Choice Hotels International Inc (CHH) 2011 Q2 法說會逐字稿

Good morning and welcome to the Choice Hotels International second quarter 2011 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 as management believes, expects, anticipates, foresees, forecasts, estimates or other words or phrases of similar import. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Please [constitute] the Company's 10-K for the year ended December 31, 2010, 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 2011 earnings press release, which is posted on our website at choicehotels.com under the Investor information section.

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

Thank you. Good morning, and welcome to Choice Hotels' second quarter 2011 earnings conference call. With me this morning, as always, is Dave White, our Chief Financial Officer.

As we noted last night in our release, we are pleased with our second quarter results, which we published and hopefully you're in receipt of. We're excited by the positive momentum we are seeing on a number of fronts, including RevPAR growth both domestically and abroad in our development area, particularly our domestic conversion franchise sales results, which continued to accelerate during the second quarter, and in the area of growing our central reservations contribution to our franchised hotels.

Our EBITDA and diluted earnings per share for the second quarter exceeded our outlook because of better than anticipated revenues driven by domestic RevPAR and international revenue growth. Considering these results and improved visibility into the second half of this year, we are raising our full year outlook for both EBITDA and diluted earnings per share, as well as RevPAR. On the macroeconomic front, however, the key fundamentals -- employment, consumer confidence and GDP growth -- that impact our results have not changed significantly since our last earnings conference call in April. Bottom line is, we still expect a gradual but steady recovery.

Turning to RevPAR, during the second quarter, our domestic RevPAR increased 6.6%, which was approximately 130 basis points better than we were expecting. Importantly, the RevPAR increases we experienced during the quarter were broad, as every one of our brands experienced positive RevPAR growth, which were driven by nearly across the board occupancies and average daily rate gains. In June and July, the first two months of our third quarter, despite more challenging comps when compared to the same period of 2010, we saw RevPAR continuing to grow in the mid single digit percentage range, consistent with our outlook for the third quarter.

Considering our second quarter and more recent results from the past two months, we are increasing our full year RevPAR growth outlook to 5% from the outlook we shared with you in our last earnings call.

Another highlight of the second quarter was our franchise sales results. For the quarter we executed 69 domestic hotel franchise contracts, up 11% compared to the 62 deals executed in the second quarter of 2010. Our second quarter franchise sales results marked the fourth consecutive quarter of year-over-year growth in domestic conversion franchise sales agreements, with conversion franchise sales contracts executed during the second quarter increasing 22% from 50 to 61.

The development in franchise sales environment for new construction remains challenging, which is not surprising at this point in the cycle, and is consistent with our Company's experience in the early recovery stage of the last lodging cycle. Historically our net unit growth has been more heavily dependent on conversion hotel openings than on new construction, and therefore the building trend in conversion franchise sales is encouraging, and we are optimistic that the continuation of those trends will enable us to return the unit growth lever to a much bigger contributor to our long-term growth.

Another highlight on the development front for the quarter was our continuing success with the Ascend Collection membership program. The Ascend Collection is an upscale network of hotels that are either historic, boutique or unique type properties. They are located in the United States, Canada and the Caribbean. We just brought online our largest Ascend Collection hotel, the 430 room Xona Resort Suites in Scottsdale, Arizona. Representative of Ascend Collection hotels include the District Hotel in New York City, the Gold Hotel in Golden, Colorado, and the Inn of Chicago on the Magnificent Mile.

As of the end of June, the domestic Ascend Collection stood at 44 properties, and in addition there were 15 outrigger properties and four hotels located outside of the United States that were all part of the system. During the past 12 months the domestic Ascend Collection system increased by 12 hotels or 37%, and we remain confident that we can continue to build on this recent success in developing this brand.

Finally, we continue to innovate in the area of business delivery, and I can't overemphasize the importance of providing high value, central reservations to our franchisees' hotels. We believe that it is the primary reason why hotel owners choose to affiliate with Choice over the long-term.

During the second quarter we continue to solidly execute on marketing and distribution strategies to grow our central reservations contribution. I am pleased to report that for the first half of 2011 our central reservations contribution increased by more than 100 basis points to nearly 35%, which contributed to a 10% increase in net revenue from our central reservation system compared to the first half of 2010. Our proprietary central reservation channels, meaning our choicehotels.com website and our call centers, provide our franchisees the highest average daily rate at the lowest cost of delivery. The long-term success of our business and our growth is predicated on delivering incremental business to our franchise properties, and on this front I'm pleased to reemphasize that the momentum is very positive.

Just after our 57th annual convention in May, we launched our new integrated marketing campaign, Your Voice. Your ChoiceHotels.com. This campaign speaks directly to the travelers who stay in Choice-branded hotels every day. We let them know by booking directly on choicehotels.com they can get the best rate available on any online channel. This campaign contributed to a record breaking June for choicehotels.com. In June, the best month in the site's history, we generated well over $100 million in centrally booked gross room revenues for our franchisees and in excess of 600,000 reservations. On July 12, we had the best day in the history of choicehotels.com, generating $4.6 million in gross room revenues.

Revenues from our mobile platform are also growing robustly. We saw a three-fold increase in mobile site revenue in June 2011 compared to the same period in 2010. We continue to invest in expanding our mobile applications for wireless devices, with an Android application to be released later this year. As you will recall, we were the first major hotelier with a global iPhone application.

And, finally, membership in our Choice Privileges reward program recently crossed 13 million members as a threshold worldwide. We've added over 1 million members year-to-date, and it's continuing to be one of the fastest growing programs in the industry.

So before I turn the call over to Dave, I want to reiterate that we're pleased with the upward trend we have achieved recently in a number of critical areas, and we remain optimistic that continued execution of our long term strategies will create value for our current and future franchisees, and most importantly for our shareholders.

Now, let me turn it over to Dave to cover our second quarter performance in more detail.

Thanks, Steve.

As you saw in last night's press release, we reported diluted earnings per share of $0.46, which exceeded our previously published outlook of at least $0.43 per share. Compared to our outlook, two primary items impacted our results during the quarter.

First, about half of our outperformance related to better than expected operating and EBITDA performance. Specifically, our royalty revenues were better than we had expected on account of a combination of factors, including domestic RevPAR growth for the quarter of 6.6%, exceeding our outlook, which had contemplated 5% growth.

In addition, international revenues for the quarter were stronger than we had anticipated, on account of strong RevPAR performance in the international markets where we operate, along with favorable foreign currency translation. The remainder of our outperformance for the quarter is primarily related to lower than expected depreciation and amortization expense and lower interest expense.

As Steve mentioned, we were very pleased with the RevPAR performance of our franchisees during the quarter. As a reminder, our RevPAR results for the second quarter reflect our franchisees' gross room revenue performance for the months of March through and including May. Our second quarter domestic system-wide RevPAR growth of 6.6% reflects accelerated growth compared to the 5.5% growth we reported in the first quarter of 2011. This RevPAR acceleration was realized despite the tougher comps in the second quarter of this year compared to last year on account of the steep quarterly RevPAR growth trend we experienced each quarter last year.

Domestic system-wide occupancy increased by 230 basis points compared to last year, with all of our brands in every chain scale segment where we operate, from economy to upscale, seeing significant improvements. We also achieved a 2% gain in overall domestic system-wide average daily rate, with nearly all of our brands gaining pricing power, ranging on an individual brand basis as high as 4.7% for our upscale Ascend Collection membership program. Our RevPAR results in June and July have continued to be positive in the mid single digit percentage area, and this is reflected in our outlook for the third quarter.

On the unit growth front, we continued to expand domestically and abroad the footprint and quality of our franchise system. While our net domestic online unit growth rate of 0.5% over the past 12 months is not at the same absolute levels we have achieved in past years, our rate of net unit growth compares favorably to the net unit growth experienced for the overall US lodging industry during the same time period, which, according to Smith Travel data, is approximately 0.2%. We attribute this outperformance to the strength of our distribution platform for hotels in the markets where we compete and believe this strength will remain a long-term competitive advantage for us.

Finally, we achieved a 4 basis point improvement in our effective domestic royalty rate for the quarter. As a result of our net unit growth, RevPAR and effective royalty rate results, we achieved a 7% increase in our domestic royalty fees for second quarter, which increased to $55.4 million, compared to $51.7 million last year. The Company's international fees included in royalty fees revenue were $6.9 million for second quarter 2011 compared to $5.8 million last year.

On the cost side of the business, our adjusted selling, general and administrative expenses for second quarter 2011 increased by $3.2 million. The adjusted figures for SG&A exclude certain specific items which we described in the exhibit to yesterday's press release. While this cost growth was within the range we had expected, it represents a higher year-over-year growth rate than we target on a normal basis on account of several items in this year's second quarter results that compare unfavorably to last year's results.

These items include a smaller mark to market adjustment related to deferred compensation plan investments; the impact of our annual convention, which occurred in a higher cost location this year compared to previous years; and costs incurred during the second quarter related to our corporate headquarters relocation on account of our pending lease expiration. As we indicated in last night's release, for the second half of 2011, we expect to manage our cost structure to a mid-single-digit percentage increase compared to the second half of 2010.

Finally, we regularly look closely at our cost structure, and we continue to believe that we're making incremental cost investments in areas that can contribute to our long-term growth and enhance shareholder value, including infrastructure to support our upscale brands, international growth, and significant efforts to broaden our corporate and business development initiatives.

Our balance sheet and liquidity position remain strong. We finished the first quarter with approximately $91 million of cash on hand and total long-term debt of approximately $252 million, which represents a net debt to EBITDA multiple of less than one times our expected 2011 EBITDA.

Turning to our outlook for the third quarter and remainder of 2011, we currently expect third quarter diluted earnings per share of $0.59. We increased our full year 2011 adjusted EBITDA to a range between $178 million dollars and $180 million, and we increased our full year 2011 adjusted earnings per share to a range between $1.75 and $1.77 per share.

The primary reason we are increasing our full year EBITDA and EPS outlook from our previous guidance is on account of better than previously domestic RevPAR performance in the second and third quarters compared to our previous outlook. This is reflected in our updated full year domestic RevPAR outlook, which we increased to 5% from 4% previously. Our current outlook assumes net domestic unit growth is essentially flat compared to last year. The figures assume our domestic system-wide RevPAR increase to the third quarter and for full your 2011 are both 5%. The figures assume a one basis point in the effective royalty rate for full year 2011, and an effective tax rate of approximately 34.5% for third quarter and 33.5% for full year 2011 respectively. All figures assume the existing share count.

We continue to experience historic low levels of hotel transactions in the segments where we operate. If we see continued improvement in the RevPAR, hotel financing and transaction environments, these factors could be positive catalysts compared to our current outlook.

Now let me turn the call back over to Steve.

Thanks, Dave.

The lodging environment remains a strong and improving one for our franchisees and for us. The recent trends taking hold in the RevPAR and franchise development environment are encouraging. In addition, we continue to make impressive strides in business delivery to our franchisees, which serves to further strengthen our value proposition with them. We continue to innovate across our organization and to strengthen and improve the value and sustainability of our brand, and I'm very excited about our ability to create and drive programs to improve the profitability of our franchisees and to create value for our long-term shareholders.

We're excited about our growth prospects in many areas. First of all, Cambria. We've made several major urban market developments, including two in New York City, and we have many others in advanced stages, with several to be expected to be announced soon.

Conversion markets are finally swinging up. Financing will follow, and this will benefit our deal flow. We expect this benefit to significantly help us in the mid to long term.

And then finally on the international front, our information technology platform is being delivered in Europe, and we expect significant unit growth coming from these efforts. We'll talk about this more towards the end of this year and early into next year.

Now I'm going to open up the call to answer any of your questions.

Thank you. (Operator Instructions). Your first question comes from the line of Harry Curtis of Nomura. Please go ahead.

Hey, guys, can you hear me?

Yes, Harry. How are you?

I'm okay, thanks. How are you?

Good.

Quick question on the balance sheet. So sequentially your receivables went up, and the receivables on marketing and reservation fees also went up. What are your expectations as far as cash conversion? Do you think that the receivables are a little bit higher than normal, and would you expect that to convert to cash pretty soon?

Hey, Harry, this is David. So if you're looking at the trade receivable account, which was about $58 million at the end of June, and it is up sequentially from the year-end balance sheet where we showed $47.6 million. There's a seasonality impact that you have to take into effect, so if you were to look back at last year's June balance sheet and you would see the same -- roughly the same level of growth on a comparable basis. So there's nothing really different I would say on the receivable side of things for June of this year compared to June of last year. It's just really seasonality which is causing that increase.

On the receivable for marketing and reservation fees, that is actually, I would say, a similar view. If you look back at last year's June balance sheet, the receivable balance was almost $59 million, so it was not that dissimilar from where we are at the end of June. So there's really no change in our view in terms of the recoverability of those receivables or anything that I would think about differently on the cash flow statement than what you've seen in the past.

Okay. And then the -- that leads me to the second question, which I think most who have an interest in your stock are chomping at the bit at. And that is you haven't bought any stock back. The stock is down from $42 a share. Cash is building on the balance sheet. What are your thoughts on using that, particularly giving your more optimistic views about conversions improving and the continuation of pricing power?

Yes, I'd say a couple of things. One is we've used our cash flow and we've talked about using our cash flow for a number of items. Cambria Suites development, expansion of that brand is one of those items. In the past, the volume and the dollar amount of share repurchases have been lumpy. We've said various factors impact the share repurchase program and the timing and the amount of the repurchases. I won't really comment beyond that. And I think we've talked about Cambria Suites' utilization of cash flow in the press release as well.

But it looks like the Cambria utilization of cash flow should be towards the end of your necessary build-out, or is that not right?

Well, as Steve mentioned in the script, we are looking at a number of different Cambria development opportunities, and so depending upon how those shake out, that will dictate the use of cash to support that brand.

So you're still in the use of your own balance sheet to build out that brand stage?

I'm sorry, repeat that, Harry, please.

So you're using your own balance sheet to build out the brand. It's not quite -- is it not ready to gain the kind of franchise traction that you're looking for?

Yes, I think from a Cambria prospective, our view is that we want to build the scale of that rapidly, and the sooner we can get it to scale, it will have a sustainable ability to develop more through straight franchising like we've seen in the past with brands that we've launched such as Sleep Inn.

And, Harry, I'd say this too. Obviously, starting a new brand, you have got to incent owners to do it. And so we're putting sliver equity and mezzanine debt and other applications to work. I would tell you though that in today's environment, that is the competitive environment, because most of the other brands are also providing similar incentives.

Okay. Any sense of over, say, the next 12 to 18 months how much cash that's going to require?

It would still be in the range of what we've been talking about, which is that $20 million to $40 million.

All right, appreciate it. Thanks very much.

Thanks.

Your next question comes from the line of Steven Kent of Goldman Sachs.

Hi. A couple of questions. First, can you just give us a little bit more color on why the fourth quarter suggests a deceleration in RevPAR? Just give us some more on that, if there's anything out there that you're seeing. Then second, on financing of new hotels, what are the local banks or the local financing groups concerned about on providing a little bit more capital to get some of these hotels built? Is it that they already have existing hotels or bad loans already on their balance sheets that they're concerned about?

I'll take the first part of that, Steve. On the RevPAR side of things, I think the biggest thing that you have got to focus on is, if you look at last year's RevPAR on a quarterly basis, it was a really steep recovery. So in the third quarter of last year I think RevPAR was up about 7%, and in the fourth quarter of last year RevPAR was up almost 10%.

So what you're seeing when you think about our outlook for the balance of the year is, and I think we are being more optimistic. I think we think the full-year RevPAR outlook is more positive than we did a few months ago. But when you're looking at it on a quarterly basis throughout 2011, you have to take into account that real steep RevPAR recovery that we experienced last year is making the comps become more and more challenging as the year progresses.

In terms of the financing environment, so I think the answer is it appears, based on what we're hearing from our franchisees to be improving, but I would call that pretty slow and gradual improvement. I think you've got a combination of two factors. One is I think the reserve requirements being -- that the banks are being held to are making them much more cautious about putting loans out there, so even with Washington's assurance that they're not asking for higher level of reserves, what we're hearing is in the application from the auditors that they are, that there's an increased identification and focus on the reserves that the banks hold. Then secondly, a number of those banks are holding hotel real estate loans in their portfolio, and based on the percentage they've allocated, have not moved back in the market.

Having said all that, for our strongest franchisees and in a number of dialogues we're having now, it appears that is loosening up some, and that a number of the franchisees -- and we heard this particularly during our convention, where people were sort of still waiting on the sideline. The number of conversations we got about folks that believe their lenders are ready to begin lending to them again, and their interest based on the improvement and the performance of their existing hotels and in the markets they're working is starting to move them towards thinking about either starting projects they hadn't started or new projects.

So I would say for the first time in a long time the dialogue we had at the convention and then at AAHOA is much more deal oriented than it's been, and so we're taking that as a good sign that we're getting a gradual push back into it. We don't expect anything rapid or sudden on the new construction side, but there are deals getting done. We're doing some, and we expect that to gradually build.

Okay, thank you.

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

Good morning, guys. Just a follow-up on some topics with regards to Cambria and its growth. I'm wondering if you can give us any color on -- I know you've got -- I think in the last quarter, you mentioned about $20 million in land banked for development of Cambria to be sold to developers. I'm wondering if you've been able to make any progress in finding developers to line up and basically sell that land over, or have anything under contract there?

And, also, I was hoping you could give us some color on how you're going to use the $250 million fund that you talked about on the last call to fund Cambria in terms of identifying which markets to go into and what not. I know the initial Cambrias may have not been in the markets you were focusing on. That's why you let some of them leave. So I'm wondering how that's going to change going forward. Thanks.

On the first part of your question, as we look at the opportunities that we've got with the land that we've banked, I would say a significant percentage of those lands that we either have under contract or that we've -- that we're actually holding title to, for most of them there are significant discussions going on about franchisees or owners wanting to take that land from us into a Cambria development. So we expect several of those deals to get announced in the not too distant future, and as you know in real estate, a deal is not a deal until it's done, but we have got enough strong interest in enough of those that we feel comfortable that for the lion's share of the land that we've contracted for that we have got franchisees that are interested in.

The actual amount of land that we've got, because we haven't closed on a number of them is actually only $8 million, not $25 million, but if we closed on everything else that we've been working on, the number would come up to probably in the $15 million to $20 million range, so you're not that far off. And in some cases we actually believe we're going to flip prior to taking title to it, so we're encouraged by that.

Secondly, on the $250 million, it really depends on the deal. We've got a number of ways of incenting development through the cap stack, and that can include a series of different options, depending on the franchisees and their partners' desire. We can do mezz loans. We can do sliver equity. We can help with top end guarantees. We can support debt structures. There's just a number of different avenues for us to go at it, and we're doing it through a variety of ways with the franchisees, depending on their needs and their project.

And so we believe that all this is relatively short-term incentive-based investment that will be recycled and are progressing along those fronts and got actually a number of pretty exciting projects that we're hoping to announce not too much into the future.

Thanks, Steve, that's helpful. I guess I'll ask you a little bit differently. I understand how you guys are using various different financing methods across the capital stack, but I'm just thinking in terms of brand growth and brand development. I think on the last call you indicated that the [summit] hotels that were removed from the Cambria system weren't particularly important to the system,. I can speculate that's because the locations may not have been that ideal. I'm just thinking those were four of the first 20 hotels in the system. How are you going to go forward to make sure that your investments into the system are in locations and properties that are important to the system is my question.

Those funds are targeted almost exclusively at all the major urban centers. So we are looking at -- a number of our projects are in all the big cities that you'd expect or in the high dense suburbs surrounding them, and that's where that -- those dollars for the most part are targeted.

So it sounds like your focus for the near term growth of Cambria is going to be geared towards major urban centers as opposed to secondary (multiple speakers) --

Yes, that's for two reasons. One is I think that's the quickest way to build the brand and awareness of the brand, but also even equally as important, that's where deals are getting done. So the financing is available for major urban markets. That's where we're seeing the first real signs of lending and recovery. And so as you talk to lenders willing to do new construction, they're looking much more aggressively at urban markets than they are any place else, so the combination of our incentive and the fact that's where the lenders want to go means that's the best fishing available.

And then what we expect is past that, that as it begins to ebb out into the other markets, that our incentives required for those other markets will be less and our dollars will be targeted on those major MSAs.

Great, thanks a lot. I appreciate the color.

Your next question comes from Felicia Hendrix of Barclays Capital.

Good morning, guys.

Good morning, Felicia.

Steve, you sounded pretty optimistic regarding the potential for conversions to start driving unit growth and also potential new franchisee agreements. Just wondering, as you look at that, when should we expect to see that flowing through your business?

Well, the lag time between the upscale transactions to begin occurring -- so let me -- just to remind everybody -- we get our conversions from two or three different places. We get them from independents that want to upgrade. We get them from other brands pushing out some of their product and our taking those into our conversion brands, and then we also obviously get them from newbuild opportunities.

So when we look at today's environment, look at the normal cycle, we're seeing the upscale and upper upscale transactions beginning to increase. Typically you would see a 6 to 9 month lag from that. And so if you looked at those transactions beginning to occur first, second quarter of this year, if we followed a typical pattern, you could see something in terms of upswing in conversions towards the end of this year into next if it follows what normally occurs.

The other piece of that is you're seeing the financing available for transactions in the upscale market. Typically then the financing for our properties begin in a lag to that as well. And then as people are improving and seeing their deals flow, the other brands will stop extending properties that they don't believe no longer fit their brands and begin to push that out. We saw that from IHG significantly at the end of last year and early into this year, and we're beginning to hear that is a growing trend, that as the other brands see their growth prospects improving, they begin to push out other properties.

So the combination of those normally in the cycle then means a big upswing in transactions and conversion opportunities. We've obviously historically have gotten more than our fair share of those conversions. We expect that same thing to continue. This cycle has been more elongated than I've ever experienced. But it appears to me, and I think the reason for my optimism over the midterm at least is that it appears that the right things are moving, and that if we follow that normal lag of when the upscale stuff occurs and then when mid [moderate] tier and below begin to move, that we're really looking at some time towards the end of this year into next year that we should see a positive momentum.

And then the other piece is, quite frankly, having several quarters of 10%-plus growth in our activity, even without a lot of transactions occurring, I think is one of the other reasons we're thinking that we'll start seeing an upswing in those numbers.

Okay, so it sounds like though, even though you said it could be at the end of this year, it's not in your unit outlook for --?

We have not added it to our unit outlook, no.

Okay. And then just --

We're still basically assuming that we're more or less on track with what we did last year, maybe slightly ahead, but more or less on track. Which is why you're seeing our forecast for the year.

Okay, okay. And then I know this isn't a huge part of your business, but some of your hotels do have groups -- smaller groups. Just wondering if you could give us any color what demand looks like there?

We don't do a lot, you're right, but we do do a lot of SMERF business, which is the smaller social, military, religious, fraternal type stuff, and so we have targeted our sales force and reorganized them around two things. One is actually pursuing corporate clients that give us both transient and group business, and we're seeing nice upswings in that.

But then also targeting specific market areas like SMERF type business. We are the king of amateur sports. If you stay in any of our hotels on a Saturday night, you're going to see lots of kids and lots of parents looking for something to do, so that's a very strong market for us. We're penetrating that by providing a lot more support.

And then the other is that we think we're probably one of bigger players in family reunions, which is great business from the standpoint of typically they're value-oriented, which drives them towards our brands, but also we can support them in a way that makes for a strong event for them and puts us in a position to be highly competitive in that marketplace.

Okay, that's helpful. And then just, Dave, on the SG&A side, and maybe this wasn't that significant, but I'm just a little confused, because we're are still kind of in a recovery, and we talked about cash --you talked about cash earlier and using that for Cambria versus buying back stocks. It seems like you're preserving cash. I'm just wondering why you'd move your annual convention to a location that's more expensive?

A lot of those decisions like the location of your convention gets made several years -- actually four years ahead of when the actual event takes place. So that decision for this year's convention was actually made four years ago, and obviously over the past two years as we've made our convention plans for the future we've taken that into consideration.

So when you make them, you don't lock in the prices then?

Yes, you're locked in, and clearly that was done --

Oh, I see, okay.

Clearly it was done prior to my coming. I can tell you that won't happen again.

Okay, glad I asked. And just, finally, you're moving your headquarters. Just wondering if you're getting any kind of tax incentives from Montgomery County to move?

Yes, we're very happy with the level of support we got both from the state and the county. I think we've been here a long time in this state. Our folks live in and around here. Our strong desire was a new building that had access to public transportation and facilities and everything else. We found a great spot, and the state and the county both felt it was important for us to stay here, and therefore were very helpful from the standpoint of making that work.

I will tell you, it was interesting, because we got calls not only from obviously the metro area, the other districts interested in our corporate headquarters, but also as far as Connecticut and Pennsylvania and other states who are really getting aggressive about trying to move -- get people to relocate their businesses to their areas. But in the end we were very happy as well as I think the state and county felt good about the program that we all put together, and are looking forward to the construction and the move, which will take about a year and a half total length.

Okay, thank you very much.

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

Good morning, everyone. I have a few questions on your development pipeline -- and I joined late, so I don't know if this was given or not, but what percentage of your pipeline -- your development pipeline have firm opening dates for 2011? What percentage is for 2012? What percentage of the development pipeline relate to conversion opportunities? What percentage of the pipeline relate to some level of capital investment? And then when I look at that pipeline, what is that level of capital investment amount? Thank you.

Okay, so I guess breaking that down in a few ways. The ratio of conversion and new construction deals in the pipeline is actually laid out on exhibit six. I'm sorry, exhibit seven. So if you look at conversions at the end of June, there were about 129 conversions out of 451 total in the pipeline. Then in terms of the timeframe for opening for conversions, typically a conversion hotel, once we execute the contract, can open anywhere between a couple of months and nine months to come on line.

So one of the points we definitely like to emphasize on the conversions, which is the reason that the growth we're seeing on the conversion franchise sales is so important, is that conversion franchise sales that we execute during a quarter can actually open during the quarter, and therefore they never even hit our -- what we call our pipeline. So I think you need to make sure you factor that in when you're thinking about our gross openings and how that flows through the net openings.

On the new construction side of things, the -- basically for full year 2011 our expectation is 35 of the new construction hotels will come on line, which is 10% or so of the new construction pipeline. Typically for a new construction contract, the timeframe for opening is much longer than on the conversion side of things. It ranges anywhere from, I'll call it, 18 months to three or four years, and as we point out and what we've seen over a long period of time is that every contract we execute for either a conversion or a new construction hotel does not necessarily result in an open hotel in the system. That's very consistent with other hotel franchisers. And clearly the success rate for a new construction hotel is not at the same degree a conversion hotel is, so you have got to also factor that in over an extended period of time.

In terms of capital utilization, really in terms of the capital program we've talked about for Cambria, that's the only thing I would say is out there that's different from what we've done in the past. As you know, Jeff, we've done development incentives over the years where we will provide a forgivable prom note upon opening of a conversion hotel or a new construction hotel. Those are normally pretty small dollars for our -- I'll call it our core brands. On the Cambria side of things, I think we've kind of talked about the amount we expect to deploy over time to grow the development of that system. I don't have the specific dollar amount that's committed here right in front of me but can provide that supplementally.

So is it fair to say then the growth additions in the back half of the year from conversions and new construction is offset by removals?

Basically, our removals, our termination rate for full year 2011, we're expecting to be in the range we've experienced for terminations historically over the past five to ten years, so somewhere around in the 5% area.

Thank you.

Your next question comes from the line of Shaun Kelley of Bank of America Merrill Lynch.

Hey, good morning, everyone. Just one question. I think everything else has been touched upon. Generally kind of watching the RevPAR numbers come in over the last couple of months, and you have seen a bit of a sequential slowdown over the summer months and you guys see a little bit more of the leisure business, so kind of was wondering if you could just give us your thoughts on have seen any of that sequential deceleration? You kind of said that for June and July, I think in your prepared remarks, that you were comfortable with mid single digit in June and July heading into the third quarter. So could you just give us a sense of kind of what you're seeing from the consumer right now and how business feels out there? That would be helpful.

I think almost remarkably, given what's going on, the numbers have held up pretty steady. So every time I've turned on the news I expect to see that reflected in our numbers going forward, but they've been pretty consistent throughout the summer, and that's why we're pretty comfortable saying -- it's almost like what else could be thrown at us that could potentially affect things and it hasn't already? So my view, and I tend to be more of an optimist, is I think there's probably more upside than downside, but we're pretty comfortable with where we are because it's been holding pretty steady. We're not seeing, even through all of what's been going on, which typically consumer confidence is a big part of our performance. So we're pretty comfortable with the forecast we've given, and that what we're seeing on a day-to-day basis, even throughout all the hysterics that we've gone through over the last month with the debt ceiling and everything else, that the business is holding up.

And just -- I appreciate that, and just one more, if I could. The second quarter number of 6.6%, I imagine that benefited a little bit from the Easter shift. Is it possible to quantify that, or was that a benefit as you looked at the monthly performance?

Yes, I don't have that quantified here in front of me, but I don't recall that being anything that we really discussed as being a significant impact to us.

Okay, thank you very much.

(Operator Instructions). Your next question comes from the line of Ryan Meliker of Morgan Stanley.

Hey, guys. Sorry, I just had a quick follow-up. I don't mean to beat a dead horse when I think about Cambria, I just want to make sure I understand the strategy going forward. It sounds like you guys are focusing your money, or least what you're putting to work in Cambria, on urban -- you said the top markets. I'm just looking at the existing footprint of Cambria, and it doesn't look like there's too much exposure to the top markets. And then if I look at one of STR's more recent pipelines, it doesn't look like there's a lot of -- less than half of the Cambrias in some stage of development are in the top 25 markets. So is it that your focus is more about putting your money to work in those top markets, but you're trying to grow the brand everywhere, or is it more that maybe there was an old strategy of just growing it where we could, and now you're trying to focus things and change it a little bit different?

Yes, I think it's the latter. The Company initially was successful in developing a number of units and actually had grown to a pretty big pipeline prior to the financial collapse without putting the balance sheet to work. When I came in, one of my first priorities was looking at opportunities to move and shift development to the major markets and knowing that in doing that we would probably have to use the balance sheet somewhat. So what you're going to see over the next six to 12 months is a significant shift of the construction and the development activity from Cambria from more of the tertiary markets into the major markets.

And as I said earlier -- and that probably makes sense, because that's where the deals are getting done and started and construction starts, so we're working really hard to make sure that we get several of the major market construction projects underway this year. We look like we're in pretty good shape on that. The two projects in New York City are a good example of the types of things we're doing. And then while you won't see them announced yet and won't see them in the pipelines that you're looking at, that will follow as those deals get done.

And is that primarily the result of the fact that deals can get done in the major markets and they can't elsewhere --?

Yes.

So it's not about a strategy about trying to focus on the major markets to grow the brand?

No, we are focused on the major markets, but because that's where they're getting done. Now we are doing other deals. We've got a couple of other ones that are not in major markets, but the bulk of our activity and our investments are targeted at driving distribution in major markets.

Okay. I guess another way to ask that question is, is it reasonable to say that maybe the strategy before wasn't ideal for growing the brand because some of these markets didn't have the exposure that you needed to really get the brand out there, and now you're trying to change that, or is that -- or is it really just driven by that's where the deals are?

I would say it's a combination of the Company was able to develop a relatively significant pipeline without investing heavily in the brand, and so as a result I think at that point, given where the Company was, that was a good strategy. I think given what's occurred over the last three years though and our desire to have Cambria be a rapidly growing vehicle, the best way to do that and to build awareness of the brand is to target major markets.

So I think you've had a shift in both the environment in which we were operating in, but also a shift in strategy based on that and the desire to help push Cambria in a way in a market that we -- it hasn't been very cooperative at all, and to get some momentum going in those major markets and getting the biggest bang for the buck.

Great, that's great color. Thanks a lot, Steve.

You're welcome.

Your next question comes from the line of Chris Agnew of MKM Partners.

Thank you very much. Good morning. A couple of questions. First on deployment of capital. Based on the transactions you're seeing or looking at today, can you give us any sense at this stage what sort of duration those investments will be? Are they short-term, sort of 12 to 18 months or two to three-year type investments? And then, secondly, could you just maybe give a little bit more color on your comments and confidence about significant unit growth in Europe, and maybe any feedback or data points there? Thank you.

So on the duration of the lending, it obviously depends a lot on the financing markets. My experience has been, when you put money into these deals, [short of it] it's typically a three month -- a three-year investment. It can go five. It can also go 18 months in a hot market with hot financing. But our anticipation and the way we're budgeting for the capital is it's in the three to five-year range of where we would be recycling it, and which kind of dictates the number we put out, because we feel like that's when we begin -- when we got to the end of that investment, that's where we begin to -- the capital would be recycled. We're reasonably confident that the application of that capital is going to get us the development that we're looking for, and we're having good results so far, and we'll be sharing some of those announcements with you.

On the European side, this is the exciting part. We have a technology platform which is relatively unique for the industry, and that is we have the only cloud-based massively distributed property management reservation system, which means something special, because what it means is your costs of conversion are dramatically less, because you don't have to buy systems and servers and cabling. Basically, if you have access to the Internet, you have access to our systems. They were not previously available to the international markets. We worked hard over the last two years to internationalize that platform, and we have done that. We've introduced it into Australia, and we're in the process of introducing it into the UK first to be followed rapidly throughout the rest of Europe.

We're excited about what that does for our value proposition. It will give us a much higher level of connectivity to the distribution channels, and we think therefore our contribution will be impacted positively. We think that makes us an interesting player in the world's largest lodging market, which is mostly focused on conversion.

So when we look at the opportunity there, Europe is tough for a lot of the major brands because hotels tend to be relatively unique and aren't typically very consistent in their look and feel. We're very comfortable working in that environment, given our history, and so we view Europe as a new major development market opportunity for us, and we've got significant plans around how we're going to organize, how we're going to effect and attract new franchisees and drive new units. And I think we're at the point now where towards the end of this year and early next we'll be able to start sharing what our expectation is in terms of unit growth, but we view that as outside of the United States our most exciting prospect.

And so just to follow up, do you have any feedback from either the UK or any of the continental countries in terms of what hotels think about the product, independent hotels and maybe your sales peoples' feedback?

Well, I think the idea is in concept people think it's an interesting and compelling type equation. I think we've got to demonstrate it could work in the countries, and I think when we have our franchisees telling the story in the UK or in France about what it does for them in terms of connectivity and what it does for them in terms of production, then that will really help move the needle, which is why our view is it's probably not going to impact this year significantly, because we're in that rollout phase, but we're looking for it to impact next year. And we'll -- as we get into that part of the phase and rollout, we'll be able to give you a better idea of the receptivity toward it, but then also how many people are buying.

We think the market's ripe. This is an area where there's not a lot of folks focused on in terms of this conversion market. Europe is rapidly shifting, and so we think the timing is great, and we're going to -- we'll put a plan together and numbers in terms of what we expect, and we'll talk about that probably early next year.

Great. Thank you very much.

Your final question comes from the line of David Loeb of Baird.

Good morning. Excuse me. I want to ask again about the free cash flow. I know you've been answering this a lot, but you have a lot of free cash flow. You're using maybe a third of that for the dividend these days. I know you're holding more cash and holding some of that free cash flow to use for the Cambria expansion. Can you just talk a little bit about your appetite for share repurchases and where else some of that capital may go besides those first two things that we talked about?

Yes, David, we talked about the share repurchases earlier, and in the script we pointed out the types of places where we're making incremental investments on the emerging brands, international and other broader, corporate business development initiatives. So I'd kind of leave it at that.

I heard all that. I guess I was hoping for a little more color, particularly given the pullback in the share price in the last quarter, and the fact that you haven't bought any shares this year. I was wondering if you could give just a little -- go a little deeper on that.

Yes, we're not going to comment beyond that.

Okay. Number two, if I can beat the dead horse just a little more that Ryan beat. If you could just give a couple of examples of Cambria development. I'm curious about your thoughts -- I know brokers have been pushing an Atlanta site that was originally developed as a Cambria. Will that definitely be a Cambria once it's completed, or are you doing things to try to get that back into the system? I've heard some talk about one in Dallas. If you could talk a little bit about just those as examples of the kinds of efforts you're putting in to grow that brand?

Yes, the Atlanta deal, the franchisee ran into a financial difficulty at the worst part of the market, and it has got stalled in its construction. It looks like that probably will result in a new deal being a Cambria. We have got -- we have a couple of projects in Dallas, but one in particular is pretty advanced, and so that was part of our land purchase acquisition, so that's looking pretty positive.

Then if you go around the country and look at the other major markets, we are working something in a lot of them. Some of them with a land purchase approach, but some of them also based on being contacted by developers with projects that they think our brand fits well with. And so we're actually pretty encouraged by kind of the receptivity of the brand and the approach that we're taking, and the combination I think of both generating deals through land acquisition -- which we're getting at what we think are really great prices -- as well as the activity of some of the development community that we've been talking to appears to now be getting to take some hold, and there is financing available. And so we're pretty encouraged that a number of those deals are going to come to fruition, and you'll start hearing about actual deal announcements in the not too distant future.

Great, and one final one. On the exhibit five on the room count data, I'm curious about removals. Ignoring Cambria, it looks like the net decline in Comfort/Comfort Suites was 38 and in some of the conversion brands about 13. And that's net clearly. Is that just kind of normal cyclical removals versus a relatively slow development in conversion environment, or is there anything else going on there that's notable?

There's a combination. It is, I would say, mostly the normal cyclical, and then we haven't seen the conversion swing up where we expect them, so our unit growth isn't as high as we would normally be at this part in the cycle. I will also tell you, and we've talked about this before, we're getting more aggressive about Comfort Inn, and so we have marked course of beginning to more aggressively pursue consistency, particularly at the lower end of the brand, and that's affecting those numbers.

Great, very helpful. Thank you very much.

Thanks.

Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back over to your President and Chief Executive Officer, Mr. Steve Joyce.

Well, thanks. We appreciate your attention. We actually are fairly encouraged by everything we're seeing. We are excited about the number of initiatives and activities we have got underway at the Company. Believe it will provide significant growth for the Company as well as significant value to the shareholders. As always, the shareholders come first in our priorities, and we are appreciative of your call and look forward to talking about further development in the fall. Have a nice day.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.