Choice Hotels International Inc (CHH) 2010 Q2 法說會逐字稿

Good morning, and welcome to the Choice Hotels International second quarter 2010 earnings conference call. At this time, all lines are in 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 it's management believes, expects, anticipates, foresees, forecasts, estimates, or in other words or phrases of similar import. Such statements are subject to risks and uncertainties, and 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 31st, 2009, and other SEC filings for information about important risk factors affecting the Company that you should consider. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We caution you, do not place undue reliance on forward-looking statements which reflect our analysis only and speak only as of today's date.

We undertake no obligation to publicly update our forward-looking statements to reflect subsequent events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our second quarter 2010 earnings press release, which is posted on our website at www.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. Good morning, and welcome to Choice Hotel's second quarter 2010 earnings conference call. With me as always is Dave White, our Chief Financial Officer.

I'm going to highlight some of the key results we published in last night's press release, and our perspective on the broader macro environment before handing the call off to Dave to discuss in more detail our financial results.

With respect to RevPAR, we have actually been pleasantly surprised by the level of improvement that we achieved during the quarter.

I think as everyone recalls, the first quarter for us was somewhat disappointing, but now we are actually seeing a relatively consistent and strong increase in RevPAR, which really represents the first growth in that quarterly metric in two years, so we remain optimistic because we have seen RevPAR improvement in the second half of the year already, and we believe that we'll continue to see that for the remainder of 2010.

Considering our published year-to-date results, plus more RevPAR performance in June and July, we have increased our full-year RevPAR outlook range by roughly 300 basis points across the board. On the development front we've added a net of 42 units and approximately 3200 rooms to our global franchise system during the quarter.

Our current full-year net domestic unit growth outlook remains directionally in line with the industry supply growth numbers, and consistent with our brand strategies intended to ensure that the quality and the value proposition of our brands to developers and to guests remains strong. As reflected in our hotel franchise contract sales results this year, I would characterize the near-term franchise sales environment as choppy.

We continue with our ongoing brand strategies, and I'm very happy with the quality of the franchise hotels we are adding to our system, but on the other hand, after seeing significant directional improvement in franchise sales during the first quarter, in the second quarter, we were disappointed to experience a year-over-year decline of nearly 50% in domestic hotel franchise sales. Despite the improving hotel environment, the weak financing and transaction environment continue to hamper our franchise sales efforts.

While we continue to believe that improved opportunities for franchise sales will happen soon, they have still not materialized. We do, however, remain confident in the strength of our brands and our value proposition for developers and in the long term system growth prospects for our portfolio, as those transactions and developments begin to return. Assuming continued improvement in hotel operating fundamentals, when the hotel financing and transaction environments improve, we would expect that to be a positive catalyst for us on the development front.

Regarding our upscale Cambria Suites brand, I have shared with you in the past we think there is great potential for that brand's future growth in the upscale segment. And as we disclosed in our release yesterday, during the year, we have seen some opportunities, and have chosen to commit some capital to incent and stimulate development primarily of the Cambria brand, and as we pointed out some of the capital has already been recycled back to the Company.

We will keep you informed of our progress in this area, and I want to reiterate that we expect the capital deployed to be primarily focused on growing our emerging brands and to generate modest financing returns in addition to the brand value can facilitate. While our first priority will always be returning capital to shareholders over time, because of our strong financial position, we are well positioned to support these types of investments as well.

On the macro front, we continue to closely monitor GDP growth and unemployment. Our business performance is strongly correlated with these two macro indicators, and we would see improvement in these gauges as positive catalysts that we can have significant impact on our room demand, and RevPAR results. By most indication, and according to most experts, modest GDP growth and flattish unemployment appears to be the expectation in the near term, and we have established our business plans, our costs, our expectations, and our targets with that backdrop. Let me turn it over to Dave now to cover our second quarter performance in a little more detail.

Thanks, Steve. I'll highlight a few additional details about the quarter before we open up the call for your questions.

During the quarter we continued to expand domestically and abroad the footprint and quality of our franchise system. In addition, we experienced what we hope in hindsight will turn out to be the first of many quarters of improving top line revenue performance for our franchisees. We're also pleased with our continued efforts during the quarter to manage the cost side of the business in a balanced manner consistent with efficient operations and continued allocation of resources against growth opportunities.

During the second quarter, we achieved net domestic unit and room growth of 2.6%, and 2.2% respectively and in international markets our net unit and room growth was 3.3%, and 2.3% respectively. RevPAR for our domestic system increased 0.3% for the second quarter, and we achieved year-over-year occupancy increases for nearly all of our brands, while the pace of average daily rate declines continued to moderate. Our domestic royalty fees for second quarter were $51.7 million which represents an increase of 3%, compared to $50 million last year.

The Company's international fees, which are included in the royalty fee revenue line were $5.8 million for second quarter 2010, compared to $5 million last year. On the development front, in addition to the reduction in executed contracts that Steve mentioned, we saw continued weakness in application flow during the second quarter. Applications received for new hotel franchise contracts during the second quarter of 2010 declined by approximately 28% compared to last year's second quarter. The level of decline was comparable to the 29% reduction we experienced in the first quarter of this year.

However, with that backdrop, we have reduced our 2010 development projections. As a result of the difficult development environment, as well as the timing of certain SG&A items, our new full-year 2010 outlook for adjusted EBITDA and EPS does not fully reflect the stronger than anticipated RevPAR results we achieved in the second quarter, and are projecting for the remainder of the year.

On the cost side of the business, our adjusted selling, general, and administrative expenses for second quarter 2010 declined by 9% primarily on account of lower than expected franchise sales commissions, reduced compensation expense resulting from mark-to-market accounting for our non-qualified retirement plan assets, and lower then expected professional fees related to certain initiatives. The latter being primarily a timing difference which we project will reverse later this year.

Adjusted diluted earnings per share for the quarter were $0.45 per share compared to $0.44 for the same period last year. The adjusted figures for SG&A and earnings per share excludes certain specific items which we described in the exhibits to yesterday's press release. Our balance sheet and liquidity position remains strong.

We finished the quarter with approximately $71 million of cash on hand, and $291 million of borrowings outstanding on our revolving credit facility. We expect to refinance the revolving credit facility in advance of its maturity in June of next year, and in that regard, we are continuing to monitor the credit environment.

Turning to our outlook for the third quarter and remainder of 2000, we currently expect third quarter diluted earnings per share of $0.57, and we expect our full-year 2010 diluted earnings per share to range between $1.70 and $1.72 per share. In addition, we expect adjusted EBITDA to range between $167.5 million and $170 million.

These figures assume net domestic unit growth ranging between 1% and 2% for full year 2010, they also assume domestic system-wide RevPAR increases by 6% in the third quarter, and for the full year, ranges between flat to a positive 2%. These figures also assume a 6 basis point increase in the effective royalty rate for full year 2010, an effective tax rate of approximately 36% for third quarter and full year 2010. And all of the figures assume the existing share count and that 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. We obviously are very pleased with the RevPAR environment and the improvement we are seeing in that. We are looking forward to signs that the domestic franchise sales environment will begin to get better, as we attend conferences and listen to the various experts, there's a belief that the transaction environment is going to improve in the near to midterm, and we're looking forward to that as we believe that will lead us to more than our fair share of those conversions as available. And over time we have achieved strong performance and delivered strong returns to our shareholders, regardless of the type of economic climate and in many segments of our industry.

This is due to our dominant presence in the moderate tier, our pure play franchising business model, and a family of well-segmented portfolio of new construction and conversion brands, which allow us to take advantage of all development environments.

Choice brand properties provide business and leisure travelers with a range of high-quality, high-value lodging options which is enormously important in this environment, and value is king in this environment, so we are ideally positioned to capitalize on this trend. By continuing to work collaboratively with our franchisees, we're strengthening our brands and the services we provide to our owners, to our operators, and to our guests. I'm now going to open up the call to answer any questions you might have.

(Operator instructions). And your first question comes from the line of Patrick Scholes with FBR Capital Management. Please proceed.

Hi, good morning. Just two questions for you. Can you give a little bit more color on your SG&A? It looks like you cut that by about 9% in the quarter, whereas your many competitors actually had that up slightly year-over-year, so just a little bit more color on where you were able to make cuts and is that sustainable? And second question is do you feel that you are any closer to possibly purchasing a brand? Thank you.

Sure, this is Dave. I'll take the first question on SG&A, and then I think Steve will take the brand question. So on SG&A, Patrick, as you pointed out, we did reduce adjusted SG&A by around 9% for the quarter, and there were a few things that were impacting that. There was -- on our retirement plans, the mark-to-market adjustment, which you see impacting our investment income, which was a loss for the quarter, ends up being a credit to our SG&A expense. So it reduces SG&A expense.

That's a piece of it, as well as we did better on the professional fee side of things as I mentioned in the opening remarks there were a number of projects that we had underway to improve obviously the quality of our system and our brand programs. Some of those things have not progressed as fast as we were expecting and we're at lower volumes than we were last year. As you look forward in our outlook, I think the last call we talked about our adjusted SG&A being up in the low single-digit area percentage wise.

At this point given where we are halfway through the year, and what I see going forward in the second half, in terms of some of those timing things reversing and professional fees, I think we're thinking about it as being relatively flat on the adjusted SG&A for the full year. And I'll let Steve take the brand question.

So on the brand search, we continue to work looking at various opportunities. We have yet to engage in a meaningful discussion on the full-service brand. You are aware, obviously of the transactions that have occurred out in the marketplace. We have attempted to play a role in those transactions, but have not yet found the right formula. I would say in terms of opportunity, though, that obviously in that down market, and the environment that we had a year ago, part of our hope, not that we wish ill on anyone, was that someone would get in trouble and need to move a brand in order to provide some de-leveraging.

That scenario, obviously has improved for the various companies, both from the general environment, but also if you look at some of the individual companies that may have sold brands, their performance and leverage and debt position has for the most part been improved, so I would actually say that probably makes it a little harder. Having said all of that, it is one of our goals. We are to aggressively going to pursue that, but it's going to take luck and opportunity to hit on that.

Thank you for the color.

Your next question comes from the line of Steve Kent with Goldman Sachs. Please proceed.

Hi, Steve, could you just talk a little bit about any leisure travel indicators we should be looking at to get a better sense for where you could see a pickup on that front? And then separately to get some transactions, maybe some conversions, what indicators should we be looking for there that might accelerate that opportunity?

Yeah, I would be happy to. Let's start on the leisure side. I think everybody on the call is probably familiar with the fact that we're roughly two-thirds leisure in our business. So obviously we monitor that closely. And that actually is sort of the bright spot in where we're seeing that RevPAR improvement. It was forecasted for the summer that most people were looking for the summer to be up 2% to 3%, and we're at least achieving that, maybe even a little better, that's why our forecast is what it is.

It appears that is a stable trend in terms of looking at our day-by-day numbers. Kind of got a tick up in May and it has kind of held through to this point, so we're encouraged by that result, and as I mentioned and we mentioned that's a little better than we had hoped for, which means that if we get into the fall and that carries through that's a good opportunity. We are obviously concerned about the drop in consumer confidence that we had in the -- I guess it was the June numbers.

But what we're seeing, and what you've seen from the consumer on the retail side starting in January that the folks that have jobs are beginning to spend again. There is some shifting around that back and forth, and so I think the relative confidence piece is an important thing to monitor, but what we're seeing is that people plan on taking their vacations. They may be a little shorter, and there may be a little less distance involved, but they are taking them and we're seeing that in our numbers, so we're encouraged by that, and we believe that if we get any sort of uptick in that employment picture that that actually will continue and grow on that piece, and we're monitoring like everyone else sort of the GDP picture, which the forecast and the ranges are pretty broad at this point.

We're starting to think about next year, and one of the issues is both from a RevPAR standpoint from a GDP, and from an unemployment standpoint, we have a fairly wide range amongst the forecasting experts, at least at this point. So as we look at it, we view it as a net positive, we're seeing that in our numbers. The summer numbers are encouraging. Anything positive at this point is a happy sign for us. But it appears that it's relatively stable, that it's holding through the numbers that we have seen up to this point, and we're expecting that to continue in our forecast.

Yeah, and the only thing I would maybe add to that, as you see the up scale brands Steve be more aggressive on pricing and drive pricing more aggressively, I think that could potentially be a net benefit for us on the leisure side as well as they start to price out some of their transient leisure business. That's looking, you know, more for a value price obviously, and same would be true, I think on the government side, to the extent that those upscale brands begin to be more aggressive on pricing and start more frequently pricing through per diems, and those could be good for us, because where our brands play, we would be in a good position to capture some of that business.

So then on the transaction side, the reason for optimism is, one, you have got the brokers talking about a higher level of activity coming into them through applications and others, and if you kind of watch the listings of properties, that appears to be increasing somewhat on an anecdotal standpoint.

One of the other big indicators though is there is a general sense that the banks are beginning to become much more aggressive about taking properties back. They are looking at a rising real estate environment, where they believe that their first mortgage that they have lent is probably covered, so therefore, they are not as willing to extend and pretend as they have in the past, or actually my favorite phrase, a rolling loan gathers no loss.

So I think as you look at that going forward, there is a belief that there is a sense of transactions coming to a forefront, the gap between buyer and seller is closing. There is creeping capital, I would not say strong capital, but creeping capital coming in from the lenders for existing hotels, not for new builds, and the banks are getting more aggressive about turning over loans and beginning to take more properties back.

You know, we were at the Alice conference about two weeks ago, that sentiment was expressed in New York and carried through to Alice, and people are starting to see that in the numbers. There is a sense, though -- the question always is, is it going to have a tidal wave of capital, pent-up demand for transactions, I think the general belief and ours is probably not, it is probably a steady flow that begins.

But once that begins that's what we're extraordinarily optimistic and excited about, because that's when we think we play, sort of the premier position as the converter of hotels. We think we'll get more than our fair share as a result, and we think that will lift us back into a more normalized development environment with the new-build environment coming sometime after that, and sometime, meaning, at least probably another 12 months.

Okay. Thank you.

And your next question comes from the line of Dave Loeb with Baird. Please proceed.

Hey, good morning. Steve, in the press release, you had a couple of paragraphs about investments in franchisees to promote the growth of emerging brands, and I had a kind of a multi-part question about that. First is the -- how does the $20 million to $40 million compare to previous years? Is that all for Cambria, and like for the last three years for example -- it is all for Cambria? What kinds of investments are you more likely to make, and what are the return expectations, both near term and long term, in terms of direct and indirect growth for the brands?

Yeah, so good question. The answer is, the intent we had all along, starting back in '08 was that we would use a portion of our balance sheet to incent the growth of the emerging brands. It is primarily Cambria related at this point. And the $20 million to $40 million was sort of a range of an estimate that we put on it. We clearly have not done that over the last several years, the numbers probably would be more in the single digits in terms of what we have put out. This year the activity has picked up a little bit which is encouraging. And it's incentive capital much like all of the other brand companies do.

We look at anything from sliver equity investment to mezzanine, to guarantees, to support some land transactions, and so, numerous number of -- think of it as sliver participation to try to help a deal go through. The reason we haven't put much out in the past is that has not been filling the cap stack because of the lack of first mortgage financing. It appears that environment is getting slightly better, but all of these deals are still tough to do, and so, you know, I think when I came in, my hope was at this point we might be doing 40 or 50 Cambrias a year, given the first mortgage financing environment, if we got ten done this year we would be very happy. So that is a project by project basis.

Our capital obviously always is going to be oriented first towards dividends and share repurchase, and so this is more of a sliver investment program, very similar to what I did at Marriott and what other folks have done. And you see this out there now as people try to spur some new development growth in the right markets. We're only doing this for sort of major market projects. And we have some interesting conversations going on that we think will help the brand.

The returns on those investments, typically you are talking sort of high single, low double digits so you get a return on your capital. But the real return is if we move the Cambria brand in to being a second major engine for the Company, those are obviously very revenue-intensive hotels for us. They represent sort of a multiple of one of our typical deals. If we can do that and demonstrate we are recycling the capital, as we showed in our quarterly report this time, then that's a good thing for us, it's a minor portion of our capital, but it is, I think, an important part of adding to our growth story and adding to the portfolio of brands as we begin to move into the upscale.

So the return on the brand if successful is obviously significant, that would be way up in the double digits if it works out the way it is supposed to be, but we are obviously carefully looking at opportunities, looking at really major market. It's mostly Cambria, and it's probably -- well, it may be picking up a little bit. It's probably going to continue to be relatively chunky in terms of that, because the mortgage financing environment is still really not supportive of a lot of new-build development.

And it's not different what the Company did when they launched Sleep Inn. Sleep Inn, if you look at that system is closing in on 400 units and obviously that brand has been around for awhile. But to get that brand moving in the right direction, from a scale perspective, many, many, many years ago, similar types of programs were adopted and as Steve said in the lodging industry in order to get traction to build a brand, these are the types of things that you have got to do in order to get those long-term franchise revenue streams moving your way.

A couple of follow-ups on that. The increase from single digits to $20 million to $40 million is that really the expectation of more deals or is it more capital per deal?

It's really the expectation of more deals. But I have got to tell you, we're -- you know, it is -- we have said this -- and we have had it in our reporting because we want people to know that's what it is doing. It's hard to get those deals going. We have had a little more traction this quarter, and we think they are the right deals, and they will be good for the system, but the volume and the numbers really still aren't there. And so we want to remind people that this is something that we want to do, but right now it's really hard to get the money out there.

And last follow-up, I promise. On a strategic level, at what point do you look at Cambria and say this isn't going to work? Obviously this is a hard thing for you to say because you are telling franchisees it is going to work? But is there only a certain amount of patience you are going to have for this? What is the time horizon for when this -- you get Cambria from very small to beginnings of critical mass?

Yeah, I think the answer is we are -- you would have to make that decision in an environment that's conducive to growing a brand that's a new-build brand, and I think our sense is that if you look at the consumer reaction to this brand, which is the most incredible reaction I have ever seen, we're the number one hotel chain in three or four states, not of hotels in that segment, of all hotels, we're the number one hotel in Michigan, number one and three in Ohio, the number one hotel in Colorado. The scores -- we're the number one, two, or three in Trip Advisor in every market that these are open, we know we have a proposition that the consumer loves. We know the cost the standpoint works for the franchisee.

So our view is it's not a question of whether, it's a question of when, and I think our idea is that as we get a cooperative environment, if we use some small levels of incentive capital to spur that, that will move us faster, get us in more major markets to build awareness for the brand, and therefore that is going to then move that brand to a critical mass standpoint, which, really, if you think about it, in order to have awareness of the consumer and be in the market that he travels to, you're really talking 125 or 150 units, and then you can decide how successful you are going to be.

This brand clearly is a winner with consumers in a way that I actually haven't seen in my 30 years. And so our sense is -- we will be successful. It's more of a how long of period of time it takes us to get to that point? And then we're going to try to help that somewhat with a little incentive from the balance sheet, but, again, we will measure and determine pace and timing on all of that, based on how well we're doing.

It's not like we're going to go commit hundreds of millions of dollars up front. We're going to do it a little bit at a time market by market and deal by deal. And our sense is the market is improving slightly for that, but we're still a ways away from anything with any real volume in it.

I know I promised that was it. But one more. The hard part of that Steve is you have a great box that's very well received by consumers but at some point the owners lose patience if they are not getting the RevPAR penetration, because it's only as good as its ability to drive occupancy and rate. So how do you bridge that gap? How do you keep the owners happy in the meantime until they can get the RevPAR penetration to reflect the quality of the box?

Well, yeah, and it's an excellent point, RevPAR indexes are swinging up significantly in the brand, so it is moving in the right direction, even in this environment, and we are supporting the owners in a significant way through sales and through distribution channel work. We're working very closely with all of them, and I will tell you that they are an encouraged group of folks that obviously want to make sure that their investments work, but they believe in the brand strongly as well, and so the meetings that we have with them, and the work that we're doing in the establishment of a sales culture that they are helping to lead are a number of the reasons why we have confidence that we will get it to, the RevPAR indexes to the point that then yields the type of return that the franchisees would then choose that on an investment vehicle basis.

So while it's a tough environment, and everybody is struggling to get the revenues that they can in the box, we're very encouraged by the movement of the brand, we're very encouraged by the consumer reaction, and we're very encouraged by the support we're getting from the franchisees and the interest level in this product from a number of the established more institutional and professional owner/operators. Between all that, this is what makes it work. But we're very encouraged by what we're seeing, and we think in a normalized operating environment, I think we're thinking that brands are going to perform well, owners will like those returns, and therefore want to build more.

That's great That's very helpful. To thank you for your candor and (inaudible).

You bet.

Your next question comes from Chris Woronka with Deutsche Bank. Please proceed.

Hey, good morning, guys.

Good morning.

Can you talk about the impact on the Gulf on your franchisees and are they working with the BP relief fund to make up for any lost business?

Yeah, I have got two responses to that. One will be my choice hat, and my other will be my Chairman of the US Travel Association hat. So on the choice front, right now as sort of expected, we don't see a big drop-off in the performance of the hotels, in part because you are still getting some business, but then you are also getting a fair amount of business from the cleanup efforts. Okay? So this is very similar to what occurred with Katrina. As you are in the efforts for insurance and for cleanup and for other folks involved, and you are still getting some of the normal tour and travel down there.

Our results at least at this point for the 20-some properties -- I'm sorry for the 31 properties that we have got there appear to be holding up well. The issue isn't going to be this year. The issue is going to be next year and the year after as the cleanup has -- well, the cleanup is going to continue for a long time but the beaches are clean. They are open for business. The number of cleanup workers, and insurance adjustors and everything else involved in this -- and the lawyers -- are diminishing, and people still have a negative image of that environment, and they just don't choose that as an option.

That's really the cost of it, and that's why you are seeing US travel work closely with the states and the CBBs, and the tourist bureaus to demand advertising dollars to tell the truth, and the truth is for the most part those beaches are open and clean. The issue is you have got a 24-hour news blips showing chasing down oil spills and showing that as the primary image from that region as opposed to people laying on the beach and the fact that the bulk of the beaches are open and clean -- well not even the bulk, the vast majority of them are.

So the concern we have and the concern that we'll work with our franchisees and work on an industry basis is not so much this year, but the next several years following, and the general belief based on research we've seen from Katrina and others is this is probably a three to four year impact on that region and those hotels as it remains as an image in the consumer's mind, not that they think they are going to see tar balls rolling up on the beach, but they are thinking, do I go there or do I go East coast Florida? And they are like, why would I go there, it wasn't so good before.

So that is the image that needs to be overcome with marketing, with messaging, with dollars. And that's where we'll see the impact for our hotels and for the other hotels in the industry. It will be a year from now or 18 months from now as people roll through the next season and we don't have those cleanup workers, and the lawyers, and those insurance adjustors, staying at our properties, keeping the revenues relatively stable.

Just to reemphasize what Steve said, there is only about 30 hotels in our system, which is obviously less than 1% of our US system that is impacted, which if you compare that back to some of the hurricanes over the last couple of years, where you actually saw a noticeable impact on our system wide RevPAR, where there were hundreds, couple hundred hotels impacted, this is not likely to have any meaningful impact on our RevPAR results or system results now or next year, frankly.

Okay. Thanks. Good color. And then are there any situations where you guys might work with distressed hotel owners or even banked-owned independent properties to bring them into one of your brands? Are there any multi-unit opportunities you see on that front?

Yeah, and that's actually one of the bright spots that we see as an opportunity for us. We actually have a number of our developers camped out at special servicers offices looking for those types of opportunities, and that's where we believe we can step in, demonstrate either to a bank that is going to hold it for a year or two, or to a potential owner that's going to pick it up from that special servicer, that we can do a couple of things for them.

One is we can lower their overall cost of operation because of our distribution system, we can raise their revenues in a multi-multi-unit deal, if they needed short-term sliver capital to help them make that deal, in a multi-unit scenario, we would be willing to help do that. We have seen several of those so far, there are a number of them being worked, and we're hoping that actually might be one of the opportunities for us to land portfolio hotels that ends back in a special servicers hands or a servicer looking to flip to a potential owner. We have got numerous of those conversations going on. That's one of the ways that we're seeing this sort of increasing level of transaction piece that we think will eventually get us to a more normalized conversion environment in the relative near to midterm.

Okay. Great. Just a couple housekeeping questions. Can you guys give us the number of intra -- kind of intra-Company conversions during the quarter? And do you have any plans to break out the RevPAR statistics for Cambria or Ascend, which I think Ascend is almost as big as MainStay now?

Our practice on the new brands, the brands that are relatively new until they get to scale, that aren't influenced by any one particular property that's generally not system wide RevPAR statistics -- so in the past what we have done is once the brand gets to about 25 units, and you have data on a comparable basis year-over-year, that's generally when we'll get into disclosures on the system size, and in terms of repositionings for the quarter, there were 12 intra brand-type -- 12 repos during the quarter.

Okay. Thanks.

And your next question comes from the line of Ryan Meliker with Morgan Stanley. Please proceed.

Hi, guys. I know it's a little early, but I thought I would ask to see if you are getting any feedback yet. Last year and the year before, you talked around now about starting to see an influx of corporate negotiation -- I guess RFPs from corporations trying to scale back some of their -- move down from upscale to mid-scale or even from upper-upscale to upscale brands. I'm just wondering if you started to see a pickup in that heading into this corporate rate negotiation season or if it's too early, or just any color would be helpful?

Yeah, it's really early for that, you typically will start seeing the expressions of interest in August, and then the season kind of goes September, October. I can tell you this, the pickup that we saw has remained relatively stable, meaning that we saw about a third pickup as the environment deteriorated in companies that were asking for RFPs from us, that sort of held up. We have a major initiative underway to grow that base, and we're encouraged by what we're hearing in terms of initial response from the companies.

But whether or not we improve from that level that we improve to I would say is probably still too early to tell. But we're encouraged by the environment, because we're hearing from the travel planners and the folks that are booking, is they want their people back on the road, they want the same number of travel days, but they want them at much lower cost.

That lines up with Dave's comment earlier about we are encouraged that the upscale companies are beginning to look at pricing, like an upscale company. They have obviously played in our space which we believe net net we've benefited, we've grown share, we think we have more trade down than there was trade up, but obviously that muted our net gain somewhat. And so as we see those folks begin to price point back up to where they should be, we think that will then further our value orientation and make us a more attractive choice for not just leisure travelers, but also business transit travelers, and some small group pieces.

And so as we, we are working hard to get into more companies and tell our story about the value orientation, and hopefully have them react positively, that's what we're doing going into this season, and then we'll see whether or not we can raise that level from the previous raised level, but we're encouraged by the responses we're getting initially.

Great. That's helpful. Thanks a lot.

And your next question comes from the line of Felicia Hendrix with Barclays Capital.

Hi, guys.

Hi, Felicia.

Okay. Just a question on the unit guidance that you gave because before it was two, and now it is one. So obviously the high end hasn't changed, but if you look at it as a midpoint, it has changed. I'm wondering is that a reflection of what you talked about at the opening of your prepared remarks? Is that a function of the near-term franchisee sales environment being choppy or is it something else?

Yeah, that's exactly it.

Spot on.

When you are in an environment like this, you get a lot of fits and starts anyway, but what we were hoping when we looked at first quarter, was hey, it looks like it was building a little bit. Second quarter was not that. We're still hoping, and the general view of the industry is it's somewhere in the next six to 12 months those transactions are going to come back. We're hoping obviously for the sooner of that, because that's really where we'd shine, but in the second quarter, we didn't see the application flow that we were hoping for.

Okay. So if I can ask you to look towards 2011, what do you anticipate unit growth might be then?

I'm not going to make a joke about how optimistic I am, so -- I think the 2011 unit growth is -- at some point in 2011, and I'm leaning more on the industry experts than on myself -- at some point in 2011, given that time frame I gave you, it means you get a return of transactions, not a tidal wave, but a steady improvement in that area.

You can sort of see that building now. Whether or not you get any of it by the end of this year, we have not seen anything that would indicate to us that we're going to get it this year, but the experts view -- and I think that guides us to believe, that -- and we'll have to figure out what that means in terms of our actual numbers when we start talking about what we think 2011 will look like, is that 2011 should begin to show more transactions, and therefore, for the conversion environment, it will be better.

Okay. And then just switching gears for a second, on -- you had a loan guarantee that expired. I was wondering if you could just give us some details on that?

Yeah, when you lay out as we said in these sliver capital environments, one of the methods is to do limited guarantees of parts of the debt. That was done a couple of years ago.

Yeah, in 2007 we had a $1 million loan guarantee on the first mortgage for Cambria Suites. And the loan guarantee expired. It continues on in the system.

When we reference sort of recycling capital, while that didn't have a capital outlay, it was a commitment on our part, and that commitment has expired so therefore that capital is no longer committed for that.

All right. Okay. That's it. Thanks.

And your final question today comes from the line of Michael Millman with Goldman Research Associates.

Actually Goldman wouldn't like that I think. Millman Research Associates probably is more appropriate. I -- just -- one of the latter things that you indicated seems to suggest that there's not a great deal of pent-up demand for conversions for sales or -- that it's going to increase kind of on a steady basis, so that's -- maybe a question in there. Secondly, can -- did you bid at all on the trip brand, the Spanish brand that Wyndham purchased? And thirdly, could you give us some indication of the importance or the percentage of third-party reservations -- on line reservations in the US versus Europe? And the trends in those as well? Thank you.

Okay. Let me start with the first part. What I said about transactions is that we don't believe that you are going to have an enormous tidal wave of them coming. There is, we believe, though, an enormous amount of transactions that need to occur. You virtually had no transactions for the last 2.5 years, so there are a number of folks, both buyers and sellers, of transactions to occur, but because of the capital in the marketplace, and because of the relative improvement, but still some uncertainty about where we're going, that's what leads to the belief that the transaction flow will be a gradual increase, versus a significant inflow automatically.

But if you think about in a normal environment, the number of transactions, we have been operating at about 15% to 20% of that level for the last two and a half years, so just by the nature of the math, you would say, boy, that means there is a fair amount of that stuff built up. But I think what you are seeing from the folks that look at this stuff carefully, and the capital constraints that are in place, that may take some time to work its way through.

So you won't get a huge inflow, you will get a steady increase that will build up. But then if historical trends hold true, that means there's a lot of transactions over the next several years that would need to occur.

On your question about the CRS contribution on the different channels, Michael, essentially what we have seen for the last 12 months, like trailing 12 months, is the contribution to our franchisees through our direct channels, which includes both our voice channel and our online channels have been increasing. And the contribution from third-party sites, and GDS, and travel agent types has been essentially flattish to slightly down. So those are the trends we have seen recently in terms of that central reservation contribution in the U.S. And then globally the trends are, I would say not that different from what we have seen in the U.S.

And in terms of just the size of the contribution in the US and Europe?

Yeah, central reservation contribution for the first part of this year has actually been a little bit better than it was last year, even when you factor out seasonality, which is good. That's obviously a key part of our value proposition, these hoteliers, is a strong central reservation contribution. So it's marginally improved. It is still around a third. We talk about it as a third, and it is still, I would call it around a third.

Yeah, and so while that is increasing, you can look at the other online travel agency contribution, their share of our business hasn't grown any in several years.

Again, you are talking out of the US?

The US, that's correct.

And outside of the US (inaudible) central reservation? It's all third-party?

No, there is central as well, but -- I don't know if we know trends. I would suspect on an international basis that the third parties play a bigger role, and I would expect that's probably growing somewhat in the international markets, but, again, not significant to the Company, and if you add it all in, we're still pretty flattish.

And then there was the -- did you -- were you involved in the trip deal?

Yeah, we -- one, we don't view that as strategic to us, but two, we're probably not going to comment on what transactions we play a role in, and don't play a role in, because if you don't end up with it, it is really kind of pointless anyway, right?

Just might give some idea of how you value it compared with how others value it.

I would say that we don't -- we don't view that acquisition of much interest to us.

Okay. Thank you.

Ladies and gentlemen, that does conclude today's question-and-answer session. I would now like to turn the conference back over to Mr. Steve Joyce.

So that's it. So thank you for joining the call. We are encouraged by those RevPAR results. I think our numbers are moving up steadily, and they seem to be stable, which is always encouraging. Obviously based on our orientation, we're not in a lot of the major urban markets, our numbers will continue to grow steadily, but probably will trail some of the companies that are more urban oriented. But we're all seeing the same results, and it's encouraging.

The deal environment as I mentioned is choppy, so we're hoping we see an improvement in that near term, but second quarter was what it was so we want to make sure everybody understands that we think it's coming but we haven't seen it yet. And then when we get to that point, we're enormously encouraged by the position of our brands, the contributions we make, the viewpoint of our franchisees that as those transactions occur, we're going to see some significant conversion activity.

And then following that, hopefully in the not too distant future after that, we'll see a more positive new build environment that we can take advantage of, particularly for Cambria as we view that as one of the real strong growth opportunities for the Company.

So with that, I hope everybody has a great summer. And we'll see you in the fall.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect, and have a great day.