Choice Hotels International Inc (CHH) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotels International first-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, today's call is being recorded.

During the course of this conference call, certain predictors or forward-looking statements will be used to assist you in understanding the Company and its results, which constitute forward looking statements under the Safe Harbor Provisions of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as choice, or its management's beliefs, expects, anticipates, foresees, forecasts, estimates, or other words or phrases of similar import.

Such statements are subject to risks and uncertainties. This 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, 2013, and other SEC filings for information about important risk factors affecting the Company that you should consider. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievement.

We caution you, do not place undue reliance on forward-looking statements. We undertake no obligation to publicly update our forward-looking statements to reflect subsequent events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as a part of our first-quarter 2014 earnings press release, which is posted on our website at choicehotels.com under the investor information section.

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

Thank you very much. Good morning. Welcome to the Choice Hotels earnings conference call and with me, as always, is Dave White, our Chief Financial Officer.

This morning, we are going to update you on our performance for the first quarter of 2014 and then our outlook for the remainder of the year. To say the least, the results this quarter have exceeded our financial expectations. Several factors contributed to the continued growth of our lodging business's quarter. Franchising revenues increased 6%, driven by the growth of domestic royalty fees, which increased 5% as a result of increases in both the size of the domestic franchise system as well as RevPAR.

We also experienced strong growth in procurement services revenue driven by a combination of growth from our strategic alliance with Bluegreen and from better throughput from our endorsed vendor program.

Finally, we continue to execute solid cost management discipline as demonstrated in a 6% decrease in our franchising selling, general and administrative expenses. As a result of these factors, our earnings before interest, taxes, depreciation, and amortization from our core hotel franchising business increased 15% to $40 million for the first quarter of 2014 from $35 million in last year's first quarter.

And our franchising margins increased from 55% to 60%. Diluted earnings per share increased 23% compared to the same period of 2013. Diluted earnings per share from continuing operations, which excludes results from the gain on the sale of our Company-owned hotels, which we had previously announced that sale, increased 12%. Based on these results, we are really quite pleased with the direction our business is headed.

Now let me give you some insight about an area that we are particularly excited about -- that is our RevPAR performance. Our domestic system-wide revenue per available room increased 5.6% in the first quarter of 2014, as occupancy and average daily rates increased 200 basis points and 1.1%, respectively, over the first quarter of 2013.

Looking ahead, we expect to see greater demand for hotel rooms as the economy continues to improve and consumers gain more confidence. This is translating into improved RevPAR performance as more people travel. Similar to what we have been seeing across the industry, Choice saw its highest RevPAR gains in the Pacific and Mountain regions in the first quarter.

The key third-quarter prognosticators are predicting an improved outlook for 2014, projecting industry RevPAR to improve from 5.3% to 6.6% for the full year. Because of our strong RevPAR performance and the optimistic industry projections, we are increasing our RevPAR guidance 100 basis points at the midpoint to a range between 4.5% and 5.5%.

Moving on to development. We executed 59 new domestic hotel franchise contracts for the first quarter. It is particularly promising that many of these franchise contracts are new construction agreements. New construction activity is picking up as the financing environment continues to improve.

We have nearly doubled our new construction franchise agreements this quarter, achieving 19 new construction agreements compared to 10 new construction agreements in the first quarter of last year.

Based on both level of deal activity and signs that the economy is improving, we are expecting that our full-year franchise contracts will exceed 2013 levels.

Turning to distribution, we continue to see our customers competently changing the way they shop for and book travel, and we are continuously evolving right along with them. The number of reservations made through our central reservation system has increased 42.6% in the first quarter, up 320 basis points over the same time last year.

Choicehotels.com contributions to the system -- revenue is up 7% for the first quarter, assisted by improved conversion rates due to site enhancements to the website and mobile booking platforms. Direct online reservations now represent nearly half of our revenue generated by our central reservation system. Bookings via our mobile apps continue to grow at a significant pace and yielded an increase of 44% for the quarter compared to the same time last year.

We launched an online verification system for choicehotels.com. These modifications to the website will provide business travelers with an added layer of authenticity regarding reviews of Choice Hotels properties. Unlike other review sites, guests posting reviews on choicehotels.com will be asked to provide their booking confirmation number to verify their stay at the hotels and thereby provide potential guests with the added confidence they need to make their booking decisions in the short term.

Since these systems have been launched, we have noticed that the reviews are converting lookers into bookers at a much higher rate. We continue to leverage our competencies in distribution and technology and provide innovative tools for our franchisees so that they can reach more customers.

Changing gears, let me give you a brief update on SkyTouch Technology. SkyTouch is focused on developing, marketing, and selling cutting-edge cloud-based technology products for the hotel industry. SkyTouch boasts a large, widely distributed cloud-based property management system. The leaders of that separate division continue to make progress on the sales front with SkyTouch. They continued during the quarter to add contracts with SkyTouch customers, mostly with independent hotel owners, and to bring them online.

Based on results so far, the strong interest received as well as the pipeline that the division leaders are developing, we remain optimistic about the revenue outlook, which is unchanged from the last quarter for that division. SkyTouch recently became an approved vendor for a hotel chain which has over 1000 members and we expect to begin signing members next quarter. We are pleased with the progress of SkyTouch and are excited about its potential impact on Choice's future growth.

Overall, we are quite pleased with the results from this quarter. We saw increases in earnings per share, franchising revenues, domestic royalty fees, and RevPAR, which helped deliver strong results for our franchisees.

So let me turn it over to Dave White, who is going to share more detail about our financial results. Dave?

Thanks, Steve. As you read in this morning's press release, we reported diluted earnings per share of $0.32, which exceeded our previously published outlook for the quarter by $0.03 per share and represented a 23% increase in the prior year. Excluding the sale of two of our three Company-owned MainStay Suites hotels during the quarter, our earnings per share increased 12% from the prior year.

Our earnings per share outperformance of the quarter is attributable to a combination of better-than-expected performance for our franchising business and lower-than-anticipated spending in our SkyTouch division. EBITDA from franchising activities for the quarter increased 15% from the same period the prior year due to a 6% increase in franchising revenues and a more than 500 basis point increase in our franchising margins.

The increase in our franchising revenues for the quarter was driven primarily by strong domestic RevPAR performance and the growth of our procurement services and other revenues.

In addition to exceeding our expectations at the franchising revenue line, our franchising SG&A expenses for the quarter were less than we had anticipated as a result of a delay in the timing of certain expenses that we now expect will occur later this year.

Our domestic royalty revenues increased by approximately 5% to $46.5 million due to a combination of increases in RevPAR on our system side, partially offset by a four basis point decline in our effective royalty rates. Domestic RevPAR growth for the quarter was approximately 5.6%, which exceeded our guidance of approximately 4%.

As a reminder, our RevPAR results for the first quarter reflect our franchisees' gross room revenue performance for the months of December, January, and February.

Our RevPAR growth was driven by a combination of a 200 basis point increase in system-wide occupancy and a 1.1% increase in our average daily rates. We attribute the increase in occupancy rates and our overall RevPAR improvement to increased leisure travel, which we believe reflects the improving US economy as well as declining unemployment rates.

As Steve mentioned, as a result of these trends and our first quarter RevPAR performance, we are increasing our full-year RevPAR guidance at the midpoint by 100 basis points to a range of between 4.5% and 5.5%.

On the supply front, we were able to grow the number of hotels operating in our domestic franchise system by approximately 2.4% in the past 12 months. Our domestic unit growth over the past year has been driven primarily by our Ascend Hotel Collection and Quality Inn brands, which increased -- have increased 64% and 6%, respectively.

We continue to execute our strategy to strengthen and enhance the Comfort Brand family by improving hotels through property improvement plans or terminating hotels that underperform in their market or are not meeting high brand and guest satisfaction standards. We have raised the expectations for Comfort Hotels and we expect that to translate into meaningful RevPAR improvement for the brand over the next several years.

As a result of this strategy, we terminated 97 Comfort hotels from our domestic system during the 12 months ended March 31, 2014. However, through our repositioning strategy, we were able to reposition 33 of these terminated Comfort hotels to other appropriate brands in our portfolio, therefore preserving the related franchise fees.

In addition to our strategy to terminate underperforming Comfort hotels, we have embarked on an aggressive new construction development program to replace terminated hotels in high-performing markets with new construction Comfort branded hotels. As Steve mentioned, the fundamentals that drive new hotel construction are improving as both the RevPAR and financing environments continue to get better.

In fact, our new construction franchise agreement executions have now increased year over year in 10 of the last 11 quarters. Consequently, we believe the timing is right to invest in our new construction development team to take advantage of the improvement in the new construction environment. We believe the industry is in the early stages of growth, which we expect to accelerate over the next several years.

As a result of the strategy to terminate underperforming Comfort hotels, we have adjusted our unit growth guidance from approximately 2% to a range of 1% to 2% to reflect the possibility that existing Comfort owners will be unable or unwilling to meet our new, more stringent requirements for maintaining the flag on their hotel.

In addition, our new full-year outlook reflects additional SG&A investments in our new construction development team, which we believe will drive new construction hotel development, particularly for Comfort and Cambria brands, over the next several years.

Now let's turn to our initial and relicensing fee results. During the first quarter of 2014, we executed 59 new domestic franchise contracts compared to 83 in 2013. Keep in mind that during that first quarter of 2013, we executed a multiunit transaction related to the affiliation of 21 Bluegreen Vacation Club Resorts with our Ascend Hotel Collection.

Excluding that transaction, domestic franchise agreements executed for first quarter of 2014 declined by three contracts from the prior year. The decline in contracts is reflective of more robust sales activity than anticipated in the fourth quarter of 2013 and we do not view it as indicative of a slowdown of new franchise agreement growth.

In fact, as Steve mentioned, we continue to expect our 2014 franchise sales activity levels to exceed the prior year.

Our relicensing and renewal activity continues to improve. After improving 22% for full-year 2013, the number of relicensing and renewal contracts during the first quarter improved 20% over the same period of the prior year and is another positive indicator of the improved hotel transaction and lending environment.

Turning to the cost side of the business, our franchising SG&A costs for the first quarter, which exclude our SkyTouch division, declined by a proximally $1.5 million and were less than we had anticipated. As a result, the combination of the topline revenue growth we achieved during the first quarter and continued disciplined cost management resulted in our franchising margins expanding from 55.1% in the first quarter of 2013 to 60.2% in the current quarter.

SG&A expenses attributable to our SkyTouch Technology division totaled $3.3 million during the first quarter compared to $2.2 million in the prior year and were slightly lower than our expectations.

During the first quarter, we completed the sale of two of our three Company-owned MainStay Suites Hotels, which generated approximately $8.7 million in net pretax proceeds to the Company and resulted in a $2.6 million or $0.03 per share gain.

We are pleased that the new owners of these hotels chose to maintain their affiliation with our MainStay Suites brand and signed new franchise agreements. We expect to sell our remaining Company-owned MainStay Suites hotel in the second quarter, which will result in net tax proceeds of approximately $3 million.

Now I will turn to our outlook for the remainder of 2014. As always, our outlook assumes no share repurchases under the Company share repurchase program and the effective tax rate for continuing operations is expected to be 30.8% for second-quarter and full-year 2014.

Our franchising activity guidance assumes that our RevPAR will increase approximately 5% for the second quarter and 4.5% to 5.5% for full-year 2014. Our net domestic unit growth will increase between 1% and 2% and our effective royalty rate will decline by three basis points for the full year.

Based on these assumptions, we are maintaining our previous guidance for full-year 2014 EBITDA from franchising activities of a range between $227 million and $232 million. We are maintaining our previous guidance despite increasing the midpoint of our RevPAR guidance by 100 basis points as we anticipate slightly lower unit growth and increased SG&A costs related to our Comfort rejuvenation strategy, which I previously mentioned.

In addition, we expect a portion of our SG&A expenses initially anticipated to be incurred in the first quarter to now be reflected later this year. Despite our increased investment in our Comfort and Cambria development resources, we expect our full-year franchising SG&A expenses to increase in the low single-digit percentage range from 2013 levels.

With regard to SkyTouch, we are projecting reductions in EBITDA for full-year 2014 of approximately $20 million compared to $11.5 million in 2013 and our previous guidance of $21.5 million. Our projections assume that our SkyTouch division executes third-party contracts with annualized revenue ranging between $4 million and $6 million, resulting in realized revenues for 2014 totaling approximately $2 million.

SG&A expenses are forecasted to be approximately $22 million related to investment in business development, sales and marketing, and continued software development expenditures related to the division's cloud-based hotel operating system products and services.

Considering our franchising, SkyTouch, and owned-hotel operating assumptions, we expect our second-quarter 2014 diluted earnings per share to be $0.48, our full-year 2014 diluted earnings per share to range between $1.87 and $1.93, and our EBITDA for full-year 2014 to range between $207 million and $212 million.

We are very pleased with our first-quarter performance and believe we are well positioned to continue our strong momentum for the remainder of the year. In addition, we are excited by our opportunities to accelerate the improvement of the Comfort brand portfolio and fuel the growth of Cambria Suites.

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

Thanks, Dave. So summarizing, we are off to a very strong start for 2014. We are optimistic because our results and because economic indicators continue to trend in the right direction. Consumers are more upbeat about future job growth and the overall economy as reported by the Conference Board's Consumer Confidence Index for March 2014. April results for University of Michigan's Consumer Sentiment Index also showed consumer sentiment rising to its highest level since July of last year.

Overall, these reports show that consumers are expecting the economy to continue improving and rising expectations suggests the economy may pick up some more momentum over the next few months.

With our strong lodging results in the first quarter and an improving development cycle and some cooperation finally from the economy, we are very optimistic about the future for Choice and for our industry.

So with that, let me open up the line to any questions you might have.

(Operator Instructions) Steven Kent, Goldman Sachs.

Two questions. First, just on the ability to get financing into build, could you just give us a little bit more color on that? And then separately, Steve, I appreciate your comments about the economy on your consumer, but as you've noted before, your consumer has a fairly short window of when they decide to use your hotels and reserve them. So can you just give us some other indicators that you are looking at that gives you a little bit more confidence to go out six to nine months?

Yes, good morning. So, on the -- let me start with the last one, first. So, on the consumer part, there's several things that we look at. We are very sensitive to employment and so as a result, we got -- when employment sank earlier during the crisis, we did definitely see that impact in our business. A lot of those folks were our customers.

As we have seen employment improve, -- and I am the first one to say it hasn't moved that much yet, but it really starts -- it is starting to feel like it is. That is going to give us an exaggerated impact based on those folks coming back with jobs and then them beginning to travel. So we are optimistic with that.

And then the other is, part of the optimism is driven by the supply and demand balance in the business, which is still really good, and even with the amounts of construction starts, you are still talking about historically 50% levels of what we've typically added. So -- and they all tend to be upscale. So as a result, we are pretty confident in our space that this business is going to be really strong, not just for this year, but for the next several years.

And as the economy begins to improve, housing is generally improving, although there was a drop in mortgage apps last month. But we are still seeing -- and we have several contacts with the housing industry -- they are still pretty confident about where things are moving. So we like that a lot.

On the develop and financing front, you are just seeing continued improvement quarter by quarter, month on month. So you have got, now, local and regional lenders beginning to call our franchisees saying hey, we finally allocated dollars to new development, are you ready to start a project. You've got the CMBS market coming back, albeit slowly, but it is coming back and it is starting to have an impact on the market. And you are seeing level -- leverage levels increase.

Originally, we were looking at 50%. Now for the average developers that's moving up 65%, 70%, and for the strong sponsor projects, you are seeing even more than that. So that is actually very encouraging.

Which is in part why we are moving now to bring more resources to bear, because we think the timing is right for the next couple of years. And we believe that that is going to help us move both Comfort and Cambria, in particular. And we are also seeing good activity in Suites, by the way.

So that financing is coming back. It is affecting our core franchisee, who typically are using more of a local, maybe regional, lender. But then our larger franchisee are seeing aggressive national lending programs available to them now. And so that is all coming back. The progress we were making was mostly urban, but you can quickly see it spreading well beyond urban into secondary and tertiary markets. So it is kind of exciting.

It looks like it is finally coming around. But you have got to love where we are in terms of supply, demand. And by the time you actually start adding any real inventory, you are talking now late into 2015, 2016, 2017. So not only do we feel really good about 2014, we are really excited about what we see in the next several years. That is why you see us making the investments we are making. That is why you see us moving aggressively on Comfort the way we are.

Thank you.

Shaun Kelley, Bank of America.

Maybe to follow up on that last question. Can you just remind us of the timeline to actually construct one of the -- one of your average hotels, just to get a sense of how long? If you guys see a ramp-up, let's say, middle of this year in construction activity, how long it would actually take for some of that supply to come online?

Well, the timeline has been shrinking considerably, because it used to be five years or not. So it is actually great now we are moving back into traditional cycles. And what you are seeing is it is about a 2 to 2 1/2 year total cycle for our hotels.

You have got -- construction period is typically nine months to a year for a bigger project. For the Cambrias, which can be high rise, obviously you are looking at longer periods -- about 18 months. But in general, our properties are going up in nine months to a year. There's usually a year or so planning, development, zoning. So that gets you into that 2 to 2 1/2. It has been really elongated because of the issue around financing and concern about when the right time to go.

But I went to the [HATO] Conference and there were 1200 attendees, which was a record. And 68% of them said they were going to start a project this year. So, I don't know about you, but that is a pretty good sign to me that people are feeling optimistic and now is the time for all of these projects that they've been sitting on and we have been talking to them about for 2 to 3 years; we think they are starting to move.

And then the aggressive incentive plan we are putting out for Comfort, we think is going to drive incremental deals for us and we are able to -- we will begin replacing those products that we're taking out with better, higher revenue intensity-type product.

And so, as we see it, that market is -- the new construction market is really finally coming around, which we see as good for us on several fronts. It is good for the new construction that we'll get. And it is good because when the other brand companies began to get new construction projects and they begin opening them, they begin to terminate properties from their system, which drives conversions for us. So right now, the way we are looking at it, it is all good.

That is actually great color. And my second question would just be on where does that leave you on conversion activity? Because, obviously, if construction is up and yet your total number of contracts was kind of flattish, and I think you did say overall for the year you still expected to be up. What are you seeing on M&A and what that means for brand conversions at this point in the cycle?

Yes, we definitely think we are going to be up. So, we might be not up as much as we thought because we are going to be a little more aggressive on the terminations, but 1% to 2% is where we are.

Now on the conversions, I noticed there was some recent information put out by some of the experts about while the new construction comes up, conversions go down. That is not true for us. When we do record new construction, we do record conversion. And as a matter fact, the part of the market that we have not seen yet is the other brand companies beginning to push properties out. So that remains to be another opportunity for us to increase our conversion level activity.

It is pretty robust, though. It is -- the conversion activity is getting back to peak levels, but we still see upside to that and we got some other interesting players, or plays that we didn't have before, Ascend being the most notable of it. Because that is a wide open territory for us. It is our fastest-growing collection of hotels. And also one of our highest-performing, both from a guest standpoint and a revenue contribution from us.

So as we look at it, the great thing is conversions are going to continue to go strong and maybe even improve and then new construction is swinging up. So we are pretty bullish about that environment for a while.

Shaun, just to add one comment to Steve's thoughts -- if you look at last year's first quarter pipeline, we had an [executed] not yet open exhibit. We had 163 conversion hotels a year ago. This year, we are reporting 158, but keep in mind that last year's figure had about 24 hotels for Ascend and that related to that multiunit transaction, which was not the situation for this year's first quarter. So if you factor that out, then actually we have got a pretty nice uptick in the conversion pipeline year over year.

Thanks for that, Dave. My last question, then, would be on SkyTouch. I think you mentioned in the prepared remarks that independent contract -- independent hotels were beginning to sign onboard. Where do you feel like you are right now in terms of traction with some of the branded hotels? Where are they maybe in testing and what is it going to take one or two of those bigger, maybe, multiunit-type contracts signed?

As I said, we did sign one, where we are providing to a large collection of hotels. The answer to what the other is the pipeline is very strong. It includes a significant number of Tier 1 and Tier 2 brand companies. Tier 1 being, obviously, the largest ones. There are several conversations going on that we think are very hopeful and we are working hard to try to bring those to close. So we think we are going to have some pretty good news to share with you in the next couple quarters. And the reaction has been very good.

The sales resources we put out to work on these projects have been significantly increased. That is all in the numbers, though. And so we are feeling pretty good about where that pipeline is, the types of folks that we are talking to, the ability of the folks on that team to not only bring them the contract, but bring them on board. And so we feel like that part is testing improvement.

As we move into these larger collections, some of them will require some customization, which may take a little bit more time before they are actually up and online. But we are ready and prepared to do that and we think we have got a pretty hot product that lots of people are interested in. And if you will follow this part of the industry, there is a lot of buzz about what we are doing and a lot of interest. So, we feel good about that.

Great. Thanks, guys.

Felicia Hendrix, Barclays.

Good morning. Steve, you guys sound very optimistic about your business, obviously. Just wondering, then, with your RevPAR growth guidance for the year, it just seems if you flow it through, it seems to imply some deceleration in the rest of the year. And I would think that, given the easy comps in the second half of the year, we wouldn't have seen that. So I am sure there is a reason for that. Can you just help us understand?

Yes, you do see, obviously we're at 5.6% for the first quarter. The first quarter is obviously our weakest quarter from a seasonality perspective. So in terms of how that quarter factors into the balance of the year, it's by far the weakest. That is the primary thing I think you are seeing there is the seasonality of the business.

Right. But to get to the full-year growth of 4.5% to 5.5%, we would see RevPAR decelerate through the rest of the year. That's what I was wondering.

Well, at the top end of the range, you are pretty close to that 5.6%, so from our perspective, at the top end of the guidance range, it is kind of even growth rate through the (multiple speakers)

Even, okay. That's fair. I was looking at midpoint. Okay, great, great, but there is no specific reason for that. So that's great. Then, Dave, while we have you, your cash balance definitely increasing nicely. Just wondering if you could tell us how you view your regular dividend in context of that increasing cash balance and if there is any opportunity to increase that.

Yes. Look, we are in a really good position, an improving position, on the balance sheet side of things. I think you pointed out a great point on cash side. One thing to keep in mind, related to that cash, is that, substantially, all of it is held offshore. So that is considered permanently invested in our international structure; absent of that were repatriations.

So I don't think the international cash balance is necessarily something that I would link to our -- directly to our dividend policy.

But we do think there is going to be some opportunities to use that cash in the business. Obviously, we could use it if we got the right opportunity internationally for some type of acquisition. We think there's also some potential to use it to help us drive development even in the US market through our credit program we talked about with Cambria Suites before. So those are the types of things we are focused on.

I think, big picture, we do take a lot of pride in our long-term capital allocation approach and being great stewards of that capital. And over time, return in excess capital to the shareholders, either through share repurchases or dividends. So we are pretty regularly looking at all of those levers and balancing them against the opportunity to deploy capital into the business.

I think as Steve talked about, we feel really good about where things are heading over the next 18 months on the new construction side of things. You will probably see us use some of that capital, as we've talked about in the past, to drive particularly the growth of Cambria. And to a degree, Comfort. Although, I think, predominately, the capital we put out on the development side will be noticeably related to the Cambria brand.

So I wouldn't link the cash directly to the dividend policy, but I think it is safe to say that we are -- we continue to have the same basic philosophy around capital allocation, which is overextended periods of time, do the right thing with that, and oftentimes that is going to involve share repurchases and dividends. But balanced with putting the capital to work in the business when that makes sense.

Yes, and I would just remind everybody on the call that return the capital to our shareholders is our number one priority. It has always been that way and it always will be.

Great. And, Steve, last question -- earlier you gave us really good color on why you were optimistic on your consumer. It seems like you were talking a lot, though, about the business-related consumer part of your portfolio. Wondering what you are seeing from the leisure consumer. I'm especially curious because there are other segments of our coverage universe that are facing challenges from that consumer in particular. So just wondering what you are seeing there.

Yes, no, the reason we focus on the business is because leisure has been really strong for us. So, that is our bread and butter. It continues to get better and better. We are very optimistic about the leisure side. So, particularly, with the employment picture improving, we just think that is going to put -- when our folks go back to work, they start traveling again. So we are disproportionately affected by downturns in employment and we are disproportionately benefited by those upturns.

Okay, great. Thank you.

Robin Farley, UBS.

I wanted to get some clarification on the SkyTouch. You mentioned third-party contracts that you are on a run rate of $4 million to $6 million. And that is, I guess, unchanged from Q4. So I am just curious if it moved within the range or if it was closer to $4 million last quarter, now it is closer to $6 million.

And also is there anything in there -- you mentioned that you signed a 1000-member hotel chain agreement and that you haven't started signing with the individual hotels yet, but is there anything from that in your $4 million to $6 million expected run rate?

Yes. So Robin, our overall view of the opportunity, the revenue opportunity for SkyTouch for the year, how we would consider it unchanged from the outlook we provided back at the end of February with our fourth-quarter release. So, obviously, the outlook would contemplate -- the existing outlook that we just published this morning would contemplate all the current facts and our current view of the pipeline, including this chain that Steve mentioned.

And you hit the nail on the head. We've signed -- we are now an endorsed vendor or an approved -- I apologize, an approved vendor for members within that chain. So we contemplate within our outlook a combination of customers, including customers from that type of chain. But there is no overall change in our overall revenue outlook for the year for SkyTouch from what we published back at the end of February.

So the agreement with the 1000-member hotel chain -- that was already in your expectations back in February that that was going to happen. In other words, that is why your run rate is unchanged?

Yes. Exactly.

Great. Thanks. Then just a quick clarification and you were talking about the seasonality of your business, the RevPAR in Q1 versus the full year. I assume after the Easter shift, maybe, has -- makes Q1 look like a higher run rate than the full year. Is there -- do you have any sort of rough quantification for what the holiday shift might have added to RevPAR in Q1?

Yes. Thanks, Robin. That is a great question. For us, actually, the Easter shift didn't impact our quarter. And the reason for that is our RevPAR results for the first quarter that we report include our franchisee performance for the months of December, January, and February. So, in 2013, (multiple speakers) yes, so it is not in our first-quarter numbers for either period. It will be in our second quarter results. Easter would be in both years.

Okay, great. That's helpful. Thank you.

Thomas Allen, Morgan Stanley.

Good morning. Related to the Comfort rejuvenation. You talked a few times about being aggressive in regarding the unit count there. Can you elaborate a bit more? You mentioned hiring salespeople, but can you also talk about what else you are doing? You answered an earlier question that you are not going to be -- put too much key money behind it, but -- or as much as you do with Cambria. What else are you doing, basically? Thanks.

So, actually, it is a good question, because it is a lot more than just to draw upon incentives. It has a program that we began about three years ago with new design, new prototype, new standards, new bedding, new breakfast. We basically have reinvented that brand and have been working to execute ever since. We have raised the level of expectations from a quality performance standpoint.

We are working with the franchisees on a series of tips that are required to maintain their status within the system. We are talking with those properties that we don't think will fit the system long term and trying to do a reasonable departure that helps both. And as you can see with the numbers of the folks that stay within the system in another brand, that is actually working pretty well.

And so now what we are doing is because we are seeing the financing environment improve, we are adding additional folks and resources in that development area. We are getting more aggressive about the incentives. But it is not Cambria-like; it is more a little bit more juice than what we have typically done on some of these. So we are not making big investments in either mezz loans or JV. It is more typical development centers that we are providing.

And we are doing what we call our Comfort property improvement process, which we announced last year at convention, which was a $40 million investment on our part that is designed to bring hotels up to speed more rapidly. Because our goal is to get this done not in a decade, which is what normally happens with 2100-type unit chains. Our goal is to get this done, really, and so the consumer would notice, in two or three years.

So that CPIP is what we are calling it -- the Comfort Property Improvement Plan. Of that $40 million is generating hundreds of millions of dollars in investment for those properties. We had 1000 properties apply; we gave it to 350 of them. And so they are rapidly doing it because, in order to get that money, they have got to be done this year. If they are not done this year, they don't get the incentive.

So they are working rapidly against that and that has driven other folks to do the same type of investment. Our early returns -- and they are early -- are very positive, both from the standpoint of the guest reaction to the hotel, but also the rate you can charge. So our best experience has been the Sleep, where we saw $10 rate increase across the board drop to the bottom line. So very strong ROI for this investment.

We are hoping for and seeing similar signs early, but similar signs from Comfort. And so that investment, we think, will help. And then, we are going do whatever we need to do at this point to bring that brand around rapidly, because that will benefit us significantly, both from the standpoint of the growth trajectory of that brand from a revenue standpoint, because we have lots of room to move up against its competitive set.

It is RevPAR index performance. It is guest performance. And look, this is an iconic brand. It has 99% awareness. America loves Comfort. It needed -- and they've told us -- it needed a reimaging and they are getting that. They love what we have done. And as a result, we think this brand is going to be something to be reckoned with over the next several years.

That's great color. So far, have you seen -- or what kind of reaction have you seen from competitors?

In fact, some of the competitors move before us, quite frankly. And so, as you have seen some of the folks that we think are most competitive, Fairfield and Holiday Inn Express and some of these other folks, they had already moved. So we are in a position where we believe this is going to allow us to gain on them. They obviously are aware of what we're doing, and market by market, there are individual situations where people are doing whatever they need to do to be competitive.

But I think it is going well. The consumer benefits; we are going to benefit; this section of the market is really one of the largest in the hotel business. It is moderate- to upper-moderate tier. We are trying to move ourselves where we are crowding into that upper-moderate part for the entire chain, but particularly with Comfort Suites pushing into low quality.

So which means actually really nice RevPAR increases for us, for the chain, as well as a reinvigoration of what has been a classic success story in the hotel business.

And then just finally -- final question following up on this. It seems like, to your prior point, everyone is trying to move up toward this upper-moderate or upper-mid scale segment of the industry. And if everyone is doing it, is there risk that there is oversupply in this segment before there is kind of across the industry in general?

Yes, I don't -- that is not the concern at this point. Because if you look at where all the inventory is getting added, it is in that upscale segment. So in this segment, one, we like where we sit; two, we believe that there is -- it is a strong and growing segment. And three, there is not that much activity going on, particularly where we are in our price point and the product that we provide. So it will be nice if three or four years from now we have that as a problem to talk about. But right now, we see this as a wide-open track for us.

All right. Helpful, thank you.

Harry Curtis, Nomura.

Good morning. Could we just get a little bit more detail on the CapEx? What is -- I don't know if you had mentioned this and I apologize if I've missed it, but what is your expected total CapEx and how would you -- for the year -- and how would you expect to split that between SkyTouch versus additional development?

If you think about our CapEx in normal years for a typical PP&E-type stuff, computer technology, those types of things, it is normally going to be in that -- call it $15 million range. Which is probably a good spot to think about it for 2014. SkyTouch is not -- has a fairly limited capital expenditure associated with it. And the type of activity there, generally, is expensed through the P&L in the year we incur it. I think our internal outlook is going to be maybe couple million dollars for SkyTouch CapEx. So that is how we think about the overall CapEx.

And then, in addition to that, the things we talked about related, like Comfort Inn, for example, in terms of potentially some modest key money. While on the Cambria side, to the extent we are looking to put capital to work in mezzanine loans or JV types of [consideration]. That is really going to be dependent upon the deal activity.

And as Steve said, we are feeling really good about what we are seeing, and we are certainly seeing more opportunities than we were a year ago, two years ago, to deploy capital into goods, sites with good sponsors. But, really, the amount of capital we deployed against it for 2014, we haven't published any type of outlook.

We've typically in the past several years talked about $20 million to $40 million per year as a way to think about it, but it could differ from those ranges depending upon what we are able to see out there.

Yes, and so what we are seeing is a lot of opportunities for some terrific projects in urban markets, which obviously take a little bit more capital. So as we go forward in the year, the nice thing is things started moving for us in 2012 and 2013. So we are going to open Washington, DC Convention Center this week. So I think I'm actually staying there Thursday night.

The two properties in New York are well on -- in New York City -- are well under way. The White Plains Hotel Cambria is going to open, I think, in the next two to three weeks.

We have got stuff under construction in Texas and we are going to start in LA. We are going to start in Phoenix. And so you can really see it starting to move. We think we have got a good shot at having 30 Cambria's under construction by the end of the year.

So if that happens, you could be on the heavier end of that CapEx side. And if some of the bigger projects in some of the major urban markets go, that could help drive that a little bit, because those projects tend to be more capital intensive.

We are still participating at relatively the same percentage levels, but if we do a major project, in Chicago for example, that is going to be a bigger capital expense than doing one in a suburban market. But it is also much more revenue, much more fees, and much more of a brand builder.

We are -- you can feel one, the momentum behind this brand, but then two, the overall movement of financing markets, and the economy's and developers' confidence all coming together to make for what we think for the next several years is going to be a pretty good development environment.

And I think the general sentiment is if you get them done this year or next year, into 2016, you are probably going to have two or three years or a pretty good run to stabilize those properties before you start thinking about another cycle. So you have got a pretty enthused development community. They are really starting to like what they are seeing with Cambria, with a performance, with the properties we are opening.

So the interest is up significantly. So I think as a result, we will start to see that capital, but it is deal by deal and the capital, even if you made a deal today, the capital might not collapse until next year.

And I think if I were going to guess for this year, that $20 million to $40 million number that we have been consistently talking about for the last five or six years, I would say if we have any luck, it will be at the heavier end of that. But we have just got to wait and see which deals pop.

My follow-up question going back to your comment about key money -- what percentage of a hotel or hotel's development cost is key money?

Well, you have to look at that kind of by brand, Harry. I would say when you are thinking about the moderates here, for a Comfort Inn, for example, it is going to be -- or Sleep Inn -- it is going to be less than 5% easily, the capital stack, and probably even a lower percentage. To the extent just talking about Cambria, which is obviously an emerging brand for us, so we are trying to expand the distribution of rapidly, we are willing to go beyond that and take bigger positions, either as a JV partner, for example. In White Plains, it is a 50-50 JV. So we own half of the project.

But basically it is going to depend upon which brand you are talking about in that moderate tier with Comfort and Sleep Inn. For example, it is a very modest piece of the capital stack.

Yes, and the other thing I think is worth noting, Harry, is in the Cambria deal, where we have got -- where we are taking either, we either provide [modes] or provide some sort of debt enhancement or equity, where we are doing that. That is going to be recycled, and we think relatively quickly, which is too bad. Because some of these deals are pretty good deals.

But those partners want us in to help get it done, but then they are going to want us out. And so our expectation is on most of those projects -- and we have already seen it a couple times this year -- in that three-year time -- two to three-year after opening, they are going to re-sign and take us out of it. Which is -- that is the plan, so that capital gets recycled and then it gets put back in the pot again.

And my last question is on the key money, is there typically an incentive fee on that or not?

You mean like an incentive fee, like a management contract?

Correct.

No. We don't have an incentive fee based under these contracts, typically.

Look, the way you ought to think about it is where you are putting in key money, you're typically -- that affects how much you discount the fees upfront. So you may discount a little less if you are providing a little more key money. That is the way to think about it in the franchise scenario.

And the other thing, Harry, to that point is we typically, if we put in key money, we are going to extend the minimum term of the contract. So instead of having a window after year five, which is kind of our typical contract, we would push that window out at least a couple of years, if not further. So we will buy -- essentially get a couple extra years on the minimum term of the contract as well.

Okay. Very helpful. Thank you.

(Operator Instructions) Nikhil Bhalla, FBR.

Good morning. Steve, a question for you on SkyTouch, here. If you can give us some color on what typical property management system across most of some similar sized hotels to yours cost to put in place? And also to run annually. I am trying to just compare that with what is SkyTouch would provide. And to follow up on that, would be -- what would preclude the brand themselves to get into this business and take the initiative to launch this? What is the barrier to entry? Thank you.

Great question. So, let's talk about the barrier first. We fully expect someone to develop this technology and match what we have done. Yet, at this point, we are the only massively distributed cloud-based property management system in the industry across the planet.

So somebody else is going to figure it out, but nobody has to date, because a lot of people can do it for a smaller number of hotels. It is scaling it over 6000, 10,000, 15,000 hotels that is the trick and we have no doubt that somebody else will figure it out, but right now we have and nobody else has.

So that is a barrier. Not a permanent barrier at all. So that is why you see us moving so aggressively, because we think now is the time to try to build some market share before other people do figure it out. So, from that perspective, we are very happy where we are, but fully expect competition to be with us at some point. And lots of people are working on it, by the way, but it is the massively distributed part.

The other is it is not comparable, because it is exponentially less, right? So the cost of a property system that is server-based includes the purchase of the server, includes cabling it, includes cooling it, includes the technicians to work on it. It includes updates where it you have to go to the property and do stuff to it.

In a SaaS space, cloud-based environment, you don't have any of that. We push one button, the entire system updates. You have better PTI compliance. You have better protection of confidential information. You have got a quicker response rate. You have got a much higher effective rate in terms of uptime.

So it is the discussion of moving from the traditional old server-based to a fast-paced environment, which means it is not incremental -- it is exponential. So that is why so many people were asking us to use it. That is in part why we've launched this opportunity and why we are pretty excited about the space long term. We have no -- we are operating under no delusions that the space will not be with competitors that have comparable product at some point. But at this point, nobody else does.

Got it. So basically it is an early mover advantage you have right now

Right.

And so that should be definitely helpful. The other part of this is there is -- I was trying to figure out if there was a way to somehow get a concept in terms of how different the costs are. I think in the last conference call you probably -- you talked about maybe $6000 that a person would pay or a hotel would pay to you on an annual basis versus how much would they spend on a legacy system. That is kind of what I was trying to get to.

It is a pretty fragmented market out there. As Steve talked about, it is a pretty fragmented market, so dependent upon what level of product quality you want to buy, it is probably going to have a pretty big impact as well as the type of system, whether it is cloud-based versus server-based. So it is just a lot of variables to go into that equation on the pricing side of things.

But the end of day, we think we have an opportunity that's pretty unique and pretty attractive because the quality of our product is quite high, as we have demonstrated through the more than 55,000 hundred hotels that we have on and then their existing system. So I think as the next couple of quarters unfold, we will be able to provide more clarity around the actual economics of customers as we bring more of them online.

One way of looking at it is when we have looked at some potential acquisitions and our ability to drive cost savings by moving that brand to our system, you should think of it is when we look at it, we think the savings are a multiple of what the actual costs are.

Got it. Okay.

That's total savings, that's total savings, though. That includes buying machines, the care and feeding of them. When you don't have to do that anymore, your operating costs come down. It is the difference between traditional server computing and SaaS-based computing. So that -- there are rules of thumb around those cost savings. You should assume we are sort of at those levels.

Got it. One last question on the SkyTouch here. Should we assume that this is primarily for select-service hotels? Or should we also assume that there is a possibility you take this a little bit more upstream towards maybe full-service hotels?

Yes, I think your assumption is right. We think this scales to, maybe, a 300-room property that doesn't have lots and lots of different outlets. And that is sort of the capacity of the system at this point. Which, by the way, is a lot of hotels. However, having said that, in some of the discussions, there has been a look at well, what would it take to do larger hotels then we are currently doing.

It is -- the system is capable of being upgraded to do that, but it would have to be a significant opportunity, obviously, for us to do that. And so you should assume that most of the folks that we are talking to about this system are 300 rooms or less and they tend to be more select-service type properties.

Thank you.

There are no additional questions. I will now turn the call back over to Mr. Steve Joyce for closing remarks. Please proceed.

So, that is it for us today. Pretty hard, obviously, not to get too excited about what we're seeing. So we will be pleased to bring you hopefully more encouraging results over the next couple of quarters. As always, thanks for joining us and for your interest in Choice Hotels. Have a nice morning.

This concludes today's conference. You may now disconnect. Have a great day.