Choice Hotels International Inc (CHH) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Choice Hotels International first quarter 2010 earnings conference call. (Operator Instructions). As a reminder, today's call is being recorded.

During the course of this conference call, certain predictive and foward-looking statements will be used to assist you in understanding the Company and its results, which constitute foward-looking statements under the Safe Harbor provision of the Security Reform Act of 1995. These foward-looking statements generally can be identified by phrases such as Choice or it's management believes, expects, anticipates, perceives, 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, 2009 and other SEC filings for information about important risk factors affecting the company that you should consider. Although we believe the expectation reflected in the foward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We caution you to not place undue reliance on foward-looking statements which reflect our analyst only and speak only as of today's date. We undertake no obligation to publicly update our foward-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 first quarter 2010 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.

Thank you. Well, good morning, and welcome to Choice Hotels' first quarter 2010 earnings conference call. With me, as usual, is Dave White, our Chief Financial Officer.

And I'd like to kick off with a topic that I'm sure you're all anxious to hear about. There's been a lot of dialogue in the industry. Our perspective on Revpar. In the first quarter, which includes December, was at -- which includes December at a minus 11% Revpar decline -- Revpar for our domestic system declined by approximately 10%, which was better than we had previously forecasted. And as if you recall, Revpar for our fourth quarter of last year declined by more than 14%, so we are encouraged that the pace of decline has moderated. Looking ahead, our Revpar results for March and the first three weeks of April of this year have been very encouraging. During this period, which will be part of our second quarter, domestic systemwide occupancies have turned slightly positive and the pace of average daily rate declines has moderated. As a result, Revpar for our domestic system has averaged low single digit percentage declines during these periods.

We are optimistic that the occupancy trends signal an improvement in room night demand, which is encouraging for us as we get closer to Choice's peak summer travel season. As a result of the trends we are seeing, along with improving industry-wide forecasts from Smith travel research and others, we are adjusting our full-year Revpar guidance upward from a range of minus 2% to minus 4%, to a range of minus 1% to minus 3% for full-year 2010. We remain hopeful that the positive Revpar trends we are seeing will continue and our outlook is directionally consistent with the most recent 2010 industry-wide forecasts from STR, PricewaterhouseCoopers and PKF hospitality which all range from flat to negative 1.5% declines for the lodging industry.

Turning to unit growth and development, during the quarter we continued to make strides in growing the size of our system, with a global franchise system unit net and net room growth of 2.8% and 2.3%, respectively. We remain confident in our ability to attain our 2% domestic net unit growth target for the year. We also believe that the accelerated improvement in the Revpar hotel financing and hotel transaction environments will be positive catalysts for our development efforts.

On the domestic franchise development side, reductions in property level revenues over the past two years, the related reduction in hotel profits, and the continuing limitations for debt financing for hotel construction and resale, have hampered our ability to accelerate sales of both new construction and conversion hotel franchises. Having said that, our domestic franchise sales results continue to stabilize in the first quarter. In the first quarter, we executed 55 new domestic hotel franchise contracts, a decrease of 8% compared to the 60 contracts executed during the first quarter of 2009. However, this 8% decline compares favorably to 2009, when our quarterly deal volumes declined anywhere from between 40% and 55% for each quarter. And in fact, we are hearing from the brokerage community that transaction activity is beginning to pick up.

I'd like to share with you the progress we were making in the upset segment in growing our new construction Cambria Suites brand and Ascend Collection membership program, a significant conversion opportunity. Both Cambria and Ascend have been extremely well received by consumers, with a very high likelihood to reccomend score. They are also bringing more business travelers into the Choice family for all of our brands. We now have 20 Cambria Suites hotels open and online, with an additional two to three expected to open before the end of the year. The Ascend Collection has 30 units open and online, and we continue to be very excited about the long-term growth prospects for both of these brands. Obviously, in the current hotel development environment the near-term prospects are brighter for Ascend, as a conversion brand, than for Cambria, until new construction financing improves. However, we are confident we can significantly grow both of these brands on account of our strong central reservations contribution, our global rewards program and innovative product design capabilities. Our efforts will be augmented by our ability to selectively leverage our strong balance sheet to support continued expansion.

On the technology front, we are very pleased with the launch of our new choicehotels.com site, which has been met with great reviews by consumers. In user testing we heard favorable comments about the overall user-friendliness of the site, ease in comparing rates, and praise for the prominence and quality of photos for each hotel. Overall, users like the clean, uncluttered pages and up-to-date design.

We're also, as we've done last year, continuing to add new members at a rapid rate to our Choice Privileges program. I'm really excited that we surpassed the ten million member mark, less than four years after hitting the five million member mark. For the 12 months ending in February 2010, Choice Privileges members delivered more than 26% of all domestic gross room revenues. This is up more than 500 basis points from where we were a year ago.

Everyone at Choice has made it their number one priority to find ways to support our owners, so that they can thrive as the economy turns around. Many of our competitors have cut back on the services they deliver to their franchisees. We, however, continue to invest in the services we provide our franchisees, through franchise services, training, development, new ROI-driven brand initiatives, and building up our e-commerce and global distribution capabilities. We're spending our marketing dollars on things that get guests to our owners' doors. Things like strong multibrand promotions tied to Choice Privileges, strong brand advertising and an integrated media plan that has enabled us to increased planned advertising impressions by 45%, and an aggressive approach to global sales reaching out to new customers here and internationally.

Overall, I am pleased with our performance on many fronts in the first quarter, and I am excited to see continued improvement in the fundamentals, as we approach the heart of the travel season. Now I'm going to turn it over to Dave, to cover our first quarter performance in a little more detail. Dave?

Thanks, Steve, and I'll spend a few minutes highlighting a couple of additional details on the quarter, before we open up the call for your questions.

Just to re-emphasize the core value drivers of our model, we remain very optimistic about our ability to expand the size and quality of our franchise system and hotel franchise brands over time. We remain optimistic in our long-term outlook for Revpar performance, and our ability to continue to improve the pricing power of our long-term franchise contracts, and to efficiently manage the cost side of the business. Steve has already shared our views on Revpar, so I will expand on the other key drivers of our operating performance for the first quarter.

In the first quarter of 2010, we achieved net domestic unit and room growth of 2.9% and 2.4%, respectively. We are particularly pleased with our results in the mid-scale chain-scale segment, where we achieved domestic net unit growth of just over 4% on a combined basis in the mid-scale, with and without food and beverage categories. Our effective royalty rate increased eight basis points for first quarter 2010, and we have continued to expect our full-year 2010 effective royalty rate to increase by six basis points. Our domestic royalty fees for first quarter of 2010 were $36 million, compared to $39.2 million last year. The company's international fees included in royalty fees revenue were $5 million for the first quarter of 2010, compared to $4.2 million last year.

On the development front, applications received for new domestic hotel franchises declined in the first quarter of 2010 by approximately 29%, compared to last year's first quarter, as the lack of hotel transactions and hotel financing continued to impact our franchise development efforts for both new construction and conversion opportunities. However, we have seen some encouraging signs of stabilization take hold in the development arena, with new construction franchise sales increasing from six deals last year to 10 deals for the first quarter of 2010,and the pace of decline for conversion franchise sales, which declined 17% for first quarter 2010, improving sequentially from the decreases we saw last year, which averaged 28%. The number of relicensing transactions for the first quarter of 2010 was 18, a 49% decline from the 35 relicensing transactions we reported last year. The reduced contract volumes resulted in initial franchise and relicensing fee revenues declining to $1.9 million for the first quarter of 2010, a 28% decline from last year's first quarter results.

On the cost side of the business, as a result of our continued focus on cost containment, the increase in our adjusted selling, general and administrative expenses for first quarter 2010 was modest, increasing 1.8%, from $21.1 million last year to $21.5 million for first quarter of 2010. And diluted earnings per share for first quarter 2010 were $0.26 compared to $0.27 for the same period of last year. On an adjusted basis, our diluted earnings per share for first quarter 2010 were $0.27, which equalled last year's results. The adjusted numbers for SG&A and diluted earnings per share exclude certain special items, which we described in the exhibits to yesterday's press release.

Year to date, through the close of business yesterday, the company has repurchased 200,000 shares of our common stock, at an average price of $31.75 per share. The company has remaining authorization to repurchase up to an additional 3.6 million shares under the share repurchase program. We also paid cash dividends during the quarter totaling approximately $11 million.

Our balance sheet and liquidity position remain strong. We finished the quarter with approximately $66 million of cash on hand and total long-term debt of $294 million, which represents a net debt to adjusted EBITDA multiple of less than 1.4 times our 2010 outlook. As of the close of business yesterday, the company had approximately $39 million of available unused borrowing capacity pursuant to revolving bank facilities that are committed until June of 2011.

Turning to our outlook for the second quarter and the remainder of 2010, we currently expect second quarter 2010 diluted EPS to be at least $0.42, and we raised our full year 2010 diluted EPS outlook to a range between $1.68 and $1.72 per share. These figures assume domestic unit growth of approximately 2% for full year 2010, and approximately 2% decline in Revpar for second quarter 2010, and a negative 1% to negative 3% Revpar decline for full year 2010. These figures also assume a six basis point increase in the effective royalty rate for full year 2010, and an effective tax rate of approximately 36% for second quarter and full year 2010. All figures assume the existing share count and the company's existing credit facility remains in place for the balance of this year.

Now let me turn the call back over to Steve.

Thanks, Dave.

So as the environment begins to improve, we remain ideally positioned for continued success. Our business model and financial strength have historically enabled us to deliver strong shareholder value over an extended period of time, and in a variety of industry and economic climates. We have ten well-segmented brands, and our Ascend Collection network program, which provides significant domestic and international growth opportunities. We are optimistic that the conversion activity will improve in the near- to mid-term, as the lodging environment continues to improve. And we have a solid track record of growing our system in those types of environments. Our brands resonate well with consumers seeking value, which is a trend we expect to continue. And finally, the strong relationship we have with our owners, and the value proposition of our brands and services, represent to our franchisees and gives us great optimism about our long-term growth prospects.

I'm now going to open up the call to answer your questions.

(Operator instructions). Your first question comes from the line of Jeffrey Donnelly from Wells Fargo. Please proceed.

Good morning, guys.

Good morning, Jeff.

Steve, actually -- and thanks for your initial color on Revpar. I'm curious, how do you think about, and I'm not asking you to opine on a competitor, but how do you think about Marriott's 3% to 6% outlook for the US? I recognize it's not quite apples to apples with Choice but, because it includes their full service product, but even at the low end, they've got a much more robust outlook. How do you reconcile that differential in your views?

Well, we look to a couple of things. One is, they've got a significant swing-up, according to their call, in their business transient business, which we participate less in. They have a much more significant urban exposure. We tend to be less so. And the other is, they've got a big pick-up in group, both currently and in the year, for the year bookings. So I think you put all those together, and the fact that they were also down more than we were down through 2009, kind of all combined, puts them in a different position than we are in with our brands.

And then just, maybe a two-part question. There are signs of, as you mentioned, there are signs of activity called stabilizing, and potentially returning to the transaction market this summer, that hopefully should accelerate in the next year. Thinking about your relicensing fees and your conversion activity, if I look at, for example, in the first part initial franchise and relicensing fees, for the last decade it's averaged about , call it 4% of revenues for the company, and today I think it's around 2% or so. Do you think there's a possibility that can quickly return to the mean, if you will, in the near future, say in 2011, if transaction activity begins to

Jeff, you know, in the relicensing side, I think I would take that separate and apart from the initial fee side. I guess what we've seen over the past decade is anywhere between 4% and 8% or 9% of our system relicensing in a given year. And certainly in those peak years and kind of that 2005, 2006, 2007 time horizon, that's when you saw those high single digit percentages. And then obviously, as you pointed out, what we're seeing on the relicensing environment right now is in the low single digit area. So, I think there -- we're optimistic that at some point you'll see some rebound and that relicensing environment, I think it kind of remains to be seen how long or if it ever gets back to those high single digit areas. I guess the average over the past 1ten years has probably been about 6%. Our guess would be that it will probably improve over time as that relicensing activity and the transactions activity heats up.

How do you think, in the same way, about conversion activity? Because I know we don't have quite the development cycle that we did in 2005, 2006, and 2007, but the same thing. Over like a ten, 12 year period, Choice has averaged about 3% to 4% year-over-year unit growth role to conversions and new development. And right now, as you said earlier, you're on target for about 2% growth. Do you think, if the transaction market resumes next year, that's going to give you the opportunity to maybe propel your unit growth for say 2011 or 2012 back to sort of that 3% to 4% growth almost exclusively by conversions, or is that just too aggressive, do you think?

Well, I guess the answer is if we get back to a robust transaction market, then we do think we will see more than our fair share of those conversions, because that's really the space we plan better than anyone else. And that's probably one of the key differences in this upturn, is that because the new construction market has been just -- has been really decimated by the lack of construction financing, that the conversions arena is where the action is going to be for the next couple of years, and we think that bodies very well for us. So yes, if you get back into a robust conversion environment, I think you could easily see us hitting those kind of numbers.

Thanks, guys.

Your next question comes from David Loeb from Baird. Please proceed.

Hi, Steve, further down that same line of thought, I know that openings are lumpy, removals probably more lumpy. But it looks like removals have been pretty high the last couple of quarters. Sequentially, you've had essentially no growth in rooms the last couple of quarters. What's behind the removals and behind the relatively slow opening pace these last couple of quarters?

I think, David, this is Dave, there's a couple things going on. One is, as we've talked talked about a little bit in the past, the new construction pipeline right is gradually decreasing as those contracts open up and come online, so I think for 2009 we opened about 100 -- right under 150 new construction hotels. For 2010 we think that number will be closer to 80. So as we progress through the year, you're going to see the gross openings that are tied to new construction gradually decline. And then on the conversion side, that's held up relatively better than new construction on the gross opening side, as we've worked through the pipeline of conversion contracts we've sold, you know, historically. The other thing is I would say is that it's difficult to see in the pipeline, what you really don't see in the pipeline, is to the extent that we sell a conversion franchise contract during the year, because those conversion hotels open pretty quickly,anywhere between three and nine months, with the average probably right in the middle, that conversion hotel can actually be sold and come online during the year. So that's one of the things that you don't see in the pipeline side of things.

And to your point, we have seen higher terminations than we have in the past couple of years, and I think there's two parts to that story. Part of that is just, we're being slightly more aggressive on the portfolio management side of thing,s as we try to really augment the brand equity of our brands and get them to improve their positioning relative to their competitive set. And then we have seen slightly higher credit terminations, just as a result of the economic environment we kind of find ourselves in. But we still feel good about, when you look out for the balance of 2010, to your point, it can be lumpy, from quarter to quarter, but over the course of 2010 we feel good about the opportunity to get to that 2% net unit growth number that we've talked about.

Can I just ask a couple of follow-up points on that? As you look at the relicensing, was some of the decline in relicensing because you were choosing to terminate for portfolio management performance reasons?

Yes. No, relicensing revenues really only relate to a scenario where an existing hotel franchisee decides to sell their property to a new owner and the new owner pays us a relicensing fee in order to join the system. So that's disconnected really completely from the termination side.

So the terminations could have been either mid-cycle or at the end of an agreement, either way?

Yes. The terminations, there's a number of different reasons, some are franchisor-induced. For example, quality assurance type terminations, or if we decide to take our contractual out at one of the windows, and then credit, those are the typical franchisor-induced termination scenarios. And then there are certainly scenarios where the franchisee has the contractual right at various points in the contract to take -- to exit the contract. And, to that, I would say that we have very good track record in terms of overall franchise system retention. If you look at our franchise year in, year out, typically a high 90% retention rate is what we've achieved pretty consistently over time in terms of -- so, in other words franchisees don't take their outs very often.

Okay. One more related to that. Do you have any color on where these hotels go when you remove them? Do they tend to just become independents, or are they choosing Wyndham brands or other brands?

Well, I think, one, one of the interesting things for the system for us is, at times we move a hotel out of one of our brands and into another one of our brands. So, for example, we've done, I think, something on the order of 80 conversions of Comfort Inns to a combination of Quality and Econo Lodge. So, at times, we're sort of supporting our own growth through that activity. And then, in some cases where the property has become functionally obsolete or they are not willing to make the investments, I think the bulk of them are either going to an independent scenario or to a down-branding with one of the Wyndham brands.

Great. And final question. Steve, I think you've said publicly that you'd love to take some of the 200 Holiday Inns that are going to get kicked out of that system this year. What do you think the prospects are for conversions from Holiday Inn, for owners that don't want to participate in the Holiday Inn re-imaging program?

We still think that's going to be a positive for us. What occurred last year was there were a number of hotels that received extensions from IHG, which then sort of slowed down that activity. But we're assuming, as they go forward with their program and everything they've put out so far that they are going to continue with that program, we clearly think that's going to be an upside for us in picking up some of those hotels.

Great. Thanks very much.

Your next question comes from the line of Chris Woronka of Deutsche Bank. Please proceed.

Hi. Good morning, guys.

Good morning.

Wanted to ask you about share repurchase. I think it trailed off a bit throughout the first quarter, relative to what you said on the fourth quarter earnings call. Any specific reason for that? Maybe other than price movement, and what would it take for you guys to accelerate that program again? Thanks.

Hi, Chris. Thanks for the question.

On the share repurchase program, what I would tell you is that the way we operate that share repurchase program is really not that different than how it's been over the life of us as a public company. So there's a bunch of different factors that go into the assessment as to the buying decision. Price is certainly one of them. We've definitely talked about our approach as an opportunistic approach. We're not agnostic, as to the price of the stock, and we have a very long-term view. The other things that can, obviously, play into that mix is the amount and cost of capital available to us, and everything else that's going on in the industry and the economics, and essentially the volatility in the capital markets, those types of things, have an impact on it as well as just our desire to maintain financial flexibility, so that if other potential uses of the capital that had better return potential became available, then we'd be well positioned for that. So there's not one thing we can point to. We do remain committed, over the long term, to being good allocators of capital. And I think returning excess capital to the shareholders is certainly one of those things. And as you're aware, we have a strong dividend which we've had in place and maintained through the lodging down cycle, which is a bit of a differentiator, I think, for us compared to some of the other companies out there in the most recent turmoil. So that's kind of how we think about it.

And then I'd just reemphasize that our primary priority is always returning value to the shareholders, it's sort of one of the hallmarks of this company and that is true today.

Okay. Great.

And then just as we think about the transactional environment, certainly it does seem to be picking up, but relative to what we might have thought, there hasn't been quite as much forced distress that maybe would have created a few more opportunities for you guys. Is that fair, relative to what you guys expect, or is it kind of playing out how you expect it? It just seems as though the distress is for various reasons, not there in a big way, at least yet.

Yes, I think if you look back six, nine months ago, our sense was that there were going to be a growing number of foreclosures. And there have been. But what we haven't seen is sort of those hotels then hitting the market relatively, in terms of the numbers that we were expecting. So I think you got a combination of two things. One is, I think the banks have been extending more than we had anticipated, and you've also got now in the new environment of this uptick in terms of Revpar, people looking to, I think maybe willing to hang on, or invest a little bit more, or provide a little bit more collateral. So while there's been an upswing in the overall activity related to that, and we've spent a fair amount of time camped out at special services offices looking for opportunity, it -- we got some lift from it but not -- I think your characterization is right, not what we had expected if you look back six months ago.

Okay. Very good. Thanks.

Your next question comes from the line of Ryan Meliker of Morgan Stanley. Please proceed.

Good morning, guys. I just had a couple quick questions. Just talking about the initial franchise and relicensing fees. If you can -- is there a lag at all between when we start to see the transactions really pick up, so when you'll start to see your fees come through? Is it going to be the same quarter, or are we looking one or two quarters down the road at typically the way things work?

Yes, I think the way you ought to think about it is, we view it as a kind of six month average. So I think you see it, once you see those transactions occurring, probably two quarters is the safe bet, as to when you'd see revenues popping.

Okay. That's helpful.

With regard to the Cambria brand, I know you guys don't like to disclose the exact occupancy ADR and Revpar because there's not a lot of properties. But can you give us any color on where the penetration rate is for Revpar or ADR, relative to the individual properties' competitors, so we can get an idea how they are performing? I know it's a challenging environment in terms of selling contracts for new builds right now, but I'm wondering how they are going to be -- what type of market share Cambria might gain going forward and when new building does start to come back.

I think the way you ought to think about it, because we -- when you have a smaller brand, putting the numbers out there heavily weighed by one property's success or another, I think the way you ought to think about it is for that brand, we are happy in that, through a ramp-up process from opening, they are hitting their fair share against the competitive set, in general. And that competitive set would include, sort of the hotels that you would expect, meaning Courtyard, Hilton Garden, Holiday.

So we think, on a head-to-head basis, we know two things. One is, when those hotels open, they typically open and are the number one or two rated hotels in Trip Advisor. So once we get them in, we have customers that really prefer that product. And then secondly, that on a competitive basis, that as they ramp up, we are hitting fair share on our Revpar basis. But what's more encouraging and probably more indicative over their performance long term, is the likelihood to recommend and the guest satisfaction are literally off the charts, they're higher than I've ever seen. And so I think that bodes very well for the long term and the performance of those hotels.

That's helpful. Thanks.

If you don't mind, one last quick question. I've heard that there are a couple of upper upscale brands on the market these days. Is that something that Choice Hotels might be interested in looking into, the acquisition of an upper upscale brand, given that that seems to be a hole within your portfolio and a big opportunity for, certainly, domestic expansion?

Yes. We think it fits the portfolio well. It would augment what is a strong set of brands now with another segment being participated in. And more importantly, it would come with a significantly higher generation of business customers. So we are absolutely interested in an upper upscale full service brand opportunity. Ascend is sort of putting us in that play a little bit, although the Ascend properties tend to be a little smaller and tend to be more boutiquey or historic, but that's giving us good play currently, sort of in a number of urban markets, and we've got significant demand that is not being met for hotel rooms in those urban markets. So, you know, it is a natural for us to progress into the upper upscale space, and we're just looking for the right opportunity.

Okay. Great. Thanks a lot.

Your next question comes from the line of Josh Attie of Citigroup. Please proceed.

Hi. Thanks. Can you compare April Revpar to March? I think you gave March and the first three weeks of April on a combined basis, but can you kind of -- how did April compare to March?

They've generally been running relatively comparable, Josh. What we've seen, a modest uptick in occupancy and the severity of the ADR declines has mitigated significantly. So that low to single digit area, relatively comparable.

I think the economy segment was up a little bit in April and it was probably -- and I think it was down 3% in March. So you guys didn't see that in your portfolio?

Yes. Well, obviously for April, we haven't finished the month, but it's -- they've been running relatively consistent for us. Which I think, part of that is when you're looking at our results on a Revpar relative to what travel research puts out there, I think you need to consider the locational differences and the business mix differences, because we tend to skew more towards leisure and we tend to skew less towards urban markets. So I think the relative Revpar volatility for our hotels tends to be a little bit less than those chain scales sometimes imply.

Can you just remind us, what kind of visibility do you have on the summer travel season?

It's very limited. Our booking window typically is, you know, seven to ten days. And so what we look to more, in terms of how to look for the summer, is the current trending, which we view as positive and then the -- for us, the stabilization of employment is a very strong factor. And usually, as the employment figure stabilizes and begins to improve, we usually see a corresponding uptick as a result of that. Because of the heavy leisue orientation of our brands, and sort of where they are situated today.

Okay. Thank you.

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

I'm all set guys. Thank you.

Okay.

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

Yes. I just have a couple questions.

On the marketing and reservation fees, on the marketing reservation receivables, it went up to $47.4 million, and it was $33.8 million the year before, and then two years ago it was $14.5 million. I know you said before, this is just a result of not billing the franchisees for the spending that you're doing, right? When does -- I guess when does this increase end and when are you going to have to start getting money back from these franchisees? Because obviously the cash flow, operating cash flow is down to $6.9 million from$10.4 million the year before. So, how long can you keep on doing this, just spending without getting the money back?

Yes, that's a good question, Joe. There's a couple of things. I mean, if you look at the cash flow statement, the receivable from (inaudible), the amount of cash used to finance our receivable is pretty consistent for first quarter this year relative to last year. The other thing is you do have some seasonality in the first quarter, because obviously that's our weakest revenue month, which actually translates through to the marketing reservations. To kind of clarify, we do bill marketing and reservation fees every month, just as we do bill the royalty fee. So we are billing and collecting marketing reservation fees along with our royalty on a monthly basis. It's just that, during certain periods, certain particular financial periods, we will spend more dollars than we actually collect, which is what causes that receivable to go up. And I think I would definitely point out a couple of things. One is, if you look back at the last lodging downcycle, you saw a similar pattern with our marketing and reservation receivable. So the marketing and reservation receivable actually grew as the lodging cycle was in the tough spot. And then as the lodging cycle improved and you get the Revpar lift, which flows through to those marketing and reservation activities, we gradually retired that receivable. So it's just something you have to factor out the cyclicality of the industry on.

Having said that, we're making some investments in our brand, particularly in international, in the area of marketing and reservations, and that are factoring into that -- that growth and that receivable. But from where we sit now, our current internal forecasts are that you could see modest growth in that receivable over the next couple of years. Over time we would begin to -- you would begin to see that ebb.

Okay. Good.

I might add to that, that it is, we think, critical to have a forceful marketing effort in this environment, because we believe our brands are ideally suited to sort of the consumer sentiment at this point, which is a strong value orientation. And so we believe that marketing effort today is going to pay off significantly as we go into that upturn.

Okay. And the other question I have is in regard to the strength of your franchisees, right, I mean, so they're roughly, approximately going through 20% Revpar declines since 2007, right? Say if you had your typical Comfort Inn owner, right? Is that person making money now, at 20% Revpar declines, with his mortgage and all the things he has to pay for? Are these guys going to -- I mean, are they making money?

Well, what I would say to that is, if you look back and you think about the operating margin on one of those hotels, it's probably somewhere between 40% to 50%, typically. So that $2 million hotel, if it's got $2 million in top line revenue, has gone from, call it $700,000 to $800,000 of NOI to probably half that. So then the question comes down to how much leverage do they have on their balance sheet, right? And that's one of the things, because of our -- because we are a franchisor, and because we have very low credit exposure to any individual franchisee, we don't have perfect insight into the balance sheet of every one of our -- we've got 6,000 franchises around the world. We don't have a balance sheet on a monthly basis from each of them. So when I'm thinking about the health of the franchise system, I have to rely on a couple of other metrics. And so what I pay a lot of attention to is DSO on our receivables side, as well as our writeoffs and our credit terminations. And we have definitely seen over the past 18 months, some modest deterioration in those metrics, but they're still fairly good. And so, I guess if you ask me how I feel today versus how I felt last quarter, I feel about the same, and in terms of the health of our franchisee system given those credit termination metrics, DSO and writeoffs.

And so as the Revpar environment improves, obviously that will start to make me feel even better about the franchisee health. But to answer your question, I mean it really depends upon how much leverage that hotel has on its balance sheet. I'm not seeing anything that causes me to believe our franchisees are particularly overleveraged.

Yes. But you are point out toward these metrics, but clearly, you have salespeople that are out there trying to sell new people all the time. Clearly -- and you have -- I'm sure you have meetings with the franchisees, clearly you must have some responses -- or have some knowledge about whether they are making or not making money at these -- at the pricing and revenue levels.

No, we do. And the answer is, if you look at the credit receivable situation, they are making money and they're paying their bills. What we know about them in general is that they are -- they tend to be lower-levered, and as a result and because of where they operate, they can operate at lower occupancy levels than other hotels. And so we have not seen the significant upswing in hotels being turned back over to the banks and foreclosure scenarios. We've seen some modest deterioration, as David said. But to answer your question, yes, we think the're making money, they're just making less.

Okay. The last question is this. So, given, I mean obviously a lot of them must know each other, right? So -- and they talk to each other, and they feel things out, whether this is a good business to go in, right? So given this fact that a lot of them know each other, is that making it hard to bring on new people, if they're talking to their friends and the guy is saying, " I have this big mortgage and I'm not making money". Has that affected bringing on new sales or is it just like -- is it like 2005, 2006, where it's not a big deal?

It's actually just the opposite, because they're holding better than their other -- remember, they don't just have our brands, they have the other brands as well. So there is a lot of conversation and a lot of comparison. In those we fare very well, and as a result it actually increases our opportunity with them.

Great. All right. Thank you.

(Operator Instructions). You have a question from the line of Michael Millman from Billman. Please proceed.

Michael Millman from Millman Research Associates.

You talk about Revpar improving year over year compared -- so looking -- comparing one moving number with another moving number, can you talk a little bit more about sequential growth relative to whatever normal is, to see to what extent we are truly getting absolute growth, if there's such a thing?

Yes. The way I would answer that, Michael, is a couple ways. On the occupancy side, when you look at room demand, I think what we talked about in the script was that we're starting to see occupancy improvement, which I think is indicative of actual growth in room demand, right? Which is a positive. If you're looking for our outlook for the balance of 2010. At the midpoint of our range, we are, on the Revpar side, we're essentially -- we had down 10% in Q1, we are expecting Revpar to be down about 2% in Q2, flat in Q3 and positive 3% or so in Q4. And I think the way we see that playing out is continued gradual improvement in the occupancy side of things, which is really kind of the first, I think, first important thing that you want to see, in terms of the lodging industry moving the right direction for our segments.

Maybe ask it slightly different. Typically, you would expect to see occupancy seasonally. Are you seeing that better than typical seasonal, or in line with typical?

Well, when we do our comparisons, we are comparing them against the same period of last year so --

That I understand -- okay, well, maybe (inaudible). On -- are you seeing any difference in the amount of quality, possibly, of your -- or the franchisee's customers coming, or reservations, coming from the OTAs?

I mean, essentially the central reservation contribution for the company, which has been around a third for the past couple of years, has moved up slightly from what it was last year. And I would say that the relative contribution from the different sources is relatively consistent. We haven't seen any major meaningful changes in that.

So we have had a little uptick. Those are our highest rated channels, the ones that we have. The OTAs are relatively flat in terms of their contribution to us, and it's also relatively minor. It's about 6%.

Okay. Thank you.

Thank you.

If there are no further questions, I would like to turn the call back over to Steve Joyce for closing remarks.

Well, we appreciate you listening in today. We do -- I guess a couple of months makes a big difference, in terms of how we are viewing the business, as is everyone else at this point. So we think we are finally beginning to see the uptick in the Revpar environment, and we also believe that the transaction environment is going to improve. And we think we are uniquely positioned to take advantage of both of those, particularly because in this cycle, value orientation, I think, is going to remain king amongst consumers, for at least through the midterm. And in addition to that, all the action in the development side is going to be in the conversion area, and that's where -- that's our strong suit. So we are optimistic about the environment we're going to face in the next year or two, and think we are going to be able to deliver strongly as a result. Thank you very much. Have a great day.

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