing or why was it over $4 million?

Interest income?

Yes. It looked a little high. I wasn't sure what was going on.

Yes, it is actually a net loss and it is basically related to the mark to market adjustment for the assets that are in our employee retirement plan.

Ah, okay. That was my problem then. That answers my question then.

That really reflects what you saw in the broader capital markets in the fourth quarter with the fall-off in the equity and even in the credit markets.

Fine. Thanks so much.

No problem. Thank you.

Joe Greff, JPMorgan.

Good morning, everyone. Just a question on the first-quarter EPS guidance and then the full year. Obviously, you're going from $0.24 to something -- on average $0.44 a quarter. And as I kind of think about the quarter and you discuss sort of how you are looking at the sequencing of RevPAR declines throughout 2009, is there a lot of volatility in terms of the unit growth quarter-to-quarter or SG&A or are there big swings in the initial franchising and relicensing fees just to get a sense of how you are looking at it from a quarterly basis throughout this year?

Yes, there is not a lot of volatility in the unit growth side of things. What I would tell you is that, for the full year, for full-year '08, we are expecting a pretty, call it, a pretty significant drop-off in our franchising revenues, of which roughly a third of that is driven by the RevPAR environment. The other kind of two-thirds of that drop-off are really in kind of the initial fee and the relicensing lines, as well as potentially kind of on the international side just because of the foreign exchange environment is a little bit different than it was a year ago.

So the drop-off though in revenues is more pronounced in the first quarter than it is in the last three quarters of the year. And then on the cost side, as kind of Steve pointed out, we had made some adjustments in the organization, which is the reason we had the severance charge in the fourth quarter.

The real benefit -- the relative benefit of those cost reductions is stronger in the last three quarters of the year on the SG&A side than it is in the first quarter. And then kind of going down to EPS, the below-the-line type things, we did have a, as you can see, a loss on the mark to market for our investments in the employee retirement plans that happened predominantly in the fourth quarter and the second half of '08 that we're really -- we're not modeling that same level of adjustments in the '09 levels. Plus put in the share repurchase numbers that we have done since our last guidance and you kind of -- that is kind of how you get there.

Okay, great. That is helpful. Thanks, Dave. And then I guess we normally don't think of you guys having to reserve for receivables. Can you just talk about that and what that driver was? And I know you don't have a lot of receivables left on the balance sheet, but if you can talk about that a little bit.

Yes, sure, Joe. We have kind of two types of loans that we make to hotel developers and it is kind of our normal incentive loans, which we make in kind of the standard development process. They are forgivable promissory notes given over extended periods of time as kind of an incentive to bring in conversion and new construction of hotels. And then there is also loans in specific situations more focused on our emerging brands where we will loan to a specific hotel developer for a specific project, kind of similar to the initiative we announced in the fourth quarter last year.

And if you look at those collectively, the aggregate balance is about $20 million at the end of '08 and we have a reserve against that, including this impairment charge we talked about in the fourth quarter of around close to $10 million. So the net value book value at the end of December for all of those loans is around $10 million, $11 million.

The impairment charge specifically relates to a loan that was made really prior to the launch of this emerging brand program and just given the climate and the specifics around those loans, we thought it was prudent to record an additional reserve. We are going to aggressively pursue recovery of those loans and hopefully we will do better than we are currently modeling. But that is kind of how you should think about those things.

Great. Thanks, guys.

I guess the other thing to say, Joe, in addition to that is, at this point, and I think I mentioned this in December, we are doing almost no incremental unit loans because of the lack of liquidity in the market and because there is no first mortgage debt, our ability to drive unit growth through providing some incentive programs is severely limited and we don't see that changing anytime soon.

Steven Kent, Goldman Sachs.

I don't know if I am from Choice yet; I'm from Goldman Sachs. So just a couple of quick questions. First, just on your new contracts being down roughly 31% or so, that was somewhat more -- you talked about it a little bit, but could you give us a little bit more color on that, what you would expect and sort of how this process -- you made a point, Steve, of saying that you have a product for everybody at different points in the hotel cycle. Are you seeing more of that where somebody is saying we just can't afford to be in the Marriott or Starwood system and we want to trade our hotel back down into the Choice system? I just wanted you to talk more about that and if that is the case, why wouldn't those new contracts start to accelerate?

So there is a couple of different sources for those products, particularly in the conversion environment and they come from really three major sources. One is independent hotels deciding that they are really not going to make it without a distribution system and in today's environment, if you look at the [Smith] numbers, you can see how those independents are really struggling. And as a matter of fact, that's one of the opportunities we have identified for Ascend, the new collection of boutique and historic. We have got a major development effort underway as it relates to that brand thinking this might be the year of opportunity to really add some units there. So you have got sort of the independents trading for security of a res system and distribution platform into.

Then you have a series of hotels that are being either required to invest more than they are willing to do or simply being pushed out of an existing brand. A good example of that is Holiday Inn Express and Hampton where they are upgrading their prototype and are pushing out older hotels. Those hotels then make excellent conversion opportunities for us either in Quality or, depending the box, an Econo Lodge scenario.

We, ourselves, do that. It is interesting. There have been 46 hotels in the last two years that were Comfort Inns that no longer fit the Comfort Inn portfolio well. Conversions to Quality and to Econo Lodge so that we were able to keep those hotels and fees in the system, which both is a benefit to us and a benefit to the franchisees.

And then you have got sort of the transactional scenario, which is a little lower at this point, but we are hoping will pick up as the year goes on whereby hotels are trading hands, the new buyer wants to invest in the product but wants to upgrade the brand and as a result, that drives a conversion opportunity for us.

Okay. Thanks for that color.

Jeff Donnelly, Wachovia Securities.

Yes, good morning, guys. Steve, Choice is in a liquidity position that is frankly not enjoyed by most of your competitors and arguably allows you to avoid making operating decisions today that you would regret tomorrow, but that doesn't mean your competitors have that same flexibility. And I guess my experience has been that sometimes it is those acts of desperation, if you will, by the weaker competitors that can bring pressure on the better platforms. Are you seeing other franchise systems out there that you compete against, even though they might be somewhat weaker, getting very aggressive on offering robust conversion incentives or waived upfront fees or even relaxation of brand standards right now that that is not something you would be prepared to adopt, but it is out there nonetheless?

Yes, we are seeing people throwing out more aggressive opportunities to help grow their brands. In some cases, we think it is an effort that is ignoring economic reality that even the incentives they are putting out aren't going to result in new units. And in some cases, we don't quite understand why people would want to add units and not profitability.

We are pretty much though holding the line for ourselves because, in our positioning, particularly for our conversion brands, we are in a unique position that we are offering a premium in terms of distribution and productivity for those hotels from the standpoint of customers coming through the door versus their alternative.

So the example of a Hampton coming through, which is an opportunity for us to convert. The other options for them to convert in general do not drive anywhere near the relative revenue intensity that our brands do. So it puts us in a premium position to be able to negotiate and receive our fair share of the royalties based on the value of the franchise that we deliver.

And so while we are -- while we are seeing more pressure and more discussion around terms and fees and we are showing some flexibility for the right products, we are not seeing any significant change in the relative terms that we are achieving through the contracts and that is up through -- we did a lot of contracts in December as normal and those contracts we're holding pretty firm.

So I guess to put a finer point on it, I mean I would guess I would have expected or at least thought that -- for example, with Hilton's balance sheet being under pressure, that they would become more aggressive with Hampton or some of the extended-stay concepts out there. Is it going, I will call it, upstream to some of those more dominant brands or is it -- hasn't really reached there yet?

Here is what we are seeing. There are two ways of being more aggressive. You can discount your fees and your overall financial deal structure with a franchisee or you can also require less investment. In the upscale segment or the upper brands, I think what we are seeing is somewhat of a lessening of the investment requirement as the brand comes in the system, which is a way of competing. But even in those segments, we have not seen any significant wholesale discounting of the full-term royalties. We are seeing it more in the shorter chains and the kind of lower-level performers.

Just a follow-up question on some of the comments made earlier about the ability to be adding units right now and the loans to potential developers. I am curious, in your sort of sweet spot size, is there a common theme I guess among the folks who are getting financing and getting deals done? Is it just purely sponsorship with who the lenders are willing to commit capital to or is it more about their location being in the urban versus suburban or just low loan-to-value?

Yes, no, it is about relationships. The folks that we are working with have done one or two hotels with a local bank. It has worked out very well. Leverage levels tend to be low. This is their primary occupation. They have done well by the banks. The banks still have some capacity and what you see is, in a typical scenario, you talk to one of our franchisees and they would have historically put out an RFP for a loan and gotten three or four responses and now they are getting one that they have got to work. But they are still finding those loans.

How many of your franchisees have multiple hotels with you guys?

Well, the average franchisee works out to something like 2.2 hotels per franchisee within our system. And there is only a handful, two or three -- well, a handful of franchisees that have 15 and more type levels.

Okay. And one last question is do you have handy what your total international franchisees were in 2008?

2008 was -- let's see, I do. $26.7 million compared to last year was $22.2 million. Keep in mind that we did an acquisition at the beginning of '08 of the UK master franchising business, which is a piece of the uplift there.

Thank you.

David Katz, Oppenheimer.

Hi, good morning. So a couple of questions. Just to follow up on some of the early issues with respect to conversions, I read an article recently, and I think it may have been an analysis by PKF, talking about how the amount of -- there was actually more conversion away from brands late in 2008. And I guess it seemed counterintuitive to me and I guess it begs the question how does this cycle play out and when is the timing -- what kind of timing should we look for in terms of the expectation that conversions will increase for you and become a larger piece of your business? And when hotels will seek the benefits of being part of a brand such as yours rather than, in this article, that seemed to suggest the opposite was going on right now?

Yes, that is counterintuitive. Now I also think that may be sort of a lagged opinion because I will tell you that, for the first time in my career in '07 and '08, you actually saw bankers recommending going independent versus [flagged], which is I mean uniquely different than my experience in the previous 25 years. Okay?

So now I might have a jaundiced view because I have always been a branded guy, but it was remarkable to me the relative confidence that banks were showing in people's ability to market and fill an independent hotel. My sense is that has dramatically reversed at the end of '08 and that, in part, you will see a drive of banks requiring independents as part of issues related to their liquidity and positioning with the banks to actually bring brands on or distribution channels on.

But in '07 and '08, I will tell you, I had a number of remarkable conversations with potential deal folks that were saying that my bank is recommending that I go independent and you just sort of shook your head. I don't think that is the case today.

We are actually already strongly shifting more into conversions than newbuilds as we speak. That is a factor of the conversions holding up significantly better and the newbuilds falling off. So our percentages versus '07 versus '08 versus '09 of newbuild versus conversion, you will see a shift up to conversion. I think '08 at the end ended up being 60 --

60/40.

60 some percent I think, which was an upswing from '07 in terms of the newbuilds. And originally, we expected '08 to be sort of a more even level of newbuild versus conversion.

Then in terms of when will the swing up of the conversion business come, I think we will see it as people feel more of the pinch over the next couple of months, but the big thing that is really going to drive the conversions is when transaction numbers pick up. And so if you listened at ALIS, there is this breathless anticipation of when the markets open up and the brokers start selling hotels again. Our stuff has continued to move to an extent, but it has slowed. We will also be though the first to come out of that because smaller transactions will lead to the bigger ones.

And so whether it is the trigger of the CMBS maturities coming due that start putting things on the market or some other forces, when those hotels start hitting the market is when we will see a big swing up in our conversion activity. The issue for us is it is so difficult to judge at this point when that might occur that we have been, I think, appropriately conservative in our supply guidance because it is a quarter-by-quarter scenario and there isn't anything that I could point to today that says, hey, you can see this trend improving and therefore, we think that more transaction will occur in this quarter.

I think, in general, people are saying, well, it needs to come and it has to come just by its nature, but the question is is it a second or a third or a fourth-quarter change and at this point, we are not comfortable betting on any individual one, which is why you saw us put our supply guidance where it was, which is a fairly significant decline from what we achieved in '08. Even though we had an incredible December, at the end of the day, activity is way down and we are assuming it will come back, particularly when transactions begin to occur, but we are struggling to forecast when that might be.

Got it. Thank you. That was an excellent answer actually. So one more with respect to share repurchases and this was the first time you are back in it in I guess about a year. And I am not sure how much color on your thought process you have given us so far on that and it has always been kind of an important indicator for us in looking at your stock. Why today and not last quarter or the quarter before?

Well, we started buying significantly right at the end of the third and continued buying aggressively through the year up to us. And I think there was a bit of an interesting reaction to my first call in July when we hadn't bought any and I forgot to say upfront our primary mission in life is to return value to the shareholders and people kind of got the impression maybe I was slightly off-track with the Company's model. I am not. The reason I am here is I love this model.

However, this Company will buy shares when we see a significant discount to the intrinsic value of the stock and we will not buy shares when there is not a significant discount. So that has been the mantra as far as I can tell for seven or eight years and that mantra continues today that, based on liquidity and our availability of cash to us, that we will be an aggressive purchaser of our stock. And as you look at the dividend, aggressive payer of dividends, particularly given sort of the comparative set in this scenario and going forward.

And you can continue to expect behavior from us that would suggest that, in a discounted scenario where we think that the market is not recognizing the power of the model and the ability for us to weather downturns better than anyone else and do well in upturns, that we will aggressively continue to return value to the shareholders through that stock purchase at significant discounts to where that stock should be valued.

I just sort of feel the need to follow that up; although I am not sure what kind of an answer I'm going to get. I mean how are you -- I realize it is our job, but how are you sort of looking at the value of your stock, right? I think one of the things we all sort of deal with today is the market multiples are kind of a different set of discount today, is not what a discount would have been a couple of quarters ago. Any thoughts you can share on that end would help.

Well, you guys know this business better than I do. But I will tell you that, as a former analyst, this company has a set of contracts that have an annuity value to them that is pretty easy to put a number on it. And you can talk multiples, which would increase or decrease the value, but in the end, it is a pretty simple business. And if you just apply some pretty basic principles to the value of those contracts, it is not a hard number to arrive at.

No, it's not. Okay, thanks very much.

Felicia Hendrick, Barclays Capital.

Hi, Steve. How are you?

I'm good. How are you, Felicia?

I'm good. Thank you.

Feeling more optimistic today?

I had a little chat with David last night. He -- anyway -- we will see how that goes. So I am wondering if you can put some numbers to this discussion on your pipeline. I am just wondering, given the statistics that you provided earlier in the prepared remarks and everything that you have talked about on the call, the latest actual numbers that we have is from your prior December forecast -- 344 conversion units and 129 new construction units for the year. I am just wondering if that has changed.

Yes, I think, Felicia, you should think about that as being not materially different from what we talked about back in the middle of December. So I think the way to think about it is we thought we would finish up the year at 5.5% unit growth for the full year for '08. We obviously finished up a little bit better than that. So our base is bigger at the end of '08 than we were thinking it would be in the middle of December. And that is kind of timing -- a little bit of timing-related to kind of gross openings and also kind of terminations of franchises.

So going forward, kind of put a 3% on that ending number gets you reasonably close to where we would have thought we would have been at the end of '09 even back in the middle of December. So it is kind of just a little bit of timing on terms and gross openings, but it's not that materially different from what we talked about in the middle of December.

Okay, but as far as how the mix looks, that also hasn't changed?

In terms of mix, yes, it really hasn't changed dramatically from what we talked about in the middle of December. Predominately conversions consistent with our past track record where it is predominantly conversions, gross openings.

Okay. I am really trying to get to the fact to the point if your conversion estimate has declined at all. It doesn't sound like it.

Not meaningfully, no.

Okay, good. And then also I am just wondering if you could, in your RevPAR guidance, if you could talk a little bit about what kind of occupancy levels that you are assuming?

Well, I think kind of what we are looking towards is kind of what the prognosticators say. So if you look at kind of the (inaudible) forecast, they are showing occupancy levels in kind of a midscale space, economy space as kind of being down about 5% or 6% from '08 levels.

Okay. So you are just basing it on that. And then just one quick one. Can you just -- what was your exact share count at the end of the quarter?

Common shares outstanding were 60.7 million. That doesn't include the impact of dilution from stock options.

Okay, thank you.

(Operator Instructions). Michael Millman, Millman Research Associates.

Thank you. Could you give us some idea of the relationship -- I guess it is a modeling question -- between the contracts outstanding and the initial franchise and relicensing fee number?

Yes, the relationship between contracts and initial fees and relicensings in 2009 is going to be driven by the number of new franchise contracts executed and the number of relicensing transactions executed. So it is not driven from what we call the pipeline of hotels open or under development basically. So kind of the way to think of that for '08 is initial fees were roughly $19.5 million on 698 executed domestic contracts. Relicensing fees were around $8.5 million on 312 relicensing transactions. And you can kind of get comparable contract and revenue numbers out of our previous 10-Ks and 10-Qs. So that is kind of the relationship and it is driven by the number of contracts we execute during a given year.

What should we assume about the relicensing?

Well, I think what we are looking at is, if you look at some recent research that has been out there, and actually I would point you out to the slide in our investor deck, kind of shows how relicensing transactions, since they are so correlated a lot with kind of credit markets and liquidity available in the credit markets for hotel transactions, they tend to move directionally in the same way our new construction contracts do. And so typically, in years where we have had higher levels of new construction contracts, we have also had higher levels of relicensing transactions. But I think if you look at the trends in relicensings for us over the past four quarters, it has been a gradual kind of erosion because of the credit market we find ourselves in.

I think what I am seeing in turns of some research we had -- we saw from like Jones Lang LaSalle recently, their modeling, that that would continue in 2009. So that is kind of our expectation is that the relicensing environment remains soft in '09 and hopefully once the liquidity comes back, you will start to see improvements there. So we have modeled kind of a downward trend in '09 for both initial fees and relicensings based upon kind of everything we are seeing.

To change the subject a bit, at least when you look at fourth quarter, I guess as you would expect, the economy numbers looked better than the other numbers in terms of occupancy and to some extent in ADRs as well. Could you talk about if you are seeing a trading down if indeed those hotels tend to be more on the road? And I think you have said in the past something like two-thirds of guests come off the road. What kind of pricing sensitivity or elasticity do those people tend to have? Or do they have any different than your guests at all levels of your franchise?

Yes, I think if you look at the numbers in the exhibit we have here on the operating statistics, kind of from a rate perspective, I mean obviously the absolute rates for the economy segment are lower than kind of where we are for our midscale brands. But the rate held up pretty well in both of those segments. And I call that a testament to our franchisees really understanding that kind of lowering your rate is not going to induce demand. So it doesn't make a lot of sense to reduce your hotel rates thinking that that is going to drive your occupancies.

On the occupancy side of things, the economy occupancies fell off a lot less in the fourth quarter than they did in kind of the midscale segment. So it is a little difficult to kind of conclude whether that -- how the tradedown effect is playing out across these different segments, but I think the economy is starting from kind of a lower base and has a little -- over a long period of time, a little more stable RevPAR performance than the higher up chain scales.

One answer might be that these were September to November. Are we seeing the same relative performance in January and February?

Yes, I mean in January and February, I think -- I don't have it by kind of chain scale here in front of me -- but I think you can see the SDR numbers that get published every week and I think you saw January and February SDR results for midscale and economy segments continue to be pretty challenging on the occupancy side of things and a little less challenging on the rate side, by challenging nonetheless.

I think what you need to keep in mind is, while we think we are seeing some tradedown, we are also seeing a fair amount of trade-out and one of the things that we monitor very closely and one of the things that is very strongly correlated with our results are unemployment figures and obviously based on recent trends, you would have to look at that and say that has got to be a concern for not just us, but for the industry and particularly at the moderate tier and below.

And finally, on your 3% supply guidance, what does that translate into room growth?

Typically, the room growth levels are just a little bit below our unit growth numbers. So that is what we have seen pretty consistently for the past several years. I think you can consider that a good assumption in '09 as well.

Thank you.

I would now like to turn the call over to Mr. Steve Joyce for closing remarks.

Well, thank you for your time and attention. I think based on the other calls that you guys have experienced, I think there was a wise man that said the future isn't what it used to be. However, this Company remains strongly focused on growth opportunities. We have, I think, an appropriate sense of caution of monitoring and being appropriately positioned, but also see this as probably a unique time, which should provide opportunities and benefits for this Company to accelerate its growth and continue to perform. We are, we think, a somewhat unique model in the industry, which puts us in a very strong position to take advantage of current circumstances. And we look forward to being able to report to you in the future on how we are doing that. So thank you for your time and attention.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.