Choice Hotels International Inc (CHH) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotel International's first quarter 2011 earnings conference call. At this time all lines are placed in listen-only mode. Later there will be question-and-answer session for further instructions will be given at that time. As a reminder, today's call is being recorded.

During the course of today's 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 provisions of the Securities Reform Act of 1995. These forward-looking statements are generally -- these forward-looking statements are generally and 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 the 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, 2010, and other SEC filings for information about important risk factors effecting the Company that could -- that should be considered . Although we believe 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 -- 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 a part of the first quarter 2011 earnings press release which is posted on our website at ChoiceHotels.com under the Investor Relations information section.

With that being said, I would now like to introduce Steve Joyce, President and Chief Executive Officer, Choice Hotels International Incorporated. Please go

Good morning and welcome to our first quarter call. With me as always is Dave White, our Chief Financial Officer.

I've got to say we are pleased with our first quarter results, which we published last night. RevPAR growth met our expectations. Deal flow for conversion hotel franchise contracts continues to show improvement. And we saw a significant improvement in our reservation contribution to our hotel franchisees.

Looking forward, while the pace of improvement is slower than any of us would like to see, we are seeing steady, positive improvement in the broad US economy and in the travel and lodging industry. We expect this trend to support continued improvement in our business and our long-term growth prospects. The economic recovery news around GDP, unemployment, consumer spending and consumer confidence continues to be somewhat choppy, but it is moving in the right direction. On the RevPAR front, our first quarter results were slightly better than we had been expecting, increasing by 5.5%, led primarily by occupancy improvements and modest average daily rate gains.

Our RevPAR growth for the quarter compared similarly to the US lodging industry performance in the mid-tier and economy segments. Normally, at this point in the cycle, we would expect our RevPAR growth to trail the industry metrics by a larger margin than we currently are experiencing because our hotels are predominantly located out of urban markets and more heavily focused on leisure travels, where most of the improvement is not occurring, where it is occurring in the business segment. However, we believe that the current trend continues to demonstrate the strong value orientation of consumers, which is driving preference for our brands.

Recent RevPAR trends have remained positive with continued single-digit percentage increases in March and April. For the full year, we anticipate RevPAR gains of approximately 4%, which is consistent with the outlook we shared with you in our last earnings call. You should not read into maintaining our full RevPAR guidance at 4%, despite the first quarter beat, as an indicator of any change in our view of the next three quarters from our previous outlook about softness in the economy or the impact of high gas prices.

Maintaining full year RevPAR guidance of 4%, is a reflection of the fact that from a seasonality perspective the first quarter represents the lowest percentage of our system-wide gross room revenues of any of our quarters. Consequently, our first-quarter results have a more limited impact on our full-year results. For 2011, recent forecasts from PWC and Smith Travel Research continue to range between 4% and 6% for our chain scale segments. Our RevPAR assumptions may prove conservative, but considering the tougher comparisons that come our way, particularly in the third and fourth quarters, we felt the estimate we published last night for RevPAR growth to be prudent.

Let me briefly address gas prices and GDP and their impact on our outlook. Our current thinking is that the elevated gas prices, which are expected to be just under $4.00 per gallon on average this summer, are not anticipated to significant impact Choice's summer leisure travel business. Our analysis of the last four or five years is that the lodging demand most closely aligns with GDP and employment, regardless of gas prices. The past two and one-half years has bourne this out, as gas prices and lodging demand have both increased over this timeframe.

We also believe that the real effect on consumers and consumer travel, of rising oil prices, is less than in the past because fuel accounts for a smaller share of their income and vehicle fuel efficiencies have risen. The studies we have seen suggest that summer travel should not be meaningfully impacted based on current gas price expectations. Clearly, in a scenario that we are not currently contemplating, as most believe it is a low probability, where oil prices could climb 15% or more beyond current expectations, travel demand would likely be more impacted.

Turning to GDP. While it is an important measure, we have found that employment levels are a much better indicator of demand for our hotels. If people have jobs they are typically more likely to travel and stay at our hotels. Employment measures are trending more favorably than other economic indicators, such as housing and state and local government spending, this year. So at this juncture we are not overly concerned about a small downward revision in GDP.

In franchise sales -- we are encouraged that we saw an uptick in domestic franchise agreements in the first quarter. Particularly on the conversion side, which saw an 11% increase. Traditionally our first quarter is our softest quarter for franchise development. We continue to expect that our domestic franchise sales for 2011 will be comparable to last year's levels.

Our domestic unit and room growth increased 1.3% and .8%, respectively, from March 31, 2010. Our full-year expectation is that both unit and room growth will be slightly positive compared to 2010. Our full-year net unit growth outlook is lower than our previous guidance on account of slower than expected gross openings, as conversions franchise development, while accelerating, has not accelerated the expected pace of opening.

Our expectations for terminations for the full year 2011 remain intact. We continue to drive more reservations to our franchisees through our proprietary central reservation channels. That is a main reason hotel owners franchise with Choice. These channels provide our franchisees the highest ADR at the lowest cost point for delivery. In the first quarter CRS contribution was up 120 basis points, which led to an overall CRS revenue increase of 10%. The vast majority of our incremental revenue was attributable to strong gains in revenue from ChoiceHotels.com, which saw revenues up 18% over last year's first quarter. We continue to enhance our distribution capabilities to maximize our value proposition to our franchisees.

Our Choice Privileges Rewards program continues to deliver more revenue to our franchisees. Choice Privilege members delivered a 7% rate premium in 2010. These loyal guests were also more likely to recommend our hotels than nonmembers. For the 12 months ending March 31, 2011, CP contribution to domestic revenues represented 28% of all room revenues. This figure is over 250 points higher than the previous year.

Choice recently received two awards for excellence and distribution in technology. We received a Visionary Award from Hospitality Technology magazine for our outstanding vision and achievement in delivering technological excellence. We were recognized for our proprietary Choice Advantage property management system. A massively distributed, cloud-based offering, in a place at over 4,000 Choice brand hotels worldwide.

We were also awarded a Gomez Best of the Web award winner in the travel hotels category for ChoiceHotels.com by the technology company Compuware. This award highlights companies that provide superior web and mobile site experiences that enhance customer loyalty, reduced cost and increased revenues.

Our thoughts and prayers go out to the many people effected by the tornado outbreak and loss of life in the eastern part of the United States. The impact on our system was minimal and less than a dozen Choice branded hotels are closed, mostly due to a lack of power. Our other hotels remain open and are housing local residents, travelers and the emergency crews working on this disaster.

Now let me turn it over to Dave to cover our first-quarter performance in some more detail.

Thanks, Steve. As you saw in last night's press release, we reported adjusted diluted earnings per share of $0.28, which exceeded in our prior outlook by $0.03 per share.

Our operating income and adjusted EBITDA were roughly in line with our expectations for the quarter. Considering the in-line operating performance, compared to our outlook, two key below-the-line items impacted our adjusted EPS results for the quarter. First, practically $0.02 of our outperformance related to discrete tax items resulting from an out-of-period adjustment to true up our federal income tax liabilities. The remainder of the outperformance of our adjusted EPS is attributable to gains in the value of investments in our employee retirement plan assets in excess of our expectations.

Our royalty revenues for the quarter grew by more than 7%, but were slightly less than we had expected, on account of fewer than expected net units online and a lower than anticipated effective royalty rate, partially offset by the higher than expected RevPAR that Steve mentioned earlier. The reduced effective royalty rate is attributable to a greater mix of conversion brand openings with the incentive compared to a non-incentive franchisees than we had expected. Over the next couple of years the effective royalty rate discounts provided to franchisees under the current strong incentive are expected to burn off at a steeper rate than past ramps, which should positively impact the pace of effective royalty rate growth in future years.

Our first-quarter results for adjusted selling general and administrative expenses were in line with the levels we had expected. I would highlight that a portion of the year-over-year increase in adjusted selling and general administrative expense is attributable to variable franchise sales commissions, reflecting higher initial fees revenue and performance-based management incentive plan expense. Excluding the effect of those items, our adjusted SG&A expense growth rate is closer to 8% for the quarter. We expect for the full year that our adjusted selling general and administrative expense growth should moderate during the balance of this year.

So turning briefly to a few additional key operating and financial metrics for the quarter. As Steve indicated, we were very pleased with a RevPAR performance of our franchises during the quarter. Domestic system-wide occupancy increased by 190 basis points, with all of our brands seeing significant improvements. We also realized a 0.7% gain in overall domestic system-wide average daily rates, anchored by a nearly 2% increase for our flagship Comfort Inn brand.

As a result of our net unit growth, RevPAR and effective royalty rate results, we achieved a 7% increase in our domestic royalty fees, which increased to $38.7 million, compared to $36 million last year. The Company's international fees, included in royalty fees revenue, were $5.6 million for first quarter 2011, compared to $5 million last year.

The adjusted figures for SG&A and earnings per share exclude certain specific items which we described in the exhibits to yesterday's press release.

Our balance sheet and liquidity position remain strong. We finished the first quarter with approximately $76 million of cash on hand and total long-term debt of approximately $260 million, which represents a multiple of 1.5 times our expected 2011 EBITDA.

Turning to our outlook. For the second quarter and full-year 2011, we currently expect second quarter diluted earnings per share of at least $0.43, and we expect our full-year 2011 adjusted diluted earnings per share to range between $1.73 and $1.75 per share. We expect full-year EBITDA to range between $177 million and $179 million. These figures assume net domestic unit growth is essentially flat compared to last year. The figures assume our domestic system-wide RevPAR increase for the second quarter is 5%, and approximately 4% for full-year 2011. The figures also assume a one basis point increase in the effective royalty rate for full-year 2011, and an effective tax rate of approximately 34.5% for second quarter, and 33.5% for full-year 2011, respectively. All figures assume the existing share count.

The primary reason we are reducing our EBITDA outlook from our previous guidance is to account for the lowered net growth and effective royalty rate expectations we highlighted in yesterday's release. The unit growth outlook reduction is driven primarily by timing-of-deal flow and the timing of deal-to-open cycles. We continue to experience historic low levels of hotel transactions the segments where we operate. And if we were to see continued improvement in the RevPAR, hotel financing and transaction environments, that could be a positive catalyst compared to our current outlook.

Now let me turn the call back over to Steve.

Thanks, Dave. There are many signs and signals that 2011 will continue to be an even stronger year for our industry, for Choice hotels and, most importantly, for our franchisees. We are confident in our long-term growth prospects due to our position as the premier lodging franchisor in the mid-scale and economy segments, with a mix of well segmented, well known brands suitable for new construction and conversion development opportunities.

Our fee-based active life franchising business model has enabled us to deliver profitable, long-term growth in a variety of lodging and economic environments, while returning value to shareholders, which is our highest priority.

I'll now open up the call to answer any questions you may have.

Thank you.

(Operator Instructions).

Our first question will come from the line of Patrick Scholes with FBR Capital Markets. Please proceed.

Good morning. A question on the Comfort Inn brand. It looks like the room count continues to go down. What is driving that? Is that you folks being actively taking out some substandard, or where exactly are these rooms going? Thank you.

Yes, Patrick, a couple of things. One is, obviously, when you look at Comfort as a family, the Comfort Suites net unit growth is being impacted on the new construction side and that's also true for Comfort. So on the opening side, the gross opening side, you are seeing some softness as the -- as the development cycle continues to play out and some of the new construction contracts that we executed several years ago open and aren't being backfilled. On the termination side, we're continuing to manage that Comfort Inn brand and the Comfort Suites brand very carefully. I would say that is a flagship brand for us, and we have probably become marginally more aggressive on the termination side of things.

Having said that, if you look over the last two and one-half years, net terminations for the Comfort brand have been around 130 over the last two and one-quarter years. Roughly, 40% of those terminations that have ended up being repositioning into other brands within our systems. So, net-net, even though the Comfort Inn brand has declined in net units, we've been the beneficiary of some of those terminations with the Quality, Clarion, Econo Lodge brand, et cetera.

Okay, thank you.

Our next question will come from the line of Stephen Kent with Goldman Sachs. Please proceed.

Hi, good morning. Just wanted to talk to you a little bit about, again, this RevPAR forecast on the expectations. Because it's been my understanding, at least when I talked to you in the past, that the advanced bookings, or some sense of how people are going to book, is pretty minimal. Meaning, that people don't book very, very far out in advance. So if gas prices do go up significantly, I'm assuming that would affect your customer base, and at the same point, if employment moves up dramatically then that's also going to be a positive for you. So, I am just wondering what you are saying in Q1 or in April that makes you more comfortable on making such a dramatic change in your view for the balance of the year.

I'm not sure it's that dramatic a change, but let me give you some color around that. So -- we are most highly correlated with employment. So, when employment is moving positively, that is typically the biggest driver of our business. And while we saw some fluctuations in that over the last couple of years, what we've seen now is the folks that have jobs are back to traveling. We rely heavily on the industry forecasts to help -- help us in our look to the future. Because, you're right, our booking window is very, very short.

And so as we look at this and we look and comparative to the summer of '08, the difference in '08 was you had a declining consumer confidence and declining employment exacerbated by higher gas prices. When we look at this summer, we're looking at what we believe to be moderate, but continuing, improve in employment and continuing improve in consumer confidence. Those will outstrip gas prices in the relative range that we've talked about. And then, obviously, as we mentioned, if they go significantly higher than that, then, yes, I think you would expect more of an impact.

Maybe I'm wrong on this but you give guidance just a few months ago where those all were the same, yet today you are suggesting a deceleration. So that's what I think has people confuse.

Steve, I think the way you have to think about it is, for the first quarter we had guided to an increase of 5% for Q1 RevPAR. And we think that by 50 basis points. And when you look at how the gross room revenues for our domestic system play out during the course of the year, the first quarter is dramatically smaller than the other three quarters. So, that beat on RevPAR for Q1 doesn't have a major impact our full-year RevPAR outlook. So we especially left our full-year RevPAR outlook unchanged. And so the last three quarters of the year -- essentially I would say it's more to some degree rounding -- the significant of the first quarter pretty light on our full-year.

Okay. Thanks.

And our next question will come from the line of Jeffrey Donnelly with Wells Fargo. Please proceed.

Good morning. Another question on, for Stephen, on the gas price debate. I'm just curious, to quantify the impact of gas prices on a customer's travel costs, have you ever looked at the trip distance that someone takes, maybe just from their billing address to where they are traveling to? I know it's not perfect, but 'm just thinking it could bring some closure to the topic.

what, we have but I don't have that with me.

It's been more broad studies that we have seen in the travel space where, if the typical round-trip for a visit to one of our types of properties is 500 miles, if you do the math on what an increase in gas price is, what $0.50 does to the cost of the trip, it's something like $35 to $40 bucks. So, our view has been consistently that if employment continues to stay firm or improve, that the folks who are employed, particularly the leisure traveler, they are not going to give up their leisure trip over $35 to $40 bucks. They will find a way to get that cost out of the trip elsewhere.

Right. Or, they just shift where they go, or --?

Yes, and I think we did see in that same study that they might shorten not the length but the distance traveled as a result.

As a follow-up to that, and I know you have a pretty big portfolio, but are there geographic shifts in the demand that you see in Q2 and Q3 that are distinct enough that maybe you could help us understand which regions are markets to watch for you during the summer, versus maybe what you'd see over the course of the year?

Yes, the way you want to think about it is, they are all up but you do have some disparity in the strength of the market. So if you look at where they are really positive, you have the Northeast, which is the strongest region we've got. And our weakest region was the Southwest, central. So that pattern is consistent with [SCR]. We've got so many properties spread over the country. If you look at SCR's results we tend to track their performance pretty closely.

Okay, then to switch gears, Steve. I'm curious what you're thinking is for the outlook for OTAs and the relationship of brands and owners, therein. Obviously, Google made some noise recently with some acquisitions and I think folks are wondering what the implications for longer-term of the relationships here between all the parties. I was curious if you had any change in your thinking?

Well, we clearly look at this as a rapidly changing and potentially disruptive environment. However, in our view we have had and have moved into a new phase of a distribution strategy which is all about driving business through our channels. And not helping other people build their business on our back.

We don't believe we are heavily reliant on any of the distribution channels in any significant way. And we are planning to go forward in a way that continues to build on our CRS contribution. That's why we wanted to highlight it here, because we think it's so important. There is going to be a lot of changes coming. Mobile is exploding. We need to make sure that we're on that mobile app in a way that drives to our proprietary channels. But we think that we are equipped to do that. And we're also, on behalf of our franchisees, feel an obligation to lead them so that we don't create scenarios where other parties are able to benefit from the work we've done.

Do you ever see yourself going the way of -- I guess I'll call it Southwest Airlines, where they're not readily available on the dominant OTA's, but yet they do have pretty good customer support? Do you think it'll go that route? We think Southwest is an amazing example. We don't think it is necessarily directly applicable to us. But their attitude about their distribution channels is the same as ours. So you can expect for us to continue to show very aggressive positioning in this space. That's helpful. Just one last question on unit growth. Setting the financing question aside, how close do you think we are to seeing the economics on development cancel out?

Okay. I've been saying 18 months for three years now. So, at some point I'm going to be right.

The issue that's a little surprising to us is, even at this point we are at 80% and 90% below the transaction levels that we are used to in our segments. So it just hasn't happened yet. And, every time we go to a conference we hear the servicers talking about, we are going to take them back and we're going to begin putting them out and the deal flow is going to continue.

But we go quarter to quarter expecting to see an uptick in that, and we just haven't seen it. So, we haven't built that into our guidance. At some point it's going to happen. What you've got now is a fairly healthy increase in the more urban -- larger hotels and their transaction activity picking up actually pretty nicely. We haven't seen in ours. Historically, ours would be at or above, after the urban effect, ours would be at the same sort of level that the larger hotels do. But we just haven't seen it yet. And we assume that there is a relative demand for both buyers and sellers that's been building. And so when it comes, we think that will be a significant upside for us, but we just haven't seen it.

Great thank you.

Our next question will come from the line of Brian Dobson with Nomura. Please proceed.

Good morning. Can you give a little more color on the pace of SG&A through the balance of the year? I know you made some comments about it earlier.

Yes. As you look at our outlook, our revised EBITDA outlook, we took that down, obviously. Essentially the takedown was pretty much entirely revenue driven. So as you look out to the balance of this year, I think I described in remarks that our first quarter SG&A growth was around 8% when you when you considered how franchise sales, commission, and our other variable compensation plans impacted the SG&A figure. So, our expectation would be that as the next three quarters unfold, that our SG&A growth rate should moderate into the mid-single digit percentage area.

Now one thing that is definitely a caveat, and I would say hopefully this will come true, is we see better than we are contemplating franchise sales results, and that would obviously have an impact on our SG&A, because the commissions flow through the SG&A line. That would be a great reason to have a higher growth rate.

Right. And what kind of trends are you seeing in attrition rates right now?

Our attrition rates -- do you mean our franchise net units open?

Yes.

Our termination rate has historically over the past decade been anywhere between 4% and 6%. We continue to be in that range. So nothing that is meaningfully different there.

Okay. Great, thanks a lot.

No problem.

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

Good morning, thank you. Just wanted to follow up on Steve's question on the guidance. Even taking into account the seasonality of the first quarter. When you look at the first quarter up 5.5%, and the second quarter of 5%, the implication is that the back half of the year is only up 3.5%. I guess I just wanted to make sure -- am I doing that math right, and is that what you are implying for the back half of the year?

Yes, you're doing that math exactly right. What you have to go back and look at, if you want to think about it as we thought about it -- if you look at the comps, the comps get very tough in the back half of the year. If you look at the last year's quarterly RevPAR growth, essentially we were negative 10% to 12% in Q1, flat in Q2, up about 7% in the third quarter and up about almost 10% in the fourth quarter. So the comps in the back half of this year are going to get pretty tough, which is how we got there.

When you look at the performance of the portfolio in '04, '05, '06, did you have that experience of having decelerating growth against more difficult comparisons?

I think what is probably different is the economic recovery curve. I think that recovery was a little bit strong, so there's other factors that you have to evaluate. We feel good about, given what we saw in the first quarter, being in line roughly with what we expected, given what we know already about our second-quarter RevPAR, obviously two months are all most done at this point, March and April, those will be the first two months of our second quarter. Which is where we got to our 5% guidance for the second quarter. And what we're seeing in terms of trends, we feel that the 4% for the full year is a good estimate of where we'll be.

Okay, thanks. And on the second quarter guidance of $0.43. I'm having a lot of trouble getting there on 5% RevPAR growth. Are there any one-time items, or are there any below-the-line items are going to be different than what they were last quarter?

I don't think there's anything that jumps out at me. I would have to look back at last year's second quarter, but I don't have that right here in front of me, but I don't thing there was anything major.

Okay, thanks a lot.

Our next question will come from the line of Mark Strawn with Morgan Stanley. Please proceed.

Good morning. A quick question on brand acquisition. Are you closer to anything perhaps domestically on the Chain sale segment or perhaps internationally?

The short answer is no. And I think it's fair to say domestically, given the fact that we are in the upswing, it would make the idea of acquisition a little more difficult. There are some brands that are going to become available. Over the next several months, or at least they are rumored to become available. We'll obviously be aggressively viewing those. And our general sense is that we have focused more on the domestic market and domestic brands. We are in the process of expanding our reach and look internationally to provide a higher probability of landing something. But there's no imminent discussions or anything of interest at this point.

Great. Thanks a lot.

And our next question will come from the line of Robin Farley with UBS. Please proceed.

Thanks. Two questions. One is, I wonder if you can give a little color around the reduction and the rate of loyalty growth? From three basis points to up only one basis point. I would've thought you would have a lot of visibility on that. Curious what has changed in the last -- since last quarter. And then, secondly, of that $20 million to $40 million in annual investments, how much of that is deployed right now and can you tie that to any specific results? Thanks.

Sure I'll take the effective royalty rate. Essentially, we put in place last year an incentive program for certain of our conversion brands. And the way the incentive works is, we were given essentially no royalties for a period of time, ranged -- last year it was I believe 18 months. We've since dialed that back in terms of the free royalty period. And the idea that was that the minimum years on these contracts, the years to first out we extended. So, we were essentially giving up royalties in the first year, year and one-half, for an extended contract life on these conversion hotel brands.

So what's happened, in terms of 2011, and you are right, we do have fairly good visability in the effective royalty rates. But what has changed is that the mix of gross openings that we have experienced recently has skewed more towards those incentives franchise contracts than we were anticipating. And we've had fewer of the full royalty contracts that we were anticipating opening open. So, as it plays out, as I mentioned in my remarks, this should be a good thing for us down the road, because the ramp on these effective royalty rate discounts, which is something we've always had in franchise sales, just not quite as steep of a ramp, should play out in future years as these contracts mature.

On the capital deployment, we really didn't -- during the quarter we didn't deployed any significant dollars against any specific projects and -- I don't know, Steve, do you want to --?

No. I think you should be aware that we've announced two projects in New York, one of them has capital associated with it. We are in deep discussions on several other projects. So I think it's fair to say that you could look to us beginning, because we really haven't done a lot to date, in deploying capital as the environment improves for dealmaking, particularly in urban environments. We are anticipating a discussion over the next couple of quarters of announcing other deals that include some sliver investments on our part. And we are excited about that opportunity, obviously, because it allows us to begin to build on what is a pretty spectacular product with amazing guest response.

One thing I will add, is some specifics successes. I would tell you that over the past several years on this program we have put some capital out, and there's two or three Cambrias, specific Cambria hotels, that are open and operating on account of the capital. There is also a Comfort Suites in downtown Atlanta that I don't think would have gotten done without the use of our capital. So there's a handful of hotels out there that don't think would be opening and operating without the capital we deployed in the past.

So, let's balance this out. The amount of money that we are talking about is still within those ranges. We have not spent those in the past couple of years not because of lack of desire but just because the deals didn't come together the way we hoped. The primary bulk of all of out activity requires the capital.

So this is really aimed at our equity plans, particularly Cambria. And we will utilize sliver pieces of capital to help drive specific, mostly urban-type markets, where we believe they really will help build our brands and our awareness with consumers.

Okay, that's helpful color, thanks. And just one quick follow-up on the question -- your comments on the royalty rates. It sounds like as soon as early 2012 we would see that pick up quite a bit, is that fair?

Yes, I think it could be the back half of '12, were you see those early deals start to hit the rampup.

Okay, thank you.

And our next question will come to the line of David Loeb with Baird. Please proceed.

Steve, I was wondering if you could comment generally on the ramp up with Cambria, since you've chosen to exit four hotels from the system. More specifically, as you look to court high-end owners, what's been the reaction to the way you've handled the Summit situation? Does seem like that was fairly heavy-handed. How does that impact the case you make to these owners?

Well, we're focusing our attention on our owners and the success of the brand. I can tell you our commitment and confidence in the brand, from us and from our owners, is as high as ever. Those hotels were not considered particularly important to the system. We are investing $250 million of our resources to support the growth and success of brand, between the real estate and financing programs, to the number of people that we have dedicated solely to supporting individual hotel performance. By our powerful marketing and reservation systems, to our award-winning design, to the architecture teams working. And then now, especially with Michael Murphy leading the brand, we are we are extraordinarily confident about the future success of the brand.

Since he's taken the helm, he's been on the road in contact with every single owner and operator of Cambria Suites, sharing what we are doing and what we're going to do even further. So, these efforts are making a visible difference in the performance. And we believe the best is yet to come.

If these four hotels were not important to the system, why didn't you allow them to exit? And, if the brand is contributing to their success, why were their RevPAR indexes so low relative to their markets?

Let me be clear. We terminated 11 franchise agreements with hotels controlled by Summit. Choice has a long-standing record of working directly with its franchisees to support their success and as such termination is always, always a last resort for us. Unfortunately, we felt compelled to do this in light of Summit's contractual breaches and material misrepresentations and omissions and the responsibility we have to protect our interest in the integrity of our franchise agreements. We had a long relationship with Summit and we remain open and committed to resolving the issue in a conclusive and productive manner.

Can you comment on what some of those omissions for other material misrepresentations might be?

No.

Okay, thank you.

Our next question will come from the line of Michael Millman with Millman Research and Associates. Please proceed.

Thank you. Going back to the discussion on distribution, particularly, trying to reduce third-party distribution. To what extent does that suggest that you might be using or accepting the agency model versus the merchant model? Do you switch back and forth, and at other times do you use one or the other, or different property's locations? Colors on agency versus merchant model?

Yes. So, essentially when you think about our distribution and the distribution channels and the proprietary channels. Each hotel has got -- we have resources that help each hotel think about how to best optimize their distribution channels and their room availability and inventory and pricing across all channels.

So, our objective on a more macro level is to continue to -- to generate the kind of success we had recently in driving consumers through our central channels, through our central website, ChoiceHotels.com, and through the call centers. There is a role for the OTA, and it differs depending upon the location of the hotel and a bunch of other factors, but we have groups that are really tasked with making sure that our franchisees optimize their top line revenues by properly managing those channels. But at the end of the day the franchisees are going to optimize their revenues by leveraging what we provide them. Which is the channels that we have at our disposal.

Will could you give some idea as to what extent or any extent this choice is between -- no pun intended -- between agency and merchant, and movement between the two?

Obviously we like agency a lot better because it is dramatically cheaper. So -- we believe that the pricing that has been in this space makes it less attractive than other distribution channels. But in the end it's insignificant to our business. When you talk about the biggest one, they're literally 2.5% of our business. We are, we are -- and no one has grown share with us in two or three years. So we are very focused on keeping it an insignificant and minor part of our overall distribution revenue generation. We're going to continue to do that because it is an expensive channel. On the other hand, as Dave mentioned, sometimes it makes sense and sometimes it doesn't. When it does we will encourage the use of it. Provided we are not only optimizing revenue, but we're also optimizing the costs in generating the revenues, which is typically the issue.

Okay thank you.

(Operator Instructions).

Our next question will come from the line of Amanda Bryant with Susquehanna. Please proceed.

Given that a brand acquisition is unlikely in the near-term, what's your current thinking on share buyback?

I think our current thinking on share repurchases and distribution of capital to shareholders over time is still intact and we've always talked about our return of capital activities as a long-term type situation.

Obviously, our first -- when you think about use of capital, our first priority would be to find suitable ways that have higher returns to invest that capital back into the business or into brand acquisition. That's always going to be our first choice. Those aren't available over time, then the next best choice is a normally going to be return of capital to shareholders over time through dividends and share repurchases.

Okay, thank you.

You're welcome.

At this time there are no further questions in queue. I would like to turn the call back over to Steve Joyce, President and Chief Executive Officer, for closing remarks.

Thank you. We appreciate you joining us on the call. As we discussed, we are encouraged by the slow but steady improvements going on in the markets. We look forward to improved RevPAR environments and improved transaction environments, which we think we'll then -- we'll be able to participate in in a very meaningful way. And we are excited about the work that we're doing, particularly around our distribution channels and our contribution to our franchisees. And look forward to talking with you on our next call, hopefully with an even better environment. Thanks very much.

Think you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day everyone.