Choice Hotels International Inc (CHH) 2009 Q4 法說會逐字稿

Good morning and welcome to the Choice Hotels International fourth quarter and full year 2009 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 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, 2008, 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 activities, 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 fourth quarter and full year 2009 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. Welcome to Choice Hotels's fourth quarter and full year 2009 earnings conference call. With me as usual is Dave White, our Chief Financial Officer. Just as a little overview, obviously as everyone is aware, the lodging environment remains extremely challenging, even with some positive signs beginning to show. Clearly as tough as anything I have seen in my three decades in the industry. The domestic franchise development environment has been constrained by a range of factors, including lack of capital, the historic RevPAR declines, and the dramatic falloff in hotel transactions, which has not yet rebounded. Hotel demand declined significantly in 2009 for both business and leisure travelers, and unemployment, which is a key statistic for our brands, remains at historically high levels without any real recovery showing at this point.

Despite operating in the midst of such an environment, the full strength of Choice's incredibly resistant business model was evident in 2009 performance, and our outlook for growth remains promising. Even with RevPAR declines of 14.4% for full year 2009, we generated cash flows of approximately $112 million. This represents the sixth consecutive year that we've achieved at least $100 million in operating cash flows. While the domestic new construction franchise sales environment will continue to be challenging, our premium conversion brands are well-positioned for strong growth, particularly when the transaction environment for hotel sales rebounds.

We continue to make strides in market share as we opened 442 new domestic hotels in 2009, contributing to net domestic unit growth of 4%. Correspondingly, our market share was up 20 basis points last year to 9.6% of domestic hotels online as of year end 2009 as measured by STR. We have been the leading gainer of market share over the past five years, growing our share of domestic units online by 160 basis points, according to STR.

We continue to make significant progress towards our goal of achieving our objective of domestic market share leadership on account of our family of well known diversified brands. Our core brands have significant room to grow, and we see tremendous growth prospects in the near term for our conversion brands, including Quality Inn and our Ascend Collection membership program and when we get lodging financing fundamentals to improve for our upscale Cambria Suites brand. Internationally, there is tremendous opportunity for our mid-scale brands, both in markets where we have a strong presence such as Continental Europe as well as emerging markets such as India.

In addition, we are pleased with our recent acquisition of the remaining 60% of our joint venture in India. This acquisition will allow us to continue our strategy of more closely directing the growth of our franchise operations in key international markets such as India, where there is tremendous need for mid-scale lodging accommodation. We remain focused on maximizing value for our shareholders, to whom we returned more than $100 million through dividends and share repurchases in fiscal year 2009, or roughly 90% of our generated cash flow. This was at a time when many other lodging companies have reduced or eliminated their dividend and share repurchase activities. I was also pleased with the results of our prudent cost control efforts last year as we saw an adjusted SG&A down 9% for the year. We will continue to remain very focused on efficiently managing our cost structure, as we believe that our current structure is highly available for scale. Even when maintaining aggressive focus on managing our cost structure, we're still in the enviable position to deliver more value-added services to our franchisees in 2009.

We grew membership in our Choice Privileges rewards program by 2 million members in 2009, doubling enrollments over 2008. Domestic gross revenue contribution from Choice Privileges members also grew approximately 300 basis points over the previous year, as CP members now deliver nearly 25% of all domestic gross room revenues. Our goal is to further accelerate the growth of Choice Privileges by adding 2.5 million new members in 2010. Choice Privileges members are our most loyal guests and pay a higher average daily rate than nonmembers. We also introduced a completely redesigned ChoiceHotels.com website with easier search features and improved design introduced with rave reviews. This new site will improve our guests' online experience and we are confident that it will increase conversion rates and deliver more reservations to our franchisees.

At the same time, we expanded the range of complementary training and education offerings both in person and online that we offer our hotel owners. We dramatically increased the range of resources on our web-based education site, Choice University. We also launched our Streetwise Tactics For Tough Times workshop, free local market forums where owners and operators shared best practices to survive the downturn and to drive revenues. Our commitment to providing the field based and centralized tools and resources to drive our franchisees' success remains a key priority for Choice in 2010. As a result, our franchisees delivered higher RevPAR index and guest satisfaction across the board. As a result of this workshop and other training initiatives we jumped over 40 spots to number 63 in the Training 125 Training Magazine's ranking of Company training and development initiatives.

Let me turn it over to Dave now to cover our fourth quarter and full year performance in more detail.

Thanks, Steve. I want to highlight a few additional items before we open up the call for your questions. To reemphasize one of the strengths of our model, we have been able to offset a portion of the RevPAR declines we experienced through new unit growth and improved pricing on our contracts. During 2009, we achieved net domestic unit growth of 4% and net domestic room growth of 3.9%. RevPAR declined 14.4% for both the fourth quarter and full year 2009. We have seen a slight RevPAR improvement in the first two months of the first quarter of 2010, as RevPAR was down between 11% and 12% during these two months. Our effective royalty rate increased 6 basis points for full year 2009 and our domestic royalty fees for the fourth quarter of 2009 were $47.1 million compared to $53 million last year. The Company's international fees, which are included in royalty fees revenue, were $6.1 million for the fourth quarter of 2009 compared to $6.3 million in 2008. Regarding development, the Company executed 112 new domestic hotel franchise contracts during the fourth quarter of 2009. This represents a decrease of 46% compared to 207 contracts executed during the fourth quarter of 2008.

Turning to applications, applications received for new construction and conversion hotel franchises in the fourth quarter increased by 22% sequentially from the third quarter of 2009 levels, but are still 28% lower when you compare them to the number of applications we received in the fourth quarter of 2008. As Steve pointed out, the lack of hotel transactions, difficult financing environment, and significant RevPAR declines have continued to hamper our new construction and conversion franchise development efforts.

As we have experienced in recent quarters, new construction franchise sales continued to be relatively more impacted than conversion franchise sales. New construction franchise sales declined by 72% in the fourth quarter compared to a 32% decline for conversion franchise sales. The number of relicensing transactions for the fourth quarter of 2009 were 23, which represents a 55% decline from the 51 relicensing transactions reported for the fourth quarter of 2008. The reduced contract volumes for both initial and relicensing fees resulted in revenue declines for those line items of $3.3 million -- declining to $3.3 million for the fourth quarter of 2009, a 51% reduction from the fourth quarter of 2008 results.

On the cost side of the business, as a result of our focus on cost containment, our adjusted selling, general, and administrative expenses for fourth quarter 2009 were $22.6 million, or approximately 9% below last year's fourth quarter. Diluted earnings per share for fourth quarter 2009 were $0.40 compared to $0.30 for the same period of last year. On an adjusted basis, our adjusted diluted earnings per share for fourth quarter were $0.43 per share compared to $0.41 per share in 2008. The adjusted numbers for SG&A and diluted EPS exclude certain items we described in yesterday's release.

For the year ended December 31, 2009, the Company repurchased approximately 2.1 million shares of our common stock at an average price of $27.03 per share for a total cost of approximately $57 million. In addition, the Company repurchased an additional 200,000 shares since year end through February 11 of this year. The Company has remaining authorization to repurchase up to an additional 3.7 million shares under the share repurchase program.

We also paid cash dividends during 2009 totaling $44 million. Our balance sheet and liquidity position remains strong. We finished the year with approximately $68 million of cash on hand and total long-term debt of $278 million, which represents a multiple of 1.3 times our adjusted 2009 EBITDA. As of the close of business yesterday, the Company had approximately $65 million of available unused borrowing capacity, pursuant to revolving bank facilities, which are committed until June of next year.

Turning to our outlook for the first quarter and 2010, we currently expect first quarter 2010 diluted earnings per share of $0.25 and full year 2010 diluted earnings per share to be between $1.65 and $1.70 per share. These figures assume domestic unit growth of approximately 2% for full year 2010 and approximately 12% decline in RevPAR for first quarter 2010 and a 2% to 4% RevPAR decline for full year 2010. These figures also assume a 6 basis points increase in the effective royalty rate for full year 2010 and an effective tax rate of 36.5% for first quarter and full year 2010. All of the figures assume the existing share count and that the Company's existing credit facility is not refinanced during 2010.

Now, let me turn the call back over to Steve.

Thanks, Dave. While the environment remains challenging, our pure play franchise business model is ideally positioned for both near term and long-term profitable growth. Near term, because we have the best hotel conversion brands and the highest flowthrough of any hotel Company. And if you look at this environment in the current financing situation, it is clear that conversions are going to be where the actions are for at least the next 18 months to two years. Longer term, because the opportunities for us in upscale and upper upscale and international are literally untapped at this point and are complete open areas for us to grow. We have an incredibly strong balance sheet which provides us substantial flexibility and enables us to return significant value to our shareholders. The combination of a dominant presence in the moderate tier, an asset light 100% franchising business model, and a portfolio mix of both new construction and conversion brands have driven strong performance through both the peaks and troughs of the lodging cycle, including this one. We are committed to achieving our vision of providing owners the highest return on investment of any hotel franchising Company. We continue to execute against our key strategies that we believe that will enable our franchisees to be more successful and will position us well to build on our track record of long-term profitable growth.

While the near term domestic RevPAR and franchise sales environment pose significant challenges, I would not trade our model for any other in the industry. Let's open up the call now to answer any of your questions. Operator?

(Operator Instructions). Your first question comes from the line of David Loeb of Baird. You may proceed.

Hey, Steve, I ask you a form of this question probably every quarter, but can you just give us a little bit view of what you think the conversion demand will be over the next several years? What starts accelerating that conversion demand, and what you might be doing to spur new development in a capital starved environment?

Good morning, David. It is a good question. At some point, I think we're going to see some sort of turn. Our general view is new construction financing is going to be tough to have for hotels of any size at all, probably through 2010, and we'll see after that. We think where it will come back first is in smaller loans, which is will benefit us. We're also -- we're going to stand to benefit some from the [SBA] changes as they up both the level of loans you can get from that as well as the amount they're allocating to that. That appears to be a focus of the administration, so that will be helpful to us.

In order to get I think a significantly higher level of conversions, two things are going to have to happen. One is there has to be more visibility into the RevPAR environment, so people have to feel confident that as they make investments in their hotels to upgrade particularly to our brands, that they're making those investments at the right time. So I think people are waiting to see and have better visibility around that. Then the second thing is transactions. They're coming at some point. You actually have seen I think a pretty good leveling of expectation both on the buy and sell side. So really the issue now is financing, and from everything we're seeing on the financing environment for existing hotels, it is improving slightly, and so we're expecting that to build throughout the year as that becomes more helpful.

Quite frankly the other opportunity for us is we're spending a lot of time talking to special servicers, which at this point of the cycle is going to be an important play I think in 2010. And then on the Ascend side we have a lot of independent hotels that can benefit by buying our distribution channel, because we have excess room night demand that we can't satisfy particularly in urban markets. So if you throw all of that together, our view is sometime during 2010 we're hoping for a change where you have more transactions and where people have better visibility. So if you went to ALIS, everybody -- all the smart folks I was listening to, were saying they were looking for positive RevPAR sometime around mid-year.

If that occurred and you had some money in the system for existing hotels, you're going to see transactions pick up, and then you're going to see people making rebranding choices because they feel more confident about going into the future. When that occurs, I think you will see a lot of brands doing conversions, and I think that's where we play such a major role -- because I think while a lot of the other brands will talk conversions, mostly they're new builds in their brands. And I believe we provide probably the highest value of anybody in terms of conversion opportunities. So when we see that, and historically we have got more than our fair share, that swing up -- whether, depending on who you're listening to, either is a steady stream or a tidal wave -- I'd probably bet more on a steady stream, we think we'll get our disproportionate share of that and that can actually make for an encouraging environment for us. On the new build side, that pushes it back some. The first place to recover is where our hotels play more. So as a result, we think when new builds come back, we'll be probably in as good or better position than anybody to take advantage of that as well.

In the meantime, we are using opportunistically the ability -- we have a balance sheet that is practically underused, and we have the ability to incent some deals. Without first mortgages, it is very difficult, but we are looking at a number of different circumstances whereby putting sliver capital into individual deals or helping to get a piece of land that is dramatically underpriced, will give us the the opportunity to push some deals forward in this environment. But the reality is without a strong first mortgage market, that's really working around the edges, because sliver capital is not going to make up for a difference of no real construction financing or no real conversion financing opportunity. As the conversion stuff comes back, we'll look at opportunistically using capital to help make deals. We don't think we'll need a lot of it. Historically, we have not. We think overall that makes for a promising opportunity for us when that stuff occurs. We've obviously not incorporated most of that into our numbers. We're assuming 2010 runs relatively similar to where we have been. But at some point it is going to pick up, and when that does, then we'll be ready to take advantage of it.

Okay. Can I ask one more? You have talked in previous calls about a desire to find upscale brands. What's the strategic imperative there? Why does upscale make sense given your brand portfolio today?

With the portfolio we have today, we think we have lots of room to grow in the moderate tier, but we are a major player already in the moderate tier and below. Where we are relatively unrepresented or dramatically underrepresented is in the upscale and upper upscale. So you're talk about the other half of the business roughly. So that's why with the system that we built and the 6,000 hotels we've got generating the number of customers that are looking for opportunity, we need to be in more urban locations. We are wasting lots of non-price turndowns every night in major markets, and so we need to look for opportunities where we can put products particularly into urban areas. Those tend to be more on the upscale and upper upscale side, which is why we think if we can get a platform to work with, we'll be able to grow it relatively dramatically and provide real value to folks in those segments. We have a number of opportunities out there that may come up this year and we're hoping that with a little luck and with a little aggressive watching on our part that maybe we'll find something. But it is -- it's got to be available, it's got to be available for the right price, it's got meet the highest return for our shareholders, long-term -- all of those things we're going to look at. But we believe that that creates big opportunity for us domestically, and also would give us a platform to grow internationally with a full service brand, so it is a major objective of ours.

Great. Thank you.

Your next question comes from the line of David Katz of Oppenheimer. You may proceed.

Good morning.

Good morning, David.

I wanted to ask -- I noticed that the room count on Comfort Inn looks like it has come down a little bit in the quarter, and I wondered just what the nature of that is and how we should think about that.

We are down slightly, and that is in line with our strategy of we are beginning to prune the parts of Comfort that are no longer relevant to what we think Comfort should be, and we are moving those more up into -- and then we're replacing those with Comfort Suite products, which we think is a big revenue opportunity for us. At the same time, the great part of our whole model is we are moving a significant portion of those Comfort Inns into Quality. So we have the ability -- this is one of the things we tout is we have a brand for every life cycle stage of a hotel. So it allows us to make sure we keep moving Comfort up, which is one of our stated goals, and to move it up by growing it, but growing it by adding higher end properties, larger more revenue producing properties, and replacing those Comfort Inns and moving those Comfort Inns to Quality or Econo Lodge while trying to retain them in the system, which gives us the advantage of the double bang. And so that's what you're seeing is the effect of that strategy.

Okay. And then if I can ask about your guidance, I notice that you have RevPAR down pretty hard in the first quarter, but your full year is a much more modest decline, and we certainly all see the week in and week out travel numbers and notice that the limited service and like segments have been under some more pressure. What is it that gives you confidence in that steep of a ramp throughout the year?

Well, I think what we've got is a sense of the folks making the forecasting as well as folks that have longer term view into the markets that as they're seeing into mid-year they're seeing -- for example, on the full service side you've got positive signs in group and relatively positive signs on the business [transaction] side. We believe based on that we will typically follow that pattern. We have a very short window. So as you would suggest, right now what we're seeing is better than it was towards the tail end of 2009, but it has not improved to a level that we're doing. But it is based on a belief that come mid-year, there will be a turn in demand that will actually -- we're not forecasting positive RevPAR, but if you listened to the folks at ALIS, a lot folks were saying RevPAR is going to turn positive at that point. And we are of the belief that as we get into the year and the comparisons become very easy -- you have to remember our comparison for first quarter we include December in our first quarter because we're a month trailing. So but we have got our RevPAR by quarter which we can share with you, and I will ask Dave to do that. That sort of shows, yes, we expect to see either at a 2% or 4.5% decline, significant pickup on that back end.

Just to add to that, one thing you should keep in mind, David, is that the first quarter from a mix perspective is our weakest quarter, right. So when you weight the quarters, the RevPAR for the quarters, the first quarter gets weighted less than the other three quarters of the year. So even though it is down 12%, that will carry less weight on our full year RevPAR numbers. And to Steve's point, if you think about the two scenarios we gave around RevPAR, the down 2% scenario, we're assuming 12% RevPAR decline in Q1 and assuming Q2, Q3, is low to mid-single digit RevPAR declines and flattish RevPAR in Q4. If you look at the down 4% scenario, RevPAR down 4% scenario, we really push out the ramp up, and end up going positive RevPAR, not until late fourth quarter, first quarter of 2011. And then I think the other thing that's really important, I think if you went back and compared, take a look at our royalty model and compare the leverage we have to RevPAR relative to the owner/operator management Company models, one of the things we've always highlighted is the fact that our RevPAR, that our model is much less leveraged to RevPAR, both directions. So something you also have to keep in mind, and I think that's reflected in the guidance as well as reflected in what we saw in our results for 2009.

And I think getting to the weighting point, our biggest time of the year is the summer, which keeps in line with our leisure orientation, and everything we're reading suggests that people are going to take vacations -- they will be a little shorter, but much more value oriented. So it gets back to our belief we're probably going to get new customers that maybe didn't use us before, and people are going to take their vacations and that we'll see a relatively stronger summer than we saw in 2008, and with that weighting and into the fall if that continues, then that's what is required to make that number.

The other thing that I will tell you, though, is -- you keep this in mind, that we missed our forecast in 2009, originally put in a 10% RevPAR decline, we ended up at 14.4%. We did the right things on the cost side and then we're able to take advantage of some things below the line, and still hit our number for the year, so we are -- we have more flexibility than other companies to control our destiny as it relates to that. We're not unaffected by RevPAR, and we need to have a stronger environment to make the numbers that we're talking about here. We do have some flexibility once we see that we are trending that way or not in terms of how we behave as a Company. I think we demonstrated that last year, but the reality is I think we believe and the industry believes that there is going to be some positive movement as we get into the year, and that's what we built into the numbers.

Got it. If I can just ask one more quick one. I just want to make sure I am clear on what the prospective brand acquisition strategy includes or doesn't include. Should we be thinking about this in terms of obviously brands that can use some distribution? Would it include or exclude potentially brands that may own some real estate where you could potentially team up with someone or look to divest the real estate or something along those lines?

It will include brands that own real estate, but our plan would not be for the Company then to end up owning that.

Got it. For any period of time or not at all ever?

It depends on the deal. We have no desire to own real estate. Our goal would it be do it without ever owning it. Could be a circumstance where we could hold it momentarily, but our goal would be to get rid of it, because that's not -- get rid of it, because that's not what we do as a Company. If people want to own real estate, they can buy another Company. We like our model. We like the fact we don't have real estate exposure. We want to continue that at virtually all costs.

Got it, perfect. Thanks.

Your next question comes from the line of Joe Greff of JPMorgan. You may proceed.

Good morning, all.

Good morning, Joe.

Within your 2010 outlook, can you clarify directionally SG&A? You have done a great job obviously over this past year -- how much more can you do there? How much growth do you see in SG&A?

We have modeled, Joe, low single-digit percentage increase in adjusted SG&A, and I think the one thing I would make the point of is to the extent the development environment is better or worse than we're thinking, then that obviously could have an impact on our variable compensation plan for the franchise salesforce. So if things go better on the development side, you can see slightly higher SG&A run rate as the commissions impact that. And the opposite holds true as well. So in the model, in the outlook for 2010, we have assumed that we can hold the SG&A to a low single-digit percentage increase, and we feel pretty good about the process we went through last year to really have the leaders of our business units go through and look at their cost structure very carefully and really make some tough choices about eliminating redundancies and avoiding costs that we could avoid. So wouldn't really at this point sign up for dramatically moving off of that increase I just talked about in 2010. As things change, we'll keep looking at it and keep trying to find ways to be more efficient over the long-term.

We believe we have got some flexibility, not clearly to take another 9% to 10% out, but some flexibility on the cost side, which is really predicated where we will see the RevPAR environment going. So we think we're appropriately sized and don't want to cut back to -- if we think we're going to add it back within the next six or twelve months, and we also think where we are sized as an organization is very scalable, and I have been around this business for 30 years. I have heard everybody talk about it. I actually have never seen it in action. I think we have a real shot at doing that. And so as we look at our flowthrough for incremental units, it is significant, and relatively puts us in pretty unique company. And so our goal is we think we have sized the Company appropriately for what we've got, and we think it is very scalable, and our goal is more not to look so much for the cut back out, but more to achieve that scale.

Thank you.

Your next question comes from the line of Jeffrey Donnelly of Wells Fargo. You may proceed.

Good morning, guys.

Good morning, Jeffrey.

Maybe I am building on some of David's earlier questions, but I am curious how deep do you see the market for brand acquisition opportunities? Do you think there is going to be a good number of more upscale oriented?

I think it is deeper than it has been in a long time. Just depends on how people are viewing their opportunity. The fact that the bulk of those brands are going to have another decline in profitability in 2010, I think there is some pressure out there building that could make for an attractive acquisition market. It hasn't really shown itself yet, but I would say this is -- in the next eighteen months I think the environment is going to be better than it has been. There's a number of discussions going on about major companies and what they need to do to help themselves with their leverage situation, which I think is what's prompting the belief. And again it is a belief -- it is not that we're seeing dramatic numbers of things posted for sale out there, but we're hoping that in the conversations and dialog that is we're having, that one will begin to bear fruit and takes luck and opportunity, but we're in the position to do it. We've got the capacity on our balance sheet. We've got strong cash flow. We can provide immediate value to those hotels, because we've got significant numbers of unmet demand, particularly in urban markets. And so when you put all of those together, it has the makings of a transaction. We just have to find the right one, be aggressive and make sure it fits the value proposition for the Company and that it does match up in terms of highest priority for use of capital for the long-term benefit of the shareholders.

Just to be clear, this is something you're actually having active discussions now -- it is not just a thought for down the road?

Active is probably too strong. There are discussions going on about what's available and who might be there and but, no, there aren't any -- there are no discussions going on today about a purchase.

Conversions -- not sure this would be a help, but have you considered maybe helping your franchisees access larger banks for capital? My sense is the regional bank market is traditionally where I guess they got their financing, but it seems to be the segment of the bank market that is now facing the greatest duress. I guess there is a way -- choice to use the -- size and reputation to access the larger banks out there to open a window for your franchisees perhaps?

We've got -- we have Treasury resources that we're having discussions with everybody that's out there, and so to the extent that we saw someone ready to move on a program, we would try to direct our folks there. We most likely are not -- probably not going to play a major role in where they go. If you look at the bulk of our transactions today, with the exception of Cambria, you are really talking about sub $7 million loans. The big banks historically have not been terribly interested in those, unless they're in big portfolio positions. Our folks are not typically in multi-unit scenarios. Our average prototypical franchisee probably has one or two units, they're self op, tend to go relatively low levered loans, and they tend to have relationships with their bankers. So if we see a significant source of capital, sure, we'll try to help direct towards that. I would not suspect we're going to see a significant change in the way our units have been historically financed.

Just last question -- about mid-scale demand has been relatively weak vis-a-vis some of the other higher priced segments, and maybe that is because of easier comps at those higher price points. But I guess I am curious -- do you think there is a trend leisure travelers may be taking advantage of discounting at those higher price points to move upscale, and conversely as pricing recovers in that market at some point, do you think it can bring customers back your way?

We gained share last year. We don't think overall we lost. We actually think we benefited. I think that gets to the value orientation. We did see a number of the brands buying business last summer, and that -- you could see it clearly that our share gains started to erode a little bit over that period of time, and we saw tougher competition in the fall, but net net we ended up gaining share. From everything we have seen, value orientation is going to continue to be huge for a significant period of time. We clearly have that. We give people what they're looking for. Free breakfast, free internet, free parking makes a huge difference in the cost of a trip, whether it be business or leisure. We have looked at our business side on the transit side. We think we're holding our own there because we're down, but we think others are down more. And on the leisure side, as I said, we gained some share, so we think we're getting there. We added 2 million members to Choice Privileges which is double, so we think we're getting a shot at new customers. And I think once we get them in and people are accustomed and much more aware of what they're paying for their room night, and what comes with that, I think you're going to see a continued movement towards value. And I think the difficulty you've got is, yes, probably some people traded up, not enough to -- in terms of trade down. We think we're still net net ahead. But I think as people start to price, I think the flight to value is going to stay, and I think that positions us well for at least the midterm.

Great. Thanks, guys.

(Operator Instructions). Your next question comes from the line of Josh Attie of Citigroup. You may proceed.

Can you talk a little bit about the eventual refinancing of your revolver? Obviously it is a below market rate and would be dilutive. Do you want to go fixed rate or floating and how early do you want to refinance that in order to get ahead of a potential increase in interest rates?

Good question. That's something we're definitely looking at. Obviously the revolver -- it's a $350 million revolver matures in June of next year, current pricing is around LIBOR plus 50 basis points, which to your point is below what the market is today. The other thing that's important to think about is the tenor, like the length of bank financing that you can achieve in the market today, is shorter than it was several years ago when we last did the revolver. So rather than a five year revolver, if things are the same when we refinance it as they are today, then you could potentially be looking at a shorter revolver, which I think is one of the factors we would think about in terms of potentially terming out debt on a longer term basis. So we're going through that analysis at this point.

I think we just wanted to make sure we highlighted to the investment community that we will need to address the revolver refinancing sometime during the course of 2010. We have not yet settled on whether that's a second quarter, third quarter transaction. And I think there is certainly a potential that we would like to put some fixed rate debt into the structure, which would get us back closer to what the capital structure looked like several years ago, when as you may recall we had a $100 million senior note offer outstanding. Current pricing on fixed rate debt for an investment grade credit like Choice tends to be between call it 5% and 6.5%, depending on the tenor you're looking at. So a whole bunch of factors we're looking at. I think the timing is still something -- we're trying to figure out the best way to time it and deploy it, but I think during 2010 it is safe to say we'll do something in that regard.

I think it is fair it to say we don't see -- we're not counting on significant interest rate hikes in 2010.

In the near term.

In the near term. So as a result we think there is a significant opportunity to fix some of your pricing on the debt which is probably an attractive time to do it, even though as you suggested it would be dilutive to our current situation. Long-term, we think that's probably the appropriate way to think about it.

Would you consider using some of your free cash flow to pay down the revolver between now and when you refinance so -- in order to mitigate the dilution so as least you weren't refinancing a lower amount of debt?

No. We're borrowing that money at nothing, so to pay it back, I don't --

I think the only wildcard is the use of capital. We'll obviously expect to generate free cash flow during 2010, and until such time as we refinance the revolver we would either use that cash to pay down the revolver potentially use it for -- obviously we've got a dividend policy in place, and depending upon where we go with the share repurchase volumes, there's a bunch of different factors that will drive between now and when we refinance the revolver whether or not we delever or utilize more leverage.

It is fair to say what we did in 2009 we think reflects what our shareholders want us doing, which is we return 90% of our cash flow to them. So situations could change and that might not be the highest and best use, but the reality is we think that's a very attractive formula for our shareholders, provided the share repurchase opportunity is there and the dividend policy continues to make sense.

So what would you need to see to accelerate the buyback from what it was in the fourth quarter?

Well, we look at it as we always have -- is a gap between what we perceive to be the value and where the share is. And so I think it is fair to say that if we saw significantly bigger gaps that we would probably be more aggressive. Somebody said to me at one point in one of these conferences that they didn't think what we did was very aggressive. I am like, we took most of our cash flow and we bought stock and we paid dividends. Show me another Company out there that did the same thing. Our view is if there is extraordinary opportunity, who knows, we may do something more aggressive. We like the fact that we've got this opportunity. If the gap grew bigger, we would look at evaluating how much we would want to bring back, but I think you should assume that our previous behavior is a pretty good indicator of what we're going to do in the future.

Okay. Thank you.

Your next question comes from the line of Michael Millman of Millman Research. You may proceed.

Thank you. Question following up on some other topics. First question and I have another one, is regarding moving upscale or upper scale, is there any intention to move beyond your franchise model?

No. Our current goal right now is we like the franchise model. We think it positions us uniquely in the market. As we grow internationally, we may have some need to do some different models, like there are things called manchises which involves a little bit, but we don't think that's going to be a significant part of what we do. Domestically. we think given what we've got and where we want to go brandwise, that will all be accomplished within the model. Given circumstances, if you buy a brand that has significant management in it, we're obviously going to have to decide what to do with that. But our strong bias is to stay within the franchise model because we think that's what makes us special in the marketplace, and that's what allows us to be a unique buy for folks who don't -- who want to be in the lodging business but don't want to be exposed to real estate. Once you get into the management business, almost by definition you have more exposure.

Okay. Second follow-up regarding trading, leisure travelers trading up, yesterday Expedia -- you know them well I think, that they -- room nights were up about 23%. Obviously very heavy promotion. Do they offer to do promotion for you in some way? Is that affecting your travelers? How are they really able to do that or who is giving up all of those rooms and deals?

Well, I think it is fair to say that we are participating with Expedia at relatively the same levels that we have historically. They are not a significant part of our revenue equation. They are for some individual hotels, and I would tell you that I don't think that our relative performance with them has changed much, and that we're not anticipating that to be a significant driver of our business going forward. It is a distribution channel for us. It is an expensive one. We use them the same as we use all distribution channels, and that is by deciding what's the best combination of production versus pricing for delivery of those rooms.

And it really highlights the value of Choice Privileges and what we're trying to accomplish with that, Mike, which is to grow that Choice Privileges program, because that is a very cost effective way to deliver reservations to our franchisees, and as loyalty program points as part of Choice Privileges are something the third party OTAs are not able to offer to the guest who is booked through their channels, or at least not able to offer as Choice Privileges specifically. And we made a lot of headway in terms of growing the size of the program and growing the contribution to the top line revenues of our franchisees, and I think strategically that's something you should expect us to continue to be focused on improving.

You don't think their promotional activity and other OTAs is really adversely affecting your occupancy rates?

No.

Okay. Thank you.

Your next question comes from the line of Joe Gagan of Atlantic Equity Research. You may proceed.

I just have a few questions. On the SG&A, you said year-over-year came down 26%. What did that entail, the big decrease? Was part of that reducing employees? So my question with regard to that is how many less employees do you have now than you had a year ago?

First of all, Joe, I would point out you should probably look at the adjusted SG&A figure, which backs out a couple of specific unique transactions, so there is an exhibit A to the press release. If you looked at our adjusted SG&A year-over-year, it is down about 9%. Although you've correctly pointed out the absolute GAAP amount is down significantly more than that.

Okay.

There were some essentially some severance charges and impairment charge in the 2008 figure and a couple of things in 2009 related to a sublease, a loss of sublease of some office space, and we curtailed one of the executive retirement plans, and had additional severance cost. So the actual on an adjusted basis SG&A is down about 9%. That's a function of a couple of different things. The franchise sales results for 2009 were less than they were in 2008, which resulted in lower commissions expense as part of our variable commissions plans for the salesforce. There was also some -- to your point we did make adjustments on the personnel side of things.

On the personnel side of things, like how many did you reduce this quarter and for the whole year, do you know that at the top of your head?

We haven't specifically talked about the percentage headcount reduction, but we went through a very detailed evaluation of each part of our business, and we eliminated -- be it a personnel cost or professional fee we thought was redundant or wasn't really what we needed in the cost structure to support the model over the next 12 to 18 months. So I can't tell you the exact percentage we reduced the employee base. It was low single-digit percentage, though, the way to think about it.

And then on the interest expense it was some $683,000 this quarter compared to $2.2 million in last year's fourth quarter, and the debt is around the same. So what did that entail? Why it was lower by $1.5 million, what was that?

I think it was essentially LIBOR, the effect of the LIBOR environment was higher in the fourth quarter of last year than it has been running this year.

So it was lower interest rates?

That's right.

Okay.

Our revolving credit facility, which is the debt that was outstanding in both of those periods, is indexed to LIBOR which was down from 2.4% in the fourth quarter of 2008 to an average of just under 1% in the fourth quarter of 2009.

Okay. The last question is as far as the marketing reservation fees and the overspending you have been doing on that and not collecting from the franchisees, when do you think you will have to start bringing that down and start collecting the money from them?

I think first of all we are collecting on a monthly basis from our franchisees and marketing reservation fees, so that receivable balance you see on our balance sheet is a cumulative over the frankly the life of the system, the life of the Company. So over the past decade, I guess the easy way to think about it is we billed and collected probably $2 billion of marketing reservation fees, and we have just at this point in time spent $30 million more than that. So we have a receivable. So we have a track record and if you look back at the last lodging downcycle, you would have seen the same type of scenario where we made investments during the downcycle and allowed that receivable to expand a little bit. As you think about that going forward, given what we've got planned for marketing and reservation activities over the next couple of years, I think it is fair to assume that that's probably going to increase some. We're going to use some of that working capital to continue to make some improvements in our infrastructure internationally, better support our international growth strategies, as well as to what we need to do to keep our emerging brands relevant with consumers and optimizing the opportunity for our franchisees. So over the next couple of years, I think you should expect that number to grow modestly, and after that we'll gradually start to whittle that down. And again I would direct to you look back at what we have done in the past in terms of our ability to do that over time.

So over the next year, it is going to continue to grow. You're not going to be collecting -- you're going to be spending more than you're collecting at the same rate as the last year or two.

That's right. I think that's a good assumption.

Thank you.

You have no further questions at this time.

Okay. Why don't I close with thanking everyone for their time. We appreciate particularly those in the Northeast and midAtlantic buffering the snow to participate. While we do think 2010 is going to be a tough year starting out, we do believe that the back end of the year is going to show some promise. And then we also believe that the untapping of the markets both for transactions and for financing when that occurs will provide significant opportunities for us and we're looking forward to take advantage of it. Thank you for your time. We'll talk to you next quarter.

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