Choice Hotels International Inc (CHH) 2012 Q4 法說會逐字稿

Good morning and welcome to the Choice Hotels International fourth quarter 2012 and full-year 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 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 its Management's 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 important information about important risk factors affecting the Company that you should consider. Although we believe that these expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels or 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 fourth quarter 2012 and full-year 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 very much, good morning and welcome to Choice Hotels' fourth-quarter earnings conference call. With me this morning as always is Dave White, our Chief Financial Officer. We issued our press release last night and I am very pleased to report a strong fourth quarter and that 2012 was a record-breaking year for our Company in terms of operating performance. We established a new -- we established new Company records for the size of the domestic franchise system, total franchising revenues, franchising margins, operating cash flows, operating income and earnings per share. Leisure travel was up, and as consumers continue to place a premium on value, they continue to seek out our brands as their hotels of choice for vacations and business trips alike.

Our brands continue to attract guests and franchisees. During the fourth quarter we completed the largest conversion deal in our Company's history adding 46 former Jameson properties to our system primarily under the Quality Inn brand. During the summer, our central reservation system had record revenue results, development continued to come back as we posted a 67% and 42% increase in executed domestic franchise agreements in the fourth quarter and full year 2012 respectively. And we returned value to our shareholders with a significant $10.41 per share special dividend payout last summer.

We executed effectively against our strategic plans to drive reservations to choicehotels.com, to grow our market share, to enhance our equity brands performance to better meet the needs of our guest, to grow and expand into upscale and urban markets, to increase share of conversion opportunities to grow distribution brands and also to expand internationally. These achievements are reflected in our key financial results, which Dave will cover in more detail in a few minutes.

As I mentioned, development appears to have turned the corner in 2012 and is expected to continue expanding in 2013. We continue to be among the top converters in the industry. Our brands, especially Quality Inn and Econo Lodge, continue to attract strong interest from mid scale and economy hotel owners. This is due to them recognizing the value that we add to their properties through our great central reservation system and easy to use cloud-based property management system, as well as our complemented franchise services including opening an ongoing property support, training and other programs designed to maximize their return on investment.

Over the course of the year, we accomplished significant milestones in our ongoing expansion into the upscale segment with both Cambria Suites and the Ascend Hotel Collection. We executed 8 franchise contracts for the Cambria Suites brand in 2012 including prime sites in top travel markets such as Manhattan, West Palm Beach, Florida, Rockville, Maryland at our new global headquarters building, Phoenix, Arizona and Plano, Texas just north of Dallas. With 6 under construction and more coming, we fully expect to have 15 to 20 under construction regularly within the next 12 to 18 months. In December, we had a historic triple groundbreaking of three new Cambria Suites in the New York Metropolitan area including Times Square and Chelsea in Manhattan and downtown White Plains. We highlighted this event at the New York Stock Exchange where we rang the opening bell.

The Ascend Hotel Collection continued its expansion with new member properties in gateway cities in the United States and Canada and openings in Boston, Gettysburg, Pennsylvania, Miami, New York, New Orleans and Calgary, Canada. We executed 12 member agreements for the Ascend Hotel Collection in the United States during the fourth quarter, and at the end of 2012, the Collection stood at 72 properties worldwide.

In January of this year, we sealed a strategic marketing alliance with Bluegreen Vacations, a leader in the vacation ownership industry. This alliance will allow us to further expand Ascend into great resort destinations and will add 21 new Ascend Hotel Collection properties into top vacation destinations. The new alliance with Bluegreen marks the first time Choice Hotels has entered into such a relationship with a timeshare company. In turn, Bluegreen Vacations owners will be able to enjoy new benefits including the ability to exchange their timeshare interests for free nights at Ascend Hotel Collection properties or for Choice privilege points which they can use for free nights at Choice Hotels properties worldwide. The new types of hotels in markets we are expanding into through the Ascend Hotel Collection are dramatically changing the look of our portfolio with great new destinations to visit and where guests can redeem and use Choice Privileges reward points.

At the beginning of last year we kicked off Comfort brands redefined and redesigned program to revitalize Comfort Inn and Comfort Suites. This effort is strengthening and revitalizing the Comfort brands 2000 domestic hotels and will help drive long-term brand performance and guest loyalty. We have also made good progress on the termination strategy we began implementing last year for these brands to ensure our hotels consistently meet the standards our guests expect.

Sleep Inn achieved many significant milestones in 2012. Nearly 25% of the Sleep system is now part of the Designed to Dream brand enhancement program. Sleep Inn's renovated Designed to Dream properties are experiencing double-digit RevPAR growth. In 2012, executed deals of applications were notably up for the brand. Executed deals overall were up 145% and new construction applications were up 186% as compared to 2011.

We also advanced our international system growth in January. We executed a strategic agreement with Akkeron Hotels Group Limited, a well-known regional hotel operator in the United Kingdom. This agreement is expected to initially result in 9 Akkeron Hotels operating under Choice Hotels' franchise agreements in the UK, representing an almost 25% increase in our UK hotel portfolio and the addition of 611 rooms. With 34 properties in the Akkeron system, we expect to be able to convert many more as well. This agreement forms a critical part of Choice Hotels growth strategy to offer financial support to boost development in key international markets such as Europe.

We also continue to see positive steady improvement in a number of other key areas that drive our success including central reservations and technology and recent development results that helped drive EBITDA. In the area of reservations, our proprietary central reservation system channels, choicehotels.com website and our call centers, continue to provide our franchisees the highest average daily rates at the lowest cost. And for the first time ever, choicehotels.com contributed over $1 billion in worldwide revenue for the Choice system, up 14% from a year ago.

Across all CRS channels in 2012, CRS contribution was 34.3% increasing 200 basis points over 2011. In 2012, CRS experienced three record-setting days above $12 million, another first for the Company. Our mobile channel revenue was up 194% in 2012. Our tablet only revenue was up 235% in 2012. During the fourth quarter 2012, the mobile channel overall contributed over 10% of all online revenue for us. We believe that we are leading the industry in this area. June 2012 was our first ever $10 million plus mobile revenue month for Choice. Choice Privileges, our guest loyalty program, added over 2 million new members in 2012 and now has 16.5 million members, making it one of the fastest-growing rewards program in the industry. It continues to engage brand loyalists and drive hotel stays.

Looking ahead for the year, we are relatively optimistic about 2013 for both Choice and the industry. RevPAR growth is expected be driven more by rates in 2013, and as we continue to see employment improve, we will also see hotel room demand increase. How well our industry performs will also depend in part on Washington and how it handles the many critical issues on the table from taxes to the debt ceiling to easing travel restrictions to the US, to immigration reform and health care, all of which impact the economy and our business. Let me now turn over the call to Dave White to give you a little more detail. David?

Thanks, Steve. As you read in last night's press release, we reported adjusted diluted earnings per share of $0.45, which exceeded our previously published outlook of $0.40 per share by $0.05. Compared to our outlook, approximately $0.03 per share of the outperformance is a result of better than expected operating and EBITDA performance driven by both top line revenue growth and cost management. The remainder of the outperformance is primarily due to a lower effective income tax rate than forecasted.

Our domestic royalty revenues were slightly better than we had expected primarily on account of the size of the franchise system exceeding our expectations. The domestic system size grew by 1.6% over the past 12 months, which exceeded our forecast of approximately 1%. Our domestic system growth was highlighted by the conversion of 46 units previously branded under the Jameson Inn flag to our brands. While the conversion of these 46 hotels did not have a material impact on our fourth quarter royalties, since they did not open until late December, they are expected to generate annual royalties of approximately $2.5 million per year. This deal also highlights our ability to execute franchise agreements and rapidly convert hotels into an open operating property in our system, as these contracts were both executed and opened within the fourth quarter of 2012.

I would also highlight that the 1.6% growth of our domestic franchise system over the past year exceeded the net unit growth experience for the overall US lodging industry and has resulted in the continued expansion of our market share. Domestic RevPAR growth for the quarter was approximately 4.2%, which was in line with our guidance of 4%. As a reminder, our RevPAR results for the fourth quarter reflect our franchisees gross room revenue performance for the months of September, October and November. Our RevPAR growth was driven by a combination of a 120 basis point increase in system wide occupancy and a 2% increase in our average daily rates. While the pace of RevPAR has continued to moderate, we are optimistic that we will continue to see RevPAR gains in the mid single-digits percentage area in 2013.

Finally, our effective domestic royalty rate for the quarter increased 5 basis points from 4.31% for fourth quarter 2011 to 4.36%. We attribute this increase primarily due to the burn off of some of the steeper royalty rate discounts given in conjunction with our development incentive that was in place during 2010. As a result of our net unit growth, RevPAR gains and increased effective royalty rate, we achieved a 6% increase in domestic royalty fees for the fourth quarter which increased to $59.3 million from $56 million last year. Our initial and relicensing fee revenues for the quarter were also stronger than we expected primarily on account of an increased number of new and relicensed franchise agreements executed. During the fourth quarter of 2012, we executed 214 new domestic franchise sales contracts representing a 67% improvement compared to the same period of the prior year.

In addition, the number of relicensing and renewal contracts executed during the fourth quarter improved 10% as of these types of transactions continued to accelerate in our system. The percentage increase in new domestic sales and relicensing contracts are not fully reflected in our initial and relicensing fee revenues as initial fee and relicensing revenues increased only 6% to $5.3 million. This primarily reflects the delayed timing of revenue recognition related to contracts executed under our incentive programs. We expect these timing differences to reverse in future periods as the new franchised hotels open. Those two factors, combined with the results of our international royalty revenues and other revenue categories, resulted in our franchising revenues exceeding the expectations contemplated in our guidance by approximately $2.3 million for the quarter.

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. Our adjusted SG&A during the three months ended December 31, 2012 declined by nearly $2 million, or 6%, to $28 million from the same period of the prior year. As a result, the combination the top line revenue growth we achieved during the fourth quarter and disciplined cost management resulted in our adjusted franchising margins expanding from 56.8% in the fourth quarter of 2011 to 60.8% in the current quarter. Furthermore, as we mentioned in our release last night, our adjusted franchising margins for the full year 2012 increased to 64.3% from 61.5% in the prior year, which is the highest in the Company's history as a public Company.

Adjusted diluted EPS was $0.45 for the fourth quarter of 2012 compared to $0.46 per share for the fourth quarter of 2011. As a reminder, our fourth-quarter results reflect an increase in borrowing costs resulting in the special cash dividend paid on August 23 of $10.41 per share, or approximately $600 million in the aggregate to our shareholders. As a result of the financing transactions entered into and the end of the second quarter and the beginning of the third quarter 2012, our interest expense increased by approximately $7 million during the fourth quarter of 2012. Our full year cash flows provided by operating activities increased $26 million to $161 million, which is another record for the Company. We continue to utilize our operating cash flows to return value to shareholders through share repurchases and dividends.

In addition, as we have previously discussed, we are utilizing our operating cash flows to offer financing and investment support to qualified franchisees to incent development of Cambria Suites in key markets. During 2012, we saw an increased opportunity to support the growth of Cambria. And as a result, the Company advanced net of repayments approximately $41 million in mezzanine financing and sliver equity positions to bring Cambria to such markets as New York City, Plano, Texas and Phoenix, Arizona. As of the end of December 2012, we had approximately $68 million outstanding related to this program. Over the next several years, we expect to continue to opportunistically deploy capital to promote growth at Cambria Suites. However, the amount and timing of the investment in these programs will be dependent on market and other conditions.

Turning to our outlook for 2013, we currently expect first-quarter diluted earnings per share to be $0.26 and full year 2013 diluted earnings per share to range between $1.96 and $1.98 per share. We expect full year 2013 EBITDA to range between $215 million and $217 million. These figures are assume our domestic system wide RevPAR increase for the first quarter is approximately 5% and to range between 4.5% and 5.5% for full year 2013. We expect our net domestic unit growth for 2013 to increase by approximately 1.5% and our effective royalty rate to increase by approximately 3 basis points. We also assume an effective tax rate of approximately 28.5% for first quarter and 30.6% for full year 2013. All of our figures assume the existing share count, which was approximately 58.2 million shares as of the close of business yesterday. So overall, we are very pleased with our record-setting 2012 and are focused on keeping this momentum going in 2013. Now let me turn the call back over to Steve.

Thanks, Dave. Overall I'm very proud of what we achieved in 2012. We are positioned to build on our accomplishments in 2013, executed well against our strategic plan and drive excellent results for our Company and shareholders. We also are benefiting from strong RevPAR, we will continue to invest in programs designed to drive more reservations through our central channels, improve guest loyalty and improve the value of our brands in an effort to drive incremental business to our franchisees. I am optimistic about our long-term growth prospects as well as our ability to continue to meet our goals and commitments. All of our accomplishments last year and what we expect to achieve this year would not be possible without our loyal and committed owner operators and talented team members who work together to make every experience great for our guests. Now let me open up the call and take any questions you might have.

(Operator Instructions) Steven Kent, Goldman Sachs.

A couple of quick questions on the financing environment for new build in particular, where we've been seeing a little bit more activity on that front. And I wanted to hear your comments on that.

Yes, it's actually encouraging. It's still I would say a relatively slow recovery. But I think we mentioned on the last call back that the urban markets really had pretty good support from the lending institutions provided you had the right sponsorship. And what we're seeing that expand to is, and this -- you can see it in the Sleep numbers, that in the regional and smaller market lending, those banks are beginning to put capital into lending again. And so we've seen a number of our franchisees who are pretty much relationship-based developers that have small local or regional banks lending to them are starting to get financing for their projects. And then our larger franchisees are finding capital available on a national basis. You're seeing that in the numbers now, granted we're coming back from a low base, but I find it very encouraging and it seems to be steadily building. And every time we meet with the franchisees, the buzz around new development, the guys are getting ready to pull the trigger on deals is increasing. So while it's still not where we'd like it to be, it really -- '12 was really the year that it looked like it turned around and we're expecting '13 to continue along those lines and then hopefully heat up a little bit. It's coming back, I would still caution that it's coming back at a slower pace than desired, but it's definitely moving.

I know you mentioned that you put in some sliver equity in some of the urban locations, but do you need to do some of that for some of these other opportunities where maybe a regional or a local bank might be willing to allow a franchisee to develop, but just needs a little bit of help from you all?

Yes, we have not seen that. We've seen the deals that got done, they don't need us to step in. Now we're incenting for multiple deals, but those incentives tend to be more of a ramp in the fees than they do sliver equity. Almost all of our capital from here on is going to be aimed Inside the Beltway. There may be a couple minor exceptions, but we are not finding the need for our core brands to incent with injections of capital to grow. Cambria being the exception to that that Dave mentioned.

Okay, thanks, Steve, thanks, Dave.

Felicia Hendrix, Barclays.

Good morning, it's actually Sheila (inaudible) in for Felicia. I had a couple of questions, on the Jameson end deal, that sounds like a pretty good deal, so congrats on that. I'm wondering do you see a lot of opportunities out there for similar large transactions like that one or should we consider this more of a one off?

Well obviously they're not plentiful, but I will tell you that they are not unique either. And so one of our expectations in the numbers that we put out for this year that we'll find, I don't know if we're going to find them that large, but we'll find some multiple hotel opportunities, and we are looking at a couple as we speak. So I think that one -- that was a very large transaction that was -- it was fortunate that the owners were very interested in working with us and we very aggressively pursued it and helped them get that deal done. But we also believe that very likely we could have another one or two over the next 12 to 15 months. They may not be quite as large, but we think there's some multiple hotel deals to be had.

Okay and did I understand correctly, did you say that you are already including some of these multiple deals in your guidance for this year?

Well our expectation is in the guidance on unit growth, there'll be a couple of multiple unit deals in that.

Okay, and then on the royalty rate, I think David you mentioned it was improving because the incentives are burning off. Could you give us any color on what kind of royalty rates you're achieving on new contracts recently and also for the Jameson deal, if you can disclose that?

Yes, so on new deals we're still offering an incentive, I would say that it's a little more modest the we've offered over the past 12 months that does involve a royalty rate discount and some level of rebate of initial fees. Traditionally it's going to really depend on the specific facts and circumstances of a deal like where the particular hotel is in the particular market. But we can do in the first two years anywhere from 100 to 200 basis point off of the effective royalty rate, so that's how we think about it. On the Jameson transaction, if you look at the -- that revenue stream, we're looking at that to be about $2.5 million a year of royalties in the first year which is in line with that discount that I just talked about.

Okay, so that should also ramp up because it's being discounted in the initial years?

Yes, over time that ramps up. It's a long-term arrangement and the idea would be at some point those hotels probably transition of ownership from the financial sponsor to more natural owners and individual franchisees. And that's going to give us a good opportunity to drive that rate higher over time.

Okay, that's helpful. And if I could ask one more about your RevPAR performance in 2012. It looks like it decelerated each quarter throughout the year. And I was wondering if you guys could maybe explain that? Also your outlook for 2013 seems to be about 100 basis points below 2012, so if you could explain that, that would be helpful.

Well I think probably the biggest thing, you think about the deceleration of the growth rate in RevPAR is looking at the comps. You're going up against continually harder and harder comps. So if you think about where our overall full year '12 RevPAR finished up, we were a bit below the STR results for the segments where we operate. But not that far below those segment averages. And I think the thing you have to keep in mind when you think about Choice is our mix of product tends to skew less urban and more in the secondary markets. So that's really not any different than it's been in past years. Although I would say if you look at that over that discount over the past several years, we've actually closed the gap a fair amount.

So the discount to the STR trends three or four years ago were not at that same level of discount, we've been able to close that gap which I think is a real testament to I think Steve talked about in terms of what we're doing around brand strategy to drive performance for our franchisees and what we're doing around distribution to drive heads and beds. And so then we look at to next year, 2013's RevPAR we obviously provided a range of RevPAR outcomes that are 4.5% to 5.5% is a bit above our full year 2012 level. But we think very appropriate given what the prognosticators are showing for our segments, I think Smith Travel Research is somewhere in that, if you blended our room supply and their forecast for '13, it'd be somewhere between 4.5% and 4.75%. We're very comfortable at that level.

Okay, that's helpful. Thanks.

Robin Farley, UBS.

First is I heard your commentary in terms of financing for new supply, could you tell us your guidance for unit growth, how much of that is conversion versus new supply in terms of what you're expecting?

Yes, so for next year we're still expecting the majority of our gross openings to be conversions as opposed to new construction. It probably look fairly similar to where we were this year, so this year we opened close to 300 conversion hotels and about 30 new construction hotels. Next year will be order of magnitude in that same spot, a little bit higher on an overall basis, but same rough mix between conversion and new constructions for next year. There's obviously a lag between when folks are -- right now Steve talked about the financing markets feel better, banks aren't saying no from the get go to new construction, but it's going to -- takes a bit of time for that to translate to shovels in the ground and hotels coming out of the ground and ultimately opening. So I think as you think about 2014 and 2015, what we're starting to see in the credit markets is what will pay off in those years in terms of the new construction openings, and maybe a little bit sooner on more of the moderate tier new construction side around Sleep.

Yes, we're expecting new construction to continue to swing up in terms of percentage, but when the openings actually occur is probably a little more lagged. The other thing that you should keep in mind is that there have been a hold off in terms of really hotels at our level changing hands. We see that beginning to shift. When that shifts, that obviously provides opportunity for us to convert hotels. And then the other major portion that has not been in place for the last couple of years is the other brand companies bringing in new properties and terminating hotels from their portfolios that provides an opportunity for us. That had slowed down considerably based on the performance of a number of those brand companies in terms of new deals they did last year. We're expecting that to swing up as well. So we think because of those two reasons, the conversion markets going to be pretty strong '13 and maybe into '14.

Okay, great, that's helpful, thanks. And then my other question is, looking at your Q4 performance versus the Smith Travel data for your segments for September, October, November, it looked like it underperformed a little bit from the national averages and I wonder if you think there's anything particular driving that?

Yes, really consistent with the previous question, we have traditionally lagged Smith Travel Research performance when you take our room supply and weight it based upon the different segments where we operate. So that's very consistent with the Company's history. I think probably the highlight would be that if you look back three, four, five years ago, that spread between where our performance was on a RevPAR growth perspective and the industry was much wider, so we've actually been able to narrow the gap. And that's despite the fact that we tend to have hotel mix that skews less urban and more secondary markets. So it's really in absolute numbers the biggest differential I think is location of the hotel. And again, I would highlight that if you look at that gap over time, we've been able to narrow it a lot based upon our brand programs and our real focus on how we're delivering revenues and heads and beds to our franchisees system to improve their top line performance.

Okay, great. Thank you.

Nick Coppola, FBR (sic see).

Steve I wanted to get a sense of how the SBA lending activity and also the EB-5 loan programs are impacting your new hotel development and conversions?

Yes, the SBA financing and the expansion of that program and the increase in the levels has been instrumental in the new deals that are coming up. I don't know what the percentage is but that there's SBA participation in a number of our new construction type hotels and a number of the purchases. And so that has been a very positive aspect. EB-5 we are -- it keeps rolling along. It's got a lot of support and there's a lot of discussion about it. We've got that mixture, so those are going into mostly urban type projects. So we've got components of those in a number of the Cambria Hotels we're looking at. It's a very attractive financing program. It allows for leverage levels that you probably wouldn't get from a standardized financing issue at relatively attractive rates and terms.

And so we've got I would say several deals that we're looking at, EB-5 money in those deals and we expect for that to play a role in those. But those are primarily the urban type projects. Because of the way and the restrictions around how that financing can be utilized and how it needs to be approved, it has to be for a shovel ready project and you got to prove the jobs and all that stuff. But it's a very attractive source. We've got a number of our owners interested in it and we fully expect to see that be a relatively important part of the number of deals we're getting done.

That's great. And one follow-up question on -- if I look across all your different brands, it seems like in 2012 you pushed a lot of Comfort Inns and Comfort Suites which tend to be typically higher RevPAR types of properties. But you included a lot of Quality Inns which have generally lower RevPAR. How do you see your mix of deals and every thing else supporting all of this, the average RevPAR in the portfolio over the next few years?

Well obviously in the short term when we take out Comforts and a lot of our growth comes in quality conversions, that's going to -- from a Company standpoint, they're obviously all positive but from an absolute RevPAR standpoint, the mix will get a little -- will soften a little bit. Obviously the more Cambrias and Ascend we add, that pushes the other direction. And so our goal though is to lift the Comfort and Sleep systems significantly from where they were. So in the long term, we obviously believe that's going to be a very positive RevPAR impact. And then the movement into upscale will obviously have an even greater impact than that.

So I think you should view it similar to the way you've seen some of the other brand companies when they've gone back to reintroduce and remake a brand. Part of that includes the termination of hotels that simply don't fit the portfolio anymore. One of the benefits we've got is that we've got a brand to put them in and so roughly 40%- some of the hotels that we're taking out of Comfort, we're able to move into another one of our brands. That's partly what you see that growth. And so that's a very positive thing for us.

But then in the long term, and long term to us we're talking three to five years, we believe that that will move those brands into a significantly higher RevPAR level which will lift the overall system. And also quite frankly make it a much more attractive, more revenue intensive hotel for us as we -- as those hotels, the older hotels that served us well for 20 years or 30 years but maybe don't fit the profile of Comfort anymore, move in to another brand that they fit better with. But we replace that with a much higher revenue intensive Comfort Inn or Comfort Suites.

Sounds good. Thank you very much for the color.

Tim Wengerd, Deutsche Bank.

I'm wondering how much EBITDA is included in your guidance from the $68 million of sliver equity and mezzanine financing that you've made so far?

It would be relatively little in 2013 primarily because those investments, the sliver equity positions and the mezzanine investments for the most part those hotels are in the early stage of development and the early stage of construction. Trying to think, White Plains opened starting 2013, middle of the year. That's the only significant one that would be contemplated in our 2013 outlook. So it's a pretty de minimis amount for '13's EBITDA. It'll start to play a bigger impact in '14 and beyond.

Yes, and while there may be some impact, these hotels are -- they are sliver investments so they're not consolidated. So it'll be the net result of the overall activity of that venture.

Okay and then would you expect to be at the high end of the $20 million to $40 million investment range in 2013?

It's really going to depend upon the opportunities we see. So we intentionally put a range out there to provide that perspective, that it's going to depend upon how things play out, what the opportunities are, what the credit markets look like, can we get the right developers, which is critical, in the right markets, which is also the critical piece of it. So I don't want to tie us down anymore to that -- beyond that range. It's obviously been pretty volatile for us and I think that when we started this program back in '08, the desire was to put out $20 million to $40 million per year and here we are five years later and in the aggregate we've put out $70 million because those are the -- that's what the cards that were dealt to us in terms of the opportunities. But frankly I think we'd probably be happier if we can get more out there and get more development going for these brands. But I don't want to pin us down anywhere -- anymore narrowly than the range we put out there.

Yes and I think the way you ought to think about it is, we're very disciplined on the [rider] so the deals have to work. And at the same time though we're hoping that the higher range and in addition to that, we're already seeing in some instances opportunities to recycle capital that we put out, so it's not a single door, it's more of a flow in and full out. And in a lot of these deals that we're doing, we are anticipating relatively short ramps which means refinancing will probably be in the earlier years of their existence. Which means that in a lot of cases the owners, while they want us to participate and we're happy to do that, they'd also like us to at the end be their franchisor, not their partner or lender. And so we view it as -- we view all this as upside.

One of the things that we've made sure all along is that we have adequate capital to do not only the investments we need for Cambria but other activities that we're looking at and keep all of our options open and that's where we are. And we're hoping in '13 that if things keep going like '12 that we would be at the higher end of it. And we're working a number of deals that gives us some confidence that if things went right, maybe it would be. But it really is a deal by deal basis. And also what's going on in the markets and the opportunities and partners we're dealing with.

Okay, thanks. And then one last question on CapEx, what do you expect CapEx to be this year?

So for CapEx, we think about the standard PP&E part of CapEx, traditionally we're somewhere around $12 million to $15 million for maintenance CapEx. This year, we as Steve mentioned earlier, we're relocating to a new headquarters buildings, so it will be about $10 million on top of that. Of which, that'll go through the investing activity section of the cash flow statement on a net -- actually it'll be more like $20 million, but we'll get $10 million back from landlord incentives which will actually flow up through operating cash flows. So the net/net of that is about $10 million more than our normal run rate which is $12 million to $15 million per year.

Okay, perfect. Thank you.

Andrew Didora, Bank of America.

Dave, wanted to get your thoughts on the balance sheet here and your use of free cash flow going forward. How do you prioritize your cash between delevering dividends and buybacks?

So I think as we have consistently said, return to shareholders is always our top priority. And you see that reflected in our dividend policy, and the dividend that we gave this summer in our approach to buy back. We -- in the situation for the dollars that we borrowed this year, are focused on paying those down. But as you know, we're a very efficient cash machine and so deleveraging occurs rapidly in this Company. And so we want to continue to not only make sure that we've got capacity to do whatever we want, we have some obligations in terms of the debt structures we put in place. But we are always focused first and foremost on return of value to shareholder whether that be in the form of dividends, whether it be in the form of share repurchase or some other vehicle that we come up with depending upon what happens long term with taxes. And so that's always number one. We have some obligations, but given this Company's cash flow generation proclivities, that's not much of an issue for us and so we continue to look for other opportunities to grow the value of the Company or to return it.

That's helpful. One quick follow up, where do you see your target leverage levels?

Well we've said we're very comfortable at 3 to 3.5. But I think given the stability of our cash flows, if the right opportunity came along we could do more, we've lived at a lot less. We were almost at from zero before we did the dividend. And so we're in a pretty attractive position of being able to lever up fairly easily with a very, very stable set of cash flows that gives us comfort that we could go at various levels. I think our general target is probably in that 3 to 3.5 range. But it's simply -- I would say that it's almost more dependent on the opportunities we've got in front of us.

Okay, that's great. Thank you.

David Loeb, Baird.

David can you go back to Jameson and talk a little bit more about the economics of that transaction? The $2.5 million that should start in 2013?

Yes, yes, that's our annual estimate for 2013. Basically the economics were, 46 hotels joined the system predominately as Quality Inns with a couple of Comforts as well. And essentially we -- similar to what we do in our normal domestic franchising business for the conversion brands, we provided a level of forgivable promissory note, it's a 10-year deal so basically we provided some upfront cash which they --we expect them to use to do renovations on the properties and implement the property improvement plans to get the hotels where they need to be to fit with brand standards. And then over that 10-year period the forgivable prom note will burn off.

What was that level of key money? What was the capital amount?

It was just under $6 million. And essentially the way to think about that is in addition to the $2.5 million of royalties, we'll get an additional $2.5 million of system fees. And so $5 million of cash flows per year, so relatively short payback against that $6 million investment. And also a longer contract term than we would traditionally get.

Very high return on that.

Yes.

And could you talk a little bit about the competitive process about how Aimbridge decides which ones would go to your system and which ones would go to Wyndham?

Yes I think that they went through a fairly aggressive look at their portfolio to try to figure out how do they optimize it. And I think the other thing that was critical in that process was looking where we had impact with other hotels, obviously we're very sensitive to our franchisees and impact. So there was some limitations in terms of the number of hotels that we could add to our system because of an impact situation given where these hotels were in their markets. And so what we got down to was the 46 which ended up in our portfolio, Colony Capital and Aimbridge got very comfortable with what we could do with those assets in terms of getting the physical product where it needed to be to fit our brands and getting their -- we expect this to be very positive to them.

That $2.5 million for example, that just assumes they operate at the same level they were operating under as Jameson's. We fully expect and fully hope that we'll actually be able to outperform for those hotel owners the levels they were getting under the old brand in which case we would have more upside on both the royalty and the system fee. But they went through a competitive process where they compared the opportunity for each hotel, what (inaudible) were available in each market and competed against us and other lodging companies out there. I don't know Steve if you want to add to that?

No, I think that's right. And obviously we -- given our distribution, the impact issue played a role, but we're very happy with what we got.

That's great. Thank you.

(Operator Instructions) Patrick Scholes, SunTrust.

Can you give me a quick update on where you stand with the Comfort Inn refresh, how far along is that? And then I think you originally said you may lose up to 10% of those hotels. Of that 10%, how much are you retaining in some of your other brands? Thank you.

You're welcome. So let's see, so we are very pleased because we're seeing early results in terms of guest satisfaction growth in Comfort with really mostly programmatic stuff as opposed to the big investment which is coming. We're hoping order of magnitude to have something close to 10% to 15% of the system done within the next year. On the terms side, we have dealt with a good number of the hotels that are going to be dealt with, and I would say the number that we quoted earlier, the 40%- some of retention is probably a good number to go with.

And one of the pleasant surprises is, which isn't totally a surprise but what is nice to always see is, how aggressive the owners are willing to be in terms of their investment to try to retain the flag if they think it's at risk to them. And so we've seen some hotels that we actually thought would need to be removed from the system actually obtain a level of performance and of positioning based on some pretty extensive capital investment that allows them to stay in, which is always encouraging because the purpose of the program isn't necessarily to terminate hotels, is to make sure they fit the expectations with guest.

So net/net though I would still assume that the numbers that we put out there in the midterm are probably what we're going to work with. But we're very encouraged with the results so far and we are looking at several different approaches to accelerate this program, so that we are talking about net/net a two to three year program versus a five to seven. Which if you look historically has happened with some of the other brands. And we're getting really good support from the franchise community and I think the timing is good because people are sensing wind at their back. And so we're hoping that not only can we do the numbers that we talked but that that will begin to accelerate as we get more into the program.

Thank you.

Thank you. I would now like to turn the call over to Steve Joyce for closing remarks.

So as I mentioned earlier really we view '12 as a watershed year for us, lot of records for the Company, very positive trends moving into '13. We think we're working on the right things to grow this Company in a way that's appropriate but also exciting. We are looking at lots of other opportunities as always. We have a very strong balance sheet, we are very pleased with the dividend that we were able provide and the market response to that dividend and are looking forward to a very strong '13 and sharing that with you as we go forward on the calls. Thank you very much.

Thank you for joining today's conference. This concludes the presentation, you may disconnect your lines. Thank you for joining. Have a lovely day.