Choice Hotels International Inc (CHH) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Choice Hotels International fourth-quarter and full-year 2014 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 as management believes, expects, anticipates, receives, 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, 2014 and other SEC filings for information about important risk factors affecting the Company that you should consider. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

We caution you, do not place undue reliance on forward-looking statements which reflect our analysis only and speak only as of today's date. We undertake no obligation to publicly update our forward-looking statements to reflect subsequent events or circumstances. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as a part of our fourth-quarter and full-year 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 like to introduce Steve Joyce, President and Chief Executive Officer of Choice Hotels International, Inc. Please go ahead, sir.

Thank you. Good morning. Welcome to Choice Hotels earnings conference call. Joining me this morning, as always, is Dave White, our Chief Financial Officer.

This morning, we're going to update you on our performance for both the full-year and fourth-quarter of 2014, including the results of our core hotel franchising business and our key strategic growth initiatives. 2014 was a record year for Choice Hotels. Our performance for the year was driven by strong RevPAR growth and our strategic franchise development results. Our fourth-quarter and full-year 2014 results exceeded our expectations.

Domestic RevPAR gains improved each quarter in 2014, culminating with an 11.2% increase in the fourth quarter, outpacing the gains of our competitive set, based on Smith Travel Research data. Occupancy and average daily rates increased 370 basis points and 3.8%, respectively, in the fourth quarter. Franchising revenues grew by 12%, driven by an 11% increase in domestic royalty fees for the quarter.

As a result of strong revenue growth and disciplined cost management, franchising EBITDA increased 15% in the fourth quarter. Domestic hotel franchise agreements totaled 269 hotels for the fourth quarter, a 25% increase year-over-year.

Overall, our new hotel franchise contract executions for the year were up more than 10%, after factoring out the impact of the 24-hotel multiunit Bluegreen portfolio transaction, which occurred in 2013. The franchise development growth strategy we are implementing is generating positive results. We continue to be an industry leader in our core midscale and economy conversion segments, due to our well-recognized brands, combined with our strong distribution channels and franchisee services.

We are also seeing very strong growth in our new construction pipeline. In the fourth quarter, contracts for new construction hotels increased by 78% compared with the same quarter last year. New construction activity is being driven as a result of several key initiatives across our brands, and I'd like to share a little bit of initial insight on those.

Our expansion into upscale, Ascend -- our expansion into the upscale segment continues to be very successful. The Ascend Hotel collection, originally designed to attract conversions from independent upscale hotels, is now generating significant new construction and adaptive reuse interest from the development community. In 2014, we executed 11 new construction deals for the Ascend Collection, primarily in New York City. We believe Ascend new construction is a great alternative for design-focused developers in urban markets or other projects that do not fit the traditional brand profile.

In addition to signing new construction deals for Ascend, the brand continues to grow rapidly through conversions with new hotels and key destinations. For example, we expanded into the Caribbean with Acoya Hotels and Suites and Villas in Curacao, and The Allegra in St. Martin -- which, if you're in the Northeast, seems like a really good place to be.

We signed our first property in Nashville, Tennessee and the White House Inn in Biloxi Mississippi, recently listed as one of the South's best new hotels in 2015 by Southern Living Magazine. We are quite pleased that so many fine independent hotels and operators continue to recognize the benefits of affiliating with Choice. Affiliating with the Ascend Collection allows the unbranded upscale operators to focus on the day-to-day challenges of running a hotel, while capitalizing on the many benefits afforded by a recognizable brand and robust distribution platform.

These hotels are experiencing positive RevPAR results and other immediate benefits of our central reservation systems, including reservations through choicehotels.com, our mobile phone and tablet apps, and our aggressive marketing campaigns. Ascend continues to play an integral part in our growth strategy to expand into the upscale segment. The success of Ascend, coupled with the results of our Cambria Hotels and Suites brand, is creating strong momentum for us in the upscale segment.

Cambria. On the Cambria Hotels and Suites front, we continue to see accelerated growth, with new hotel openings and groundbreakings in major markets across the country. We are excited about the quality of the Cambria Hotels currently under development. We recently opened new hotels in Washington, DC; White Plains, New York; and Plano, Texas. We have more openings scheduled with two Cambria's soon to open in New York City, and another hotel that will open this spring right across from our headquarters, just outside of Washington, DC.

We recently signed a new deal for a Cambria in Nashville, Tennessee that will be our largest Cambria to date with 224 rooms. In January, we unveiled a new construction prototype for the Cambria brand, and showcased a new prototype to developers at the American Lodging Investment Summit. The new prototype is designed with the target audiences of business travelers and millennials in mind.

Consumers love this brand. In markets where Cambria has opened, the hotels are one of the top-rated hotels on TripAdvisor. We believe this brand is well-positioned for significant growth for us.

Let's talk about some of the existing brands. On Comfort, our brand is helping to fuel our growth in new construction. The improvements we implemented for Comfort Inn and Comfort Suites brands have generated significant new construction interest and opportunities. We signed 70 new construction franchise agreements for the Comfort brands in 2014. And it is particularly exciting because we are seeing interest in new development across all market types, including new deals signed in major markets like New York City, Boston, Philadelphia, Denver, and Houston.

We believe that this increased interest in Comfort is a direct result of our multiyear plan to position the Comfort brand as a leader in its category. The plan includes implementation of higher standards for hotels joining the Comfort brand; requiring meaningful property improvement plans at contract windows; and targeting underperforming Comforts for termination and replacement with new construction product.

To accelerate the transformation of the Comfort brand, we launched a landmark property improvement plan to provide incentive to franchisees to help them update their hotels and improve the guest experience in important markets. Over 300 Comfort properties participated in this program and completed the work in late 2014 to qualify for the incentive.

Although early in the process, franchisee and guest feedback about the Comfort brand improvements have been extremely positive, and it is showing in the brand's results. In fact, we plan on targeting another 75 to 100 properties in 2015 for a similar program.

In addition to improving the existing system, we launched a new construction development incentive last spring, which is driving interest in the new prototype and should provide further lift to the Comfort system. We are excited for guests to experience the new Comfort in 2015 and later this year, and we will be supporting the rejuvenated Comfort brand with a marketing program to introduce the new Comfort to the public.

We are also excited for our Comfort Inn owners and hotel developers. As a result of our efforts, RevPAR index for the Comfort brand family against its competitive set is moving in a very positive direction. We expect this trend to continue this year.

Let's talk a little bit about distribution. The revenue contribution of our central reservation system increased to 35% in the fourth quarter, up almost 300 basis points compared to the same time last year. We had 23 days in the fourth quarter that generated over $10 million through our CRS, up from just 4 in the fourth quarter last year.

Choicehotels.com revenue increased by more than 18% for the quarter, and we had our first 5 million booking days ever for the fourth quarter for choicehotels.com. In fact, we had five of them versus zero for any previous years.

Bookings via our mobile applications continue to grow at a fast pace and yielded an increase of 55% for the quarter, compared to the same time last year. Our distribution strategy is delivering great results. We are staying ahead of guest booking needs, and we are leveraging our distribution channels to deliver an increasing number of customers to our franchisee's hotels.

SkyTouch. Changing gears, I'd like to give you a brief update on SkyTouch Technology, the separate division that focuses 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.

As of the end of 2014, SkyTouch had signed agreements with 97 third-party hotels, representing more than 6,800 rooms. More than 65 of these hotels have come online, and are up and running on the platform, with the remainder in the process of being onboarded. In 2014, in addition to the nearly $30 million of fees attributable to Choice franchisees, SkyTouch earned another $600,000 in revenues from unrelated third-party hotels, comprised of fees for implantation, training and installation, and monthly system fees.

Nearly 2/3 of this revenue was earned in the fourth quarter of 2014, reflecting the recent momentum that SkyTouch has had in attracting new business. Many of the SkyTouch new customers are chains and multiunit owners and managers who recognize how SkyTouch helps them grow their system size with a proven platform.

SkyTouch recently announced an agreement with G6 Hospitality, which operates in franchises more than 1,200 properties in North America under the Motel 6 and Extended-Stay Studio 6 brands. Pursuant to this agreement, SkyTouch will begin supporting G6 needs in its Mexican and Latin American properties as they begin opening this year.

During past earnings calls, we've referenced this significant development agreement on an unnamed basis. The development work is nearing completion, and we expect to begin bringing G6 properties onto the Hotel OS system soon.

SkyTouch also recently announced their agreement with Cobblestone Hotels. This is significant, because Cobblestone is one of the fastest-growing, independently-owned hotel chains that owns, operates and franchises 64 properties open and under construction, and 50 new properties in development. The SkyTouch sales and marketing team is engaged in significant dialogues with other brand companies and potential hotel systems number in the thousands.

SkyTouch is making progress, and we are very excited about the current successes and its potential impact on our future growth and profitability. We are very pleased with our fourth-quarter results, obviously, and the year.

Let me turn it over to Dave White to share more detail about the financial results.

Thanks, Steve. Our fourth-quarter results closed at a strong year for the Company, and propelled us to new records in terms of franchising revenues, franchising EBITDA, and franchising margins.

In this morning's press release, we reported diluted earnings per share of $0.43 for the fourth quarter of 2014, and $2.10 for the full year. These results exceeded our previous guidance of $0.34 per share for the quarter and $1.99 to $2.02 per share for the full year. Our full-year 2014 franchising EBITDA totaled $240 million, which exceeded the high end of our previous outlook for that metric.

We are pleased that the fourth-quarter financial performance of the Company exceeded our expectations, and continued to build on the strong momentum we saw in the first three quarters of last year. We outperformed our earnings-per-share and franchising EBITDA guidance, primarily due to a combination of better-than-expected revenue performance and lower-than-anticipated selling, general and administrative expenses.

Franchising EBITDA for the fourth quarter increased 15% over the same period of the prior year, due to the 12% increase in franchising revenues and a 150 basis point expansion of our franchising margins. The increase in our franchising revenues for the quarter was driven primarily by strong domestic RevPAR performance; franchise development results, which drove growth of initial franchising and relicensing fees; and by growth of procurement services revenues.

Approximately 75% of the fourth-quarter topline franchising revenue growth of $9 million flowed through to franchising EBITDA. As a result, our franchising margins expanded from 60.6% in the fourth quarter of 2014 to 62.1% in the current quarter.

Domestic royalty revenues increased by approximately 11% to $59.2 million, driven by an 11% increase in RevPAR. Our fourth-quarter RevPAR growth exceeded our guidance of 9%, and was driven by a combination of a 370 basis point increase in systemwide occupancy and a 3.8% increase in our average daily rates.

We are particularly pleased that our domestic RevPAR for the fourth quarter meaningfully outpaced the overall industry growth of 9%, as reported by Smith Travel Research. The RevPAR growth rate also outpaced the industrywide RevPAR results for the chain scale segments in which we primarily compete.

We attribute the increase in occupancy rates and our overall RevPAR improvement to the improving US economy, increased leisure travel, as well as our efforts and initiatives to improve business delivery and hotel revenue yield to our franchisees. For full-year 2014, our domestic systemwide RevPAR grew by 8.5%, driven by an average occupancy percentage increase of 310 basis points to 59.5%, and a 3% increase in average daily rates.

We expect average daily rates to be greater driver of RevPAR growth in 2015, as occupancy levels reach historic highs. Current RevPAR trends, industry supply dynamics, and US macroeconomic trends, point to continued growth in 2015, and we expect our full-year 2015 RevPAR to increase between 6.5% and 8%. We also expect the strong RevPAR trends experienced in the fourth quarter to extend into the first quarter. Therefore, we are projecting RevPAR to increase 11% for the first quarter of 2015, but then expect a slight deceleration in the pace of quarterly RevPAR growth the remainder of the year, as the prior-year comparable figures get stronger.

On the supply front, we were able to grow the number of hotels operating our domestic franchise system by nearly 1% compared to the December 31, 2013. With respect to franchise development, the fundamentals that drive new hotel development and conversion opportunities continue to improve. As a result, our initial and relicensing fees increased 15% in the fourth quarter of 2014.

During the fourth quarter of 2014, we executed 269 new domestic franchise contracts compared to 215 in 2013, a 25% increase. We are particularly pleased with the level of new construction franchise agreement activity, which increased 78% to 80 agreements for the quarter. The increase in new construction agreements was powered by our Comfort family of brands, which increased nearly 200%. And as Steve mentioned earlier, we believe that this increase is directly attributable to our multiyear plan to rejuvenate the brand and position it as a leader in its category.

Conversion franchise agreements executed during the fourth quarter increased by 11%, and combined with our new construction franchise sales efforts, led to a 21% increase in our domestic pipeline of hotels under construction awaiting conversion or approved for development at year-end. We believe the industry is still in the early stages of the supply grid portion of the cycle, which we expect to accelerate over the next several years. We expect our 2015 franchise sales activity levels to exceed last year's impressive results.

The number of relicensing and renewal contracts executed during the fourth quarter improved 9%, and increased 16% for the full year, reflecting the improved hotel transaction environment. For the year ended December 31, 2014, we executed 336 domestic relicensing and renewal contracts, which represents approximately 6.5% of our domestic system.

As we have mentioned on previous calls, we are encouraged about the increased pace of relicensing and renewal activity. We are optimistic that there is additional headroom for growth of transaction volumes and the related relicensing fee stream, as the current volumes are still less than peak transaction levels we experienced between 2005 and 2007. During those years, the percentage of the domestic franchise system that relicensed annually ranged between 8% and 10%.

Our full-year free cash flow, which we define as net cash provided by operating activities less net cash utilized in investing activities, increased from approximately $125 million in 2013 to $166 million in 2014 -- a 33% increase. We utilized these free cash flows during 2014 to return value to our shareholders through a combination of share repurchases and dividends. The Company paid dividends during full-year 2014 of $43.5 million. And in the fourth quarter, announced that our Board of Directors authorized a 5% increase in our annual dividend rate from $0.74 per share to $0.78 per share, beginning with our dividend paid in January 2015.

We also repurchased 1.4 million shares of common stock under our share repurchase program at a total cost of $72.6 million during 2014. In addition, our Board of Directors increased our current authorization to 3 million shares.

Our cash flows from operations for full-year 2014 included a $27 million increase in cash provided by marketing reservation activities. These activities represent contractual reimbursements of expenses, and therefore do not impact our net income. The increase in cash flows reflects the reimbursement of previously advanced costs for marketing reservation activities, and the timing of certain multiyear initiatives designed to improve business delivery and hotel revenue yield to our franchisees. Depending upon the timing of these initiatives, we expect positive cash flows for marketing reservation activities to range between $15 million and $20 million in 2015.

Now let me turn to our outlook for 2015. As always, our outlook assumes no additional share repurchases under the Company's share repurchase program. Our outlook also assumes the effective tax rate for continuing operations to be 31.8% for the first quarter and 31.1% for full-year 2015. Our franchising activity guidance assumes that our RevPAR will increase approximately 11% for the first quarter, and range between 6.5% and 8% for full-year 2015.

Our net domestic unit growth will increase by approximately 1%, and our effective royalty rate will increase by 2 basis points for the full year. Based on these assumptions, we are establishing guidance for full-year 2015 EBITDA from franchising activities to range between $254 million and $259 million.

With regards to SkyTouch, we are projecting reductions in EBITDA for full-year 2015 to range between $15 million to $20 million compared to approximately $16 million in 2014. We expect our first-quarter 2015 diluted earnings-per-share to be $0.37; our full-year 2015 diluted earnings-per-share to range between $2.14 to $2.21; and our consolidated EBITDA for full-year 2015 to range between $236 million and $241 million.

These earnings-per-share and consolidated EBITDA estimates assume that we incurred net reductions in EBITDA related to SkyTouch at the midpoint of the range for that investment. We are pleased with our fourth-quarter performance in 2015 will be another strong year for our core franchising business that will allow us to build on our track record of creating strong returns for our shareholders.

And now I will turn the call back over to Steve.

Thanks, Dave. It was another strong year and obviously a great quarter. We're finally getting some cooperation from the economy, which is giving us even more encouragement. The macroeconomic outlook is favorable, and the components of GDP that are most tied to lodging demand are strong.

Hiring and consumer spending -- blue chip forecasts indicate job and wage growth is predicated to accelerate modestly. It's encouraging to see continued strong gains in household employment. The labor force participation rate has also been stabilizing after lengthy periods of declines. Consumer confidence and sentiment indices are also looking positive.

We are very optimistic about our business in both the short-term and the long-term because of those improving economic conditions, and the fact that franchise revenues grew, RevPAR increased, new construction deals are on the rise, development is up overall, and our brand strategies are delivering results for our franchisees.

With that, I'd like to open up to any questions you might have.

(Operator Instructions). Felicia Hendrix, Barclays.

Steve, just to tag onto your closing remarks there, you just mentioned a lot of drivers behind the strength that you are seeing in your consumer. Just wondering, how much of the recent strength that you've seen in the quarter could you attribute to easy weather comps, and then also lower gas prices? And do you think that that's a large part of the strength you saw in the quarter, or is it more macroeconomic-related?

Well, the strongest correlated factor we look at the most is employment. So, if we were going to point to one factor that had the biggest impact, it's that positive job growth, particularly because it's an inverted hiring curve. The folks that are getting hired are our customers. So they are getting their jobs back or they are going back to -- and they're going back to work, and on the road for business. And then when they do that, they also take vacations.

Now having said that, we also are looking at gas prices to be [up] net positive for us, because we are seeing a situation where the cost of it is creating a more drive-oriented sentiment on the consumer's part, and the fact that airline prices are not coming down, and the hassle of flying is going to continue to impact that. So we obviously think that's going to be positive for us. And then just the general consumer sentiment is strong.

And, quite frankly, I think we're doing a good job in the distribution game, in terms of getting our product out there in front of the consumer in the way that they want to buy. And I think that's contributing as well.

That's very helpful, thank you. And then just for my follow-up, I wanted to move on to SkyTouch. I mean, it sounds like you continue to be successful with sign-ups, but just where your EBITDA is trending and revenues are coming in lighter than we anticipated, I'm just wondering -- are there any plans to divest that business? Is there a reason why it needs to be on your P&L?

Well, because of the accounting rules, number one. (laughter) So we are -- you know, look. If we had done this in previous years, it would've been an investment on the balance sheet. But because the accounting rules are, it runs through EBITDA. But no, we have no plans to divest at this point.

It is, down the road, an option. We now have a proven model that third-parties wants to buy. We think we're going to sign somewhere between 2,000 and 3,000 hotels this year. So we are very pleased with where this is going. We think it's going to be a net contributor in the not-too-distant future for us. And then that gives us lots of options of what to do with it.

Holding a technology company within the confines of Choice may not be the long-term strategy, but there are five or six different ways that Choice shareholders could share in the value of what's being created. And we're going to keep our options open.

Okay. Just with the 2,000 to 3,000 sign-ups -- and I know you're only giving guidance for 2015 -- but do you see this breaking even in 2016?

We -- well, it depends on the pace that continues in 2016. We are looking at, most likely, a 2017 breakeven position, but we will see. We've got a lot of interest in this product.

Okay. Great. Thank you so much.

Thomas Allen, Morgan Stanley.

Just following up on some of those earlier questions. Can you remind us what your leisure versus corporate mix is? And can you give any more color or quantify how the RevPAR trends were one versus the other, if you could? Thank you.

Well, let's start with the mix. The mix now is roughly 2/3 leisure, but business for us is growing very rapidly, more rapidly than leisure, because we are very focused on the business traveler, particularly for Ascend and Cambria, but also for Comfort and Sleep. And so, we are growing our business traveler numbers at a strong clip. And so -- and we expect that to continue this year, because a lot of the things we started last year, to help drive that business, are being accelerated this year. And we think they're going to have a big impact.

Yes. For just more specific figures, I mean, for 2014, if you look at kind of the GDS channel, that net revenue for our system, for the Choice brand system, grew at about 11%. So, real strong results there on the corporate side of things. But to Steve's point, both the leisure and the business travel demands are showing real strength in 2014, and that's continued so far here in the first couple months of 2015.

Helpful, thank you. And then I just want to understand the unit growth better. A couple of questions. So, first, when you guide to unit growth, are you discussing number of hotels you're guiding to, number of rooms?

You guys gave a lot of good color about record numbers of executed contract and all that. But if you look at your number of rooms at the end of the fourth quarter, they were actually down year-over-year. So just wanted to understand the attrition levels, and maybe some impact of those owned hotels that left the system. Yes, any color on that would be helpful. Thank you.

Yes, sure. I think when you step back from our net unit growth figures for 2014, we really have to think about it on a brand-by-brand basis, and think about the strategies we are executing, particularly around Comfort. So Comfort, on the Comfort family, as we talked about in the past, we are in kind of the middle innings, I would say, of a significant brand rejuvenation. And part of that brand rejuvenation strategy includes terminating Comfort product that doesn't fit the -- you know, meet the grade, so to speak.

So you really see that in the Comfort family, that unit growth that you're -- been seeing those declining. And that, quite candidly, will probably, for that brand, continue for another year or two.

But on the flipside, right, if you look at our development results franchise sales for Comfort and the strength of new construction sales, I mean, that's the pipeline that's going to, over the next several years, replace these terminations of opening property we are taking out now. So that's kind of Comfort. And, obviously, since Comfort represents about half of our portfolio, it has a big impact on the consolidated net unit growth figure.

But then the other thing -- I think sometimes people don't focus on this -- is, if you look at our -- I'll call them our primary conversion brands -- Quality, Clarion, Econo Lodge, Rodeway -- and you parse through the 2014 numbers, looking at just those brands, which is the primary conversion brands, on a unit basis, they were up about 4%. And for those folks who have followed the Choice story for a long time, back in the -- I guess call it, 2004 through 2007 timeframe, we were clipping along net unit growth in that -- and call it 4% to 6% range.

So when you look at those particular conversion brands, we are touching the bottom end of the ranges we were seeing back then, which is pretty -- which is encouraging, particularly when you combine it with what we are seeing on the development side for new construction and conversion. So it's -- you've got to focus, in other words, on the brand-by-brand. We feel good about what we are doing with our brands.

And the other piece of it, obviously, is reflected in really strong RevPAR results relative to the industry. So, just to some degree, we probably traded a little bit of unit growth for a stronger RevPAR performance. But for the long-term, we think that's the right strategy.

Okay. And then understanding that you want to focus guidance on 2015, but given your commentary you just made, I mean, can we think about like a goal of unit growth? And once the Comfort rejuvenation is done and kind of a little later in the cycle?

Yes, I think as we get a little later in the cycle, and as that Comfort story unfolds over the next two years, following that, you should expect to see -- our expectation would be that the net unit growth figures start to move on a consolidated basis more back towards those historical levels that I talked about.

The other thing that you really keep in mind is, as Cambria ramps up in terms of its construction activity, we are expecting to see, in those later years, significant impact from those hotels on our overall revenues and profitability, because the size of those hotels are dramatically larger than our core hotel, and they're -- and are much more revenue-intensive.

So, a typical Cambria is worth something on the order of three to four times a Comfort. So, as that brand ramps up with these major urban properties, and the brand begins to accelerate its development across the country, we think that's going to have a big impact for us.

All very helpful. Thank you.

Patrick Scholes, SunTrust.

Just two questions here. I want to follow-up on the previous one. When I look at the 1% unit growth this year, can you drill down a little bit more and just quantify how many points of unit growth you're losing this in 2015 from that -- from the Comfort Inn? That's the first question.

Yes, I would probably think about that in the context of 1 to 1.5 points, something maybe 1 to 2 points, probably the way to think about it.

Okay. Okay, good. And then a second question is something I wonder if you can help you with. When I think about what Street expectations were for 2015 EBITDA, and EPS certainly looks like EBITDA was in line, though EPS versus what we on The Street and investors were expecting, a little bit lighter, it appears, the best I can tell, that's partially due to a tax rate. But is there something else below the line that we can help bridge that -- you can help us bridge that gap with a higher depreciation, or whatnot?

Yes, you kind of answered your own question, actually.

Okay. (laughter)

Good pickup. But in fact, really, there's two pieces to it. About half of it is driven by the tax rate. So, for 2014, we finished it right around 30%. And for 2015, our expectation is around 31%. So that explains about half of that gap.

And then the other half is really being driven predominantly by depreciation and amortization related to our Comfort rejuvenation program, where we provided for close to 300 hotels some forgivable key money essentially. And the amortization of that key money is going to flow through really in 2015. And that's the other piece of it.

Great.

(multiple speakers) level, just to kind of give a little more clarity is somewhere between kind of $2 million and $3 million for 2015, is kind of about the incremental lift on depreciation and amortization related to that program.

Perfect. Thank you for the color.

Shaun Kelley, Bank of America.

I just wanted to check in -- I think, towards the end of your prepared remarks, you talked about the domestic relicensing fees being, I think, at peak closer to 8% to 10% of your system renewing each year. Could you remind us of where that number is right now? You may have mentioned it and I might have just missed it.

Yes. So, right now we are right around 5% or 6% of the system -- I'm sorry, 6.5% of the system was with the 2014 figure.

Great.

So, about two-thirds -- yes, about two-thirds of the way back to peak levels.

And then I don't know if that's something -- do you have an expectation or something implied in guidance for where you think that ends up in 2015?

No, within 2015, we've implied modest increase in terms of relicensing fees. We don't imply getting all the way back to that peak level.

Got it. And then totally to switch gears, but just kind of curious, on the balance sheet -- so, leverage continues to come down obviously as cash flows are strong. There was a period -- I guess it was a number of years ago at this point -- where the Board chose to do a little bit of a recapitalization. Could you just remind us of your kind of leverage target and how you think you're matching up against that right now?

Sure. Yes. Our overall leverage target for the Company is a range on a gross debt to EBITDA of between three and four times. When you look at our balance sheet, we are right about 3.5 at the end of the year. Now there's some -- you have to bake in, we have a few credit enhancements out there for some Cambria Suites, which would take it a little bit north of that 3.5, but still underneath the high end of that range -- I talked about that 4. So that's our overall leverage target in terms of where we are comfortable on the balance sheet side of things.

Perfect. Thank you very much.

Sure.

Robin Farley, UBS.

Just looking at SkyTouch and the loss kind of expected to widen in 2015, is that a wider loss because of kind of the one-time cost of getting properties on the system? Or is it just kind of increased investment in marketing?

And in October, you had kind of given a revenue run rate guidance of the same kind of -- that you were on track for $4 million to $6 million in annual revenues at that point. Can you kind of update where that revenue run rate is now?

Sure. So, there's two components there. On the cost side, what you're seeing is that, as we ramped up during 2014, the SkyTouch organization, particularly in the sales and marketing team and the product development teams, that happened during the course of 2014. So what you are seeing there is the impact of the annualization of the impact of those hires.

And in 2015, as we think about the cost and as we think about the range we provided for the investment in SkyTouch, it will depend to a degree on customer specific milestones when we acquire customers, and the level of customization, if any, that's required to support their expectation. So in terms of the revenue side of things, as we talked about, we generated about $600,000 of third-party realized revenues in 2014.

For 2015, we haven't provided specific revenue guidance, but we are thinking about the right way to think about success for startup eventually like SkyTouch, is really the number of hotels we kind of add to the platform, third-party hotels. And so I think the best way to think about the answer to your question is just we will report back out on the number of hotels signed. And our target is to have somewhere between 2,000 and 3,000 hotels signed up during the course of 2014. And that essentially corresponds with the revenue that's implied in our investment guidance for SkyTouch for 2015.

Okay. Great. My other question had been on your unit growth. And you've made a couple of comments that mostly answered it. I guess just looking at unit growth of about 1% last year, and then pretty significant increase in your pipeline of new signings, that it seems like it would be higher unit growth than the 1% to 2%. It sounds like maybe the Comfort rejuvenation takes like 150 basis points off.

Is there anything else that -- whether it's expecting other removals from the system, or is it just longer time to open some of the new -- maybe because it's more new construction-weighted versus previous years, that it takes longer for pipeline to actually enter the system as unit growth? Just trying to think about what other factors are kind of keeping that pipeline from getting to unit growth.

Yes. So, that's exactly right. So in two instances, because of the upswing in new construction, those projects are typically two to three years from application to opening. So that's clearly having an impact.

Then the other is, we are being more demanding of the product coming into our system. So the conversion time has lengthened. A lot of the Ascends we did, we did -- particularly the 24 Bluegreens -- they were in such good condition, we could bring them almost immediately. But as we bring in other of our core product, we are demanding more work be done, and so that's lengthening that conversion time.

And what's your percent of pipeline that's conversions versus new construction now versus a year ago, just to kind of think about that?

So the percentage of the pipeline that's new construction would've increased -- here, it's on the -- let me get my schedule, sorry. We have an exhibit -- on Exhibit 7, we laid that out. So basically at the end of last year, we had 235 new construction on a base of 420 total contracts, so a little over 50% there. Now we've got 326 new construction on a base of 510. Conversion pipeline is about the same year-over-year in terms of absolute number of contracts.

Okay. Okay, great. Thank you.

(Operator Instructions). James Kayler, Bank of America.

Just one follow-up on the balance sheet questions that Shaun asked. I guess, strategically, do you guys see value in getting back to investment grade? Or are you comfortable with sort of being in the high-double-B crossover area? I guess that's question one.

And question two is, if getting back to investment grade is a target, what are the conversations that you're having with the agencies? What have they said they want to see to get there?

Yes. So I would say the way we think about our leverage is around the right level of leverage for this business model, which is kind of where that three to four times gross debt to EBITDA came from. We believe that that leverage level corresponds to a rating, a credit rating, that's at the low-end of the investment grade spectrum. So, that's kind of the leverage level where we are comfortable. We think it corresponds over time to a leverage level that's consistent with a low investment-grade credit rating.

In terms of the strategic value of investment grade credit rating, I think, obviously over time, over long periods of time, depending upon what's going on in the macro environment, it can be beneficial. But in some periods of times, it's obviously, from a cost of debt, it's not as advantageous as kind of where we are positioned. So, I don't think there's always an answer to that question. It depends upon kind of where you are in the lodging cycle, where you are in the credit market cycle, and the other factors going on within your business.

And then philosophically, the reason that we were comfortable moving into the lower end, where we actually got a split rating, was because the high-yield markets at the top end looked a lot like investment-grade. So if that continues, then we are going to continue to think that there's somewhere in between.

The others, quite frankly, we saw that we don't get credit are rewarded for much lower levels of leverage. In fact, just the opposite. When we did that special dividend paid out and raised our leverage levels, we had a significant increase in the share price as well, which is sort of inverse of what you would expect.

So we believe that three to four times is correct, and that -- and whether or not we were at the upper end of high yield or at the lower end of investment is more about, as Dave mentioned, the conditions of the credit market at that point.

Okay, very good. Thank you.

We have no additional questions. I will now turn the call back over to management for any closing remarks. Please proceed.

So, obviously, we are very pleased with the results, and we are obviously very encouraged about the environment we are in for 2015. We look forward to sharing those results on our next call. Thank you.

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