Choice Hotels International Inc (CHH) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Choice Hotels International second-quarter 2012 earnings conference call. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session, and further instructions will be given at that time. As a reminder, today's call is being recorded.

During the course of this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the Company and its results, which constitutes forward-looking statements under the Safe Harbor provision of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as Choice or its management believes, expects, anticipates, foresees, forecasts, estimates, or other words or phrases of similar import. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Please consult the Company's Form 10-K for the year-ended December 31, 2011, 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 2012 earnings press release, which is posted on our website at www.choicehotels.com under the investor information section. With that being said, I would now like to introduce Steve Joyce, President and Chief Executive Officer of Choice Hotels International Incorporated. Please go ahead, sir.

Thank you very much. Good morning. Welcome to Choice Hotels' second-quarter 2012 earnings call. With me this morning as always is Dave White, our Chief Financial Officer. As you know, we put out our press release last night; we are very pleased with the second-quarter results. Consumers are traveling. We are driving record traffic to our hotels. We are seeing both strong RevPAR and global system growth, and we are very excited about the accelerating momentum in the franchise development world. In fact, this past quarter has been the best travel season we have seen in several years, and our franchise development results are very strong, with the number of domestic franchise contracts up 54% compared to last year, and meaningful gains in both new-construction and conversion hotel franchises.

All of these factors contributed to a very good quarter, as reflected in the key indicators we use to measure our performance. RevPAR is up nearly 8%, which is better than the industry average for the comparable time period, and ahead of our own expectations. These results reflected a mix of occupancy that was up over 250 basis points, and an average daily rate increase of 2.8%. Both domestic and global net unit growth increased 1.3% ahead of our target, and these two drivers resulted in strong domestic royalty fee growth of approximately 8% for the quarter. Our EBITDA and diluted earnings per share for the quarter increased 14% and 20%, respectively.

We also continue to execute our long-term capital allocation strategy, and last night we were pleased to announce that our Board of Directors declared a special cash dividend of $10.41 per common share, or roughly $600 million in the aggregate. This special cash dividend will be paid on August 23. In this unprecedented and prolonged period of historically low interest rates, this capital structure transaction and significant return to our shareholders is both an appropriate corporate finance decision, and the right strategic action for Choice.

One of our long-stated goals is to deliver increasing value to our shareholders in the most efficient and effective way possible. This transaction achieves this objective in a meaningful way, lowering our overall cost of capital without affecting our ability to grow this Company. The special dividend announced last night reflects management's and the Board's confidence in the future of our brands, and their substantial cash-generating capabilities. After this transaction, we will continue to have significant financial resources to fund our business operations, and to exploit potential and actual business development and growth opportunities in the near term.

Turning back to our quarterly results, we are especially pleased with the strength and the momentum of our new domestic franchise development activities. During the quarter, we executed 106 new contracts, which is substantially higher than the same period last year. We are seeing positive momentum in conversions, and also notably in new-construction activity, which was up nearly three-fold over the last year's second quarter. We are excited about how well developers are responding to the Sleep Inn program, with 12 new deals year-to-date. And developers like this Sleep Inn prototype, which is a very efficient building that offers low development costs, as well as low operating costs, than, in comparison to any of the other mid-scale brands, and works particularly well in a significant number of secondary and tertiary markets.

We are also seeing a very positive response in our new Comfort Inn and Comfort Suites design package. In particular, we are seeing a lot of interest in new-construction markets that are based on energy, like North Dakota, South Dakota, Texas, and Pennsylvania. On the conversion front, we executed 85 new deals during the second quarter, driven primarily by Quality Inn, which increased from 11 deals in the prior year to 36 this quarter. Finally, in addition to strong new-franchise sales, we are seeing ongoing strength in the number of new relicensings and renewal contracts, which we view as a positive catalyst for overall franchise sales opportunities going forward. So, to summarize, we feel very good about our development results, and are heading in a positive direction.

Turning to the area of reservation contribution, our central reservation, or CRS, is on pace to have a record-breaking year. Just last week on July 16, we had our highest revenue day ever on the CRS at $12.4 million. This was matched by our highest ever CRS reservations total for one day, which exceeded 72,000 reservations. We are currently delivering nearly 37% of our franchisees' hotel reservations through our CRS, which is 200 basis points higher than this time last year. www.Choicehotels.com contribution is also higher than it has ever been at 19%, which is more than 150 basis points higher than the same time last year. Choice drove over $1 billion in revenue through www.Choicehotels.com in 2011, and year-to-date revenue is 18% over that. This revenue is attributable to both strong traffic growth and site conversion. www.Choicehotels.com is attracting 100 million visits annually, and we're tracking 15% higher year-over-year.

Our mobile reservations platform expansion has been a key contributor to our strengthening CRS results. We were first to market in our industry with the iPhone App, launched the Droid App last summer. We also just launched our iPad App in May. Our mobile revenue is up year-over-year by over 230%, which makes up about 7% of our online revenue, which is higher than the industry average of around 4% according to [Focus Right]. Contributing to these strong results is our integrated multi-brand marketing campaign, which is comprised of traditional TV, online TV, digital search, social media, and some really innovative partnerships with the Weather Channel, Rand McNally and US Today, as well as Pandora.

In addition, Choice Privileges offers are really resonating with our guests. So, we are firing on all cylinders, and effectively driving travel demand through our lowest cost channels for the benefit of our franchisees. A few notes about Choice Privileges -- in May we topped 15 million members worldwide, which is tripling our membership in just over the past five years. This impressive achievement means Choice Privileges is the one of the fastest growing rewards program in the travel industry. And in April, the Freddie Awards, which recognizes rewards programs, over 1.3 million frequent travelers scored Choice Privileges as the second-best program overall, which is our best result in the program's 14-year history. We expect continued focus and dedication of resources to this program to continue to strengthen the value of our franchise and brands to consumers and to hotel developers.

Looking ahead, while there are a number of macroeconomic challenges on the horizon, slower than hoped for employment gains, uncertainty surrounding the elections here at home, and the ongoing challenges in Europe, we remain optimistic about our opportunity to continue to grow our business, and create value for our shareholders. And we are well positioned to perform particularly well in a variety of economic environments.

So with that, I am going to turn it over to Dave to give you a little bit more detail on the quarter.

Thanks a lot, Steve. As you read in last night's press release, we reported diluted earnings per share for the second quarter of $0.55, which represents a 20% increase over the diluted earnings per share of $0.46 reported for the same period in the prior year. The increase in diluted earnings per share over the prior-year results reflect the continued improvement in our EBITDA performance, driven by both top line revenue performance and disciplined cost management. EBITDA increased 14% to $53.6 million for the three months ended June 30, 2012, compared to $47 million for the same period in the prior year.

Our second-quarter franchising revenues increased by approximately 6% compared to the prior year, primarily due to improvements in our domestic royalty revenues, which increased by approximately 8%, and an improvement in our initial and relicensing fee revenues. The increase in domestic royalty revenues was primarily driven by a 7.7% increase in RevPAR, reflecting a combination of occupancy and average daily rate increases of approximately 250 basis points and 2.8%, respectively. Our RevPAR performance also compared favorably to our forecasted RevPAR increase, which was 7% for the second quarter. Similarly to our first quarter, we saw strong gains in RevPAR performance across all of our domestic brands.

Furthermore, the RevPAR gains reflect continued improvement in the occupancy rate, which suggests that our franchisees still have opportunities going forward to increase their room rates beyond the 2.8% increase experienced in the second quarter. As a reminder, our RevPAR results for the second quarter reflect our franchisees' gross room revenue performance for the months of March, April and May.

On the supply front, we were able to grow the number of hotels operating in our global franchise system by approximately 1.3%, comprised of domestic unit growth of 1.3% and international growth of 1.6%. Our effective royalty rate declined by 1 basis point to 4.33% for the six months ended June 30, 2012 due to the various incentive programs we have implemented that provide for royalty rate discounts in the early years, in an effort to increase franchise sales development. These discounts are greater in the early term of the franchisee agreements than prior discounting tactics, and are expected to burn off at a steeper rate as we move forward.

Initial fee and relicensing revenue increased 14% to $3.2 million for the three months ended June 30, 2012 due to an increase in both new franchise agreements, as well as the number of relicensing and renewal contracts. During the second quarter of 2012, we executed 106 new domestic franchise sales contracts, representing a 54% improvement compared to the same period of the prior year. We are particularly encouraged that the pace of new franchise agreements has accelerated in the first quarter, and we are optimistic that the development environment will continue to improve. The number of relicensing and renewal contracts executed during the second quarter improved 27%, as the hotel transaction and lending environment continues to show gradual improvement. The percentage increase in initial and relicensing revenues were lower than the percentage increase in the new and relicensing contract figures, primarily due to the timing of revenue recognition related to contracts executed under our incentive programs.

On the cost side of the business, the measures we implemented in the fourth quarter of 2011 to increase productivity and streamline services continue to have a positive impact on our margins. As a result, the combination of the top line revenue growth, and the $2 million or 7% decline in our SG&A for the second quarter of 2012, resulted in our franchising margins expanding from 61.2% in the second quarter of last year to 65.9% in the current quarter. Diluted earnings per share for the second quarter of 2012 were also impacted by a decline in the Company's effective income tax rate for the three months ended June 30, 2012 from 34.5% to 33.5%. And our second-quarter diluted earnings per share performance exceeded our previously published outlook of $0.51 per share by $0.04. We are optimistic that these trends will continue throughout the remainder of 2012.

As we announced last night, our Board of Directors declared a special cash dividend of $10.41 per share, or approximately $600 million in the aggregate. The special cash dividend is being paid with the proceeds of the Company's recently completed $400 million senior notes issuance, and our new senior secured credit facility, which we also announced last night. The Company's new senior secured credit facility consists of a $200 million revolving credit tranche, and a $150 million term loan tranche with an initial four-year term. We expect to utilize the proceeds from the term loan, as well as approximately $50 million under the revolving credit tranche, for payment of the special dividend. Our decision to declare a special dividend is consistent with our primary focus of creating value for our shareholders in the attractive debt markets, favorable tax environment for dividends, and our low leverage levels, which allowed us to enter into this transaction.

An additional question that may be on the minds of some of our shareholders is whether or not a portion of the dividend will be considered a return of capital. While we will not be certain until we close out 2012, and can calculate actual cumulative earnings and profits, we currently expect, based on our historical earnings and profits, and forecast for the balance of the year, that substantially all of the dividend will not be deemed a return of capital, but rather will be ordinary dividend income. After the final determination is made after year-end, we will communicate that result to the market. In addition to the special dividend, we will continue to seek ways to return value to our shareholders, as well as continue to make strategic investments to grow and strengthen our business.

For the six months ended June 30, 2012, the Company also declared and paid cash dividends at a quarterly rate of $0.185 per share. And during the six months ended June 30, 2012, the Company paid cash dividends totaling $21.4 million. And we expect to maintain the payment of a quarterly dividend on our common stock, subject to the discretion of our Board of Directors. During the second quarter, we repurchased approximately 200,000 shares of stock under our share repurchase program at an average price of $37.39 per share, and we currently have authorization to purchase up to an additional 1.4 million shares of stock.

Turning to our outlook for 2012, we currently expect third-quarter diluted earnings per share of $0.61, and full-year 2012 diluted earnings per share to range between $1.91 and $1.94 per share. Our outlook for 2012 reflects the impact of increased borrowing costs to be incurred as the result of the declaration of the $600 million special cash dividend, which will be paid on August 23. These costs are expected to total approximately $14 million or $0.16 per share. We expect full-year 2012 EBITDA to range between $201 million and $203.5 million. The figures assume our domestic system-wide RevPAR increase for the third quarter is 5%, and ranges between 6% and 7% for full-year 2012, and they assume an effective tax rate of approximately 34% for the third quarter, and 33.8% for full-year 2012.

Based on the supply growth we have experienced to-date, we are increasing our supply growth estimates to a range between flat and 1%. However, based on the success of our developer incentive programs have had on our franchise sales results, we are reducing our effective royalty rate increase forecast from an increase of 1 basis point to flat. All figures assume the existing share count, which was approximately 58 million shares as of July 26, 2012. So, overall, we are very pleased with our results thus far, and hope to keep the momentum going throughout the remainder of the year.

And now, let me turn the call back over to Steve.

Thanks, David. Well, obviously, we are pleased with the results from this quarter, and the continued strength of the recovery in the travel industry. We have had a very good year so far. We are closing in on earning levels measuring EBITDA that are comparable to peak levels achieved in the last cycle. And I am excited and optimistic about our continued long-term growth prospects, and our ability to continue to drive excellent results for our Company and shareholders. I have said before -- because of the supply/demand balance going forward, we believe the hotel industry, and particularly for Choice because the value orientation of the consumers, that we are in for a very good run. And the question will be, if we get any cooperation from the economy, we are in for a really, really good run. So, we remain optimistic about the future, about our options.

And now I would like to open up the call to answer any of your questions.

(Operator Instructions).

And your first question comes from the line of Jeffrey Donnelly of Wells Fargo.

Good morning.

Good morning.

Dave, I guess, Steve told me that you were the responsible one, so I want to pass along kudos for the special dividend. (Laughter).

Well, if you like it, I think I will take some of the credit.

Yes. I'm curious, after it's payment as you look down the road, is it your plan to use future cash flow to whittle leverage back down to current levels, or are you expect to run at this sort of new level of leverage going forward?

Yes our expectation what we said all along, is we have a long-term kind of leverage level where we feel comfortable, and we've historically talked about that as kind of 3 to 3.5 times debt-to-EBITDA. So I think the way you should think about it in the near-term we are going to be focused on managing back toward those levels. And when you look at kind of the credit facility that we put out there last night, you can see how the leverage covenants kind of ratchet it down over the four years.

So that's kind of our thinking on that, over the near-term, we will focus on deleveraging. And again, just to emphasize what Steve kind of highlighted, which is this is really reflects the confidences of our Board and our Management team in the substantial ability of our brands to generate significant cash flows. So we feel pretty good about our ability to deliver fairly, fairly quickly. But that's how I think you should think about the leverage levels going forward.

Well, to deliver quickly, and also to invest in all the opportunities we think we're going to. So.

Okay. And maybe you can clarify something in one of releases this morning, and maybe I am just misreading it. But it stated that the dividend will be paid on the 23rd, but it also states the dividend, the ex dividend day is the 24th. I think it's just a typo, but I could be mistaken, but I think the--

No, no. It gets a little technical, but Dave why don't you explain it?

Yes, there's some rules for large dividend like this, that's more than 20% of the of the stock price that the New York Stock Exchange has that -- that's just how it works for kind of a large special dividend. It is a little bit different than just kind of a more ordinary dividend. So those are actually the right dates. So basically holders of the stock, at basically on close of business on August 23, are the ones who will be receiving the cash payment.

Okay. Okay. I just wanted to clarify that, because we have had a lot of questions on that.

And Steve, I'm curious, what gives you the confidence and the development environment, does that -- is that the result of you partnering with folks, or are you seeing an inflexion in banks willing to provide capital out there?

Yes, a little bit of both. So we just, I was just with a bunch of our franchisees a day ago. So they're seeing for existing hotels a much better lending environment, where the leverage levels are coming up, and the requirements in terms of the tenets of the agreement, the guarantees are starting to ease somewhat. So they are pretty positive about that. And in fact, the ones that we have got that have really strong relationships with their banks, are the ones that we are seeing that are actually looking at the new construction activity as well.

So I wouldn't call it -- it's not like the lending environment is completely back, but it is -- it has steadily improved. As we talked earlier in the year, in the success of Cambria in the units we're getting done there, that is -- that was in large part due to the lending environment that had come back in the urban environments. But now we're starting to see it spread out more to our typical markets that we're operating in. And we think that, plus the transaction environments, which is why we watch the [Relix] so carefully. That it looks like that transaction market is finally coming around, and when people are selling hotels that's typically when we get a shot at the conversion opportunity.

And so we just, we are viewing all of, we have been waiting for this for 3.5 years, and it looks like we're finally getting into a more normal look at the -- at the up swing in the cycle, where development will begin to come back. Where we will see a lot of conversion opportunities first, but then new construction will follow. And barring something unforeseen, it looks like that momentum is building.

And just one last housekeeping question, did you give us royalty fees from international hotels?

Yes. Let me, I will come back to that here in just a minute, Jeff. I don't have that right here in front of me.

Okay. Thanks.

Your next question comes from the line of Felicia Hendrix of Barclays.

Hi, good morning.

Good morning Felicia.

I'm just wondering Stevie just kind of alluded to this, just that some of the lending is loosening up a bit. I'm wondering, could you talk about the competitive environment as franchisees are seeking out flags, as there's a bill lit more access to capital. We are just hearing that some, that lenders are willing to lend to franchisees, who are only willing to align themselves with certain brands?

Well, that's -- yes -- you have got, you've always had a certain number of the lending communities that don't -- it's not so much the brands, it's the segments they like to lend into. And so the number of banks that lend into the moderate tier and below, where we are substantially, there are banks that avoid that space, because they like to stay to the upper moderate to upscale.

And then, I think what you're seeing now, which we're actually benefiting from is banks are beginning to ask what the contribution of brands is. And so, when they're looking at a brand for a hotel and a underwriting scenario, they are looking to what the contribution levels are for those brands. That puts us in a very good position, particularly in the conversion market, because of the folks that do a lot of conversions, we drive more business into the hotels than anybody else, on average about 37%. And so -- so that puts us sort of on the top of the list with most lenders, who are lending in our environment.

That's really helpful, thanks. And unfortunately, Steve I missed some of the your pre-prepared remarks. Hopefully you didn't touch on this, with our pipeline can you just tell -- I mean obviously, we see the guidance and all that kind of stuff. But you had nice rate of growth this quarter in terms of new units and conversions, and can you just tell us what you might be seeing for further quarters?

Yes, I think -- we have had two straight quarters now, Felicia, where the development results have been accelerating, culminating with the second quarter being particularly strong. So we are feeling really good about the development environment. I think when you break it down, new construction, I mean, obviously we have seen actually some positive things going on in new construction. Some of that I think has been driven by energy market type supply growth, which is -- which is fine. That is good growth for us.

But on the conversion side, which you know has normal represented a fairly significant part of our gross openings, that has been really encouraging with kind of the growth of Quality Inn, really leading the way. And I would highlight, just think about it sequentially, at the end of the year at the 2011, we had 131 conversion contracts in our pipeline of executed but not yet open hotels. And that has increased by a little more than 10%, to where are here at the end of June. And obviously, during the four months, some of the, some of the stuff that was in the pipeline at the end of the year has come on-line.

So we've been able to start to replenish our conversion pipeline at a faster rate than -- than the openings coming out of it, which is very encouraging to us. And as we look forward in the second half of the year, I think we are feeling pretty good about how our brands are positioned to continue to do well in the development front.

Great. Thank you so much.

Sure.

Your next question comes from the line of Robin Farley of UBS.

Thanks. Yes, I wonder if you could talk a little bit about the decision with the special dividend, and how you weighed that against using the capital -- returning the capital in a share buyback versus a special dividend?

Sure. Well, the biggest thing is, we have not abandoned share buyback, it will continue to be a tool to return capital to shareholders. The amount that we were able to do, clearly would have taken us several years to accomplish in a share buyback scenario.

And then, quite frankly, when we looked at the decision, we had been -- we have been evaluating this for several years. We were looking for the right set of circumstances, and we view this as the relatively perfect storm of -- you have got capital markets where the lending environment is incredibly attractive, both from a rate perspective and from a tenant and requirements perspective underneath the, in those loan documents. So we have never seen a more positive environment to do that. And that's indicative of the rates that we're able to achieve, and the fact that we gave up almost no flexibility whatsoever.

So we view those capital markets as sort of in a relatively unique scenario. It's driven by the high yield markets, and so that's, that is affecting all of the markets. So we, we view that as, that may be around for another couple months, but it's not going to be around forever.

Secondly, tax rates on dividends are never going to be better. I don't know how much worse they're going to get, but they are going to get worse. And so, we viewed this as an opportunity to take advantage of what will probably be the lowest tax environment for dividends for the next 10 or 15 years.

And then lastly, we, when we have talked about this extensively, we had an under optimized balance sheet. Our cost of capital wasn't what it should have been, because we hadn't used the capital that this Company should have used to driven to certain level that sort of optimizes that, that cost to capital. In a way, though that is, that is the right investment for the Company.

We have invested significantly in the business, as we have talked about over the last couple of years. We will continue to do that. This isn't preclude any of the things we've talked about. In fact, it's all built in.

But at the same time, we get to sort of those levels that we think is the optimal positioning of our balance sheet, which is in that 3 to 3.5 range. So we're a little above that now, but because of the amount of cash we generate, relatively short-term we are going to be right back in investment grade territory, which is where we think we should be, sorts of in that 3 to 3.5 times scenario. So we think that met all the criteria.

And all these came together in a scenario that we don't think we're going to see again, and we thought this is the right time to do it. We wanted to go early, because we think at the end of the year there's going to be a line of companies looking at similar things. And we wanted to make sure that we got ours out in time to take advantage of those, without getting the pressure of a supply demand scenario.

Okay, thanks. And my other question is, just with your guidance -- your unit growth -- unit guidance up a little bit, and royalty rate guidance down a little bit. So kind of trading off between growing the unit base versus kind of improving the profitability per unit. I know you mentioned there's some sort of -- in the early years discounting. I guess when, how long of a period is that sort of the first 12 months or 24 months? When do you think we'll see that royalty rate start to uptick, as you get past this initial periods?

Yes, I mean, each contract that we do is obviously negotiated, based upon kind of the facts and the circumstances for that particular hotel, and that particular market, and who we're competing with for that franchise flag. So there is not one answer for every contract. But on balance, the way to think about it is, the first 3 to 4 years, it's going to take 3 to 4 years for those rate discounts in the early year to burn off.

And that's kind of -- what you should start to see is as we -- we open those hotels you're starting, what you're starting to see in the second half of this year is, hotels that we sold a 1 year, 1.5 year ago that had even steeper royalty rate discounts will start to weigh favorably on the effective royalty rate. But you will still see, as we continue this incentive to kind of gain share, some hold back on the effective royalty rate over the next couple of years. In terms of pace of growth, I would say.

Yes, I think the important thing to note about these incentives is, they really aren't a dramatic change from the types of ramping of fees that we were doing previously. What we have done is accelerate that ramp into a more concentrated period. So you're getting the same relative markdown from full price contract, you are just getting it more in the first year or 18 months. And as a result, that effects that first year or first 18 months, but then what you do is spring back to a full priced contract.

So that, when we talk about that it's a steeper turn to that, that's why we're saying that. Because the contracts long-term are at the full rate and what we're expecting to do. So -- but we are moving that discounting up into the early years, to incent people to move now. It's been very effective. It does cost us a little bit in the near term, but very quickly, it springs back to full pricing.

And the other things we get normally is, most of our contracts normally have a window every fifth year, where the franchisee or the Company can take a penalty free out. When we do these incentives, we typically push that -- that window out a couple years. So we are essentially kind of locking in a extra couple of years of cash flow, and that's something that we think is valuable.

Okay. Great. Thank you.

Your next question comes from the line of Joshua Attie of Citi.

Thanks, good morning.

Good morning.

Can you tell us how June and July is pacing, relative to the 5% RevPAR guidance for the third quarter?

Well, let me -- Dave can give you some color. So June is not in our numbers. That's in our third quarter, and June was an incredibly strong month. We pushed close to 9% in RevPAR. July has softened, and we haven't, we don't have final numbers yet, but it appears that July may have come off from that 9% high 400 or 500 basis points. We're not sure, we have a very short window in the bookings, so we don't really know what August is going to give us, because we because our booking pattern is literately, you know, 7, 8 days out.

So we're assuming that may stabilize at a little higher level. But what we baked in is the assumption that we're going to continue to strive relatively strong RevPARs. But as you recall, we made all of our RevPAR gains in the third and fourth quarter of last year.

The summer wasn't all that strong in the second quarter. It was the third and fourth quarters where we really drove some really significant increases. So as we move into those comps, that's why you're seeing us -- we think the, the relative strength of the demand is holding up. But you're just getting tougher comparisons at the back end. Dave?

No, I think that pretty well hit it.

But your third quarter will include June, July and August correct?

That's right.

That's right.

But it will include up 9% for June, maybe up 5%-ish for July, and then whatever August is?

Yes, that's right.

Okay. And can I just ask a question -- on the increased development activity. I know you talked a little bit about this earlier. How much of the increased activity is conversions versus new builds roughly? Is it 85% conversions or, can you give us some idea?

Yes, so for quarter, conversion franchise sales were up about 40%. So they were about -- about 75% of our total franchise contract number for the quarter. And then new construction was up 163% off of a fairly small base last year, in the second quarter. So we went from 8 to 21 deals on new construction side. We went from 61 to 85 deals on the conversion side.

And on the new construction side, are you putting capital in?

For the deals that we did in the third -- in the second quarter, most of those are Comfort and Sleep. So I would think of those as more of our normal development type incentives we had in the past. I mean, there's some, if we get a little promenade type things, and some fairly limited situations with we might do, something beyond that. So for the most part these are kind of the core mid tier brands that are already at scale. So the capital commitment really to those new construction contracts is fairly limited, and fairly consistent with what we've done in the past.

Yes, where the capital is going is into the Cambria development as we've discussed.

Do you expect to hit the $30 million a year investment target over the next year or so, or come close to it?

I hope so. We have got, I think, where are we to date? $17 million committed.

Yes, something like that.

We're at like $17 million committed. We will see whether or not those go through. And so it's building. So we're encouraged by that, and we're hoping that as we get into 2013, if you look at the number of deals we are hoping to do, that would put us sort of in that range. But we are not -- we are not at that level of making commitments at this point.

That's still what we're targeting, and we think that's the right thing to do to support the development of that brand.

Okay. Thanks very much.

You're welcome. And I owe an answer on a previous question that I have the info for on the international royalty fees. So for the second quarter of this year, international royalty feels were $6.3 million, and the for the first quarter of this year they were $5.5 million.

Your next question comes from the line of Nikhil Bhalla of FBR.

Thank you. Just, if you could remind us about G&A expense heading back towards the back half of the year. You may have made some comments earlier, I'm sorry. I missed that.

Yes so in the, so basically kind of going back, last year, we had talked about a $15 million cost reduction compared to last year's full-year GAAP SG&A expense.

Sure.

For this year, when you think about it for the full year, we'll probably come in at not quite that level, and there's really a couple reasons for that. I would think of about it, as somewhere around half of that level. But there's really a couple primary reasons for that, that I think are important.

So probably half of that variance is really driven by things that are kind of variable, cost for example, franchise sales commissions. Since franchise sales have exceeded, or we expect to exceed what we were thinking they would be when we gave that outlook, we are going to have higher commissions expense which will take SG&A higher. But obviously there will be revenues tied to that.

Some of the items related to the mark-to-market accounting for our non-qualified benefit plans was also factored in that. And there was a litigation settlement in the first quarter that was also impacting that. So if you look at that gap, that explains a big piece of it.

The other piece of it is transaction costs. Obviously, we weren't contemplating related the special dividend, as well as in our range we thought about some additional costs we are expecting to incur related to just business development opportunities. So that's kind of how we're thinking about it, and how we modelled it in our guidance.

So half off the $15 million that you guided to before, basically that's how we should think about it right?

That's how we're thinking about it in our guidance.

Okay. And is there --just, if we tried to weight it, is it more toward the fourth quarter or the third quarter, or is it more even across both?

I would say it's fairly -- fairly even.

Okay. All right. Thank you.

Okay.

(Operator Instructions)

And your next question comes from the line of Patrick Sholes of SunTrust Robinson, Humphrey.

Morning, Patrick.

I just need to follow up on Josh Attie's question concerning the RevPAR. It basically implies that in your guidance for August, that it's looking to be zero or no RevPAR growth. I know you don't have the greatest visibility with your bookings, but we are practically in August. Is there anything on your books that would indicate that it's any -- anywhere close to being zero at this point?

Yes. I mean, like Steve said, our booking window is really short, and for the first couple of months of the quarter, so for June and July, I mean, we've been on average, roughly in line with what we guided to. That 5% for the third quarter. But so, no, I don't think there's anything right now that we're seeing that ties to August that tells us it's going to be close to --.

Well, we don't have August at zero.

Exactly.

So you should think July we're not sure where we're ending, but we think July will be somewhere between 3% and 5%. So if you think about that, then you look at similar numbers for August.

Okay. Thank you.

And this ends today's Q&A session. I would like to hand the call back over to Mr. Steve Joyce, President and Chief Executive Officer for any closing remarks.

So thank you. Thank you for joining us on the call. Obviously, we're pleased with the results. And we look forward to reporting more to you in our next earnings call.

Thank you for your participation in today's conference. This concludes the presentation. You may disconnect, and have a wonderful day.