Choice Hotels International Inc (CHH) 2016 Q1 法說會逐字稿

Good morning, and welcome to the Choice Hotels International first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, today's call is being recorded.

During the course of this call, certain predictive or forward-looking statements will be used to assist you in understanding the Company and its results. Which constitute as 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 believes, expects, anticipates, foresees, forecasts, estimates or other words or phrases of similar importance.

Such statements are subject to risks and uncertainties and 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, 2015 and other SEC filings for information about important risk factors affecting the Company that you should consider.

Although you believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. We caution you, do not place undo reliance on forward-looking statements which reflect our analysts 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 the reconciliation of our non-GAAP financial measures referred to in our [mark] as part of our first-quarter 2016 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 our host for today's conference, Steve Joyce, President and Chief Executive Officer of Choice Hotels International Incorporated. Please go ahead, Sir.

Thanks very much.

Good morning. Welcome to Choice Hotels earnings conference call. Joining me as always is Dave White, our CFO. This morning we'll update you on our performance for the first quarter of 2016. And we also want to share some exciting company news on an important strategic growth initiative that was announced this quarter.

It is a great time to be in the lodging business and Choice continues to find innovative ways to differentiate the Company and grow the business by understanding and leveraging on customer trends. One of those trends is the rapidly increasing consumer interest in the vacation rental market. While we find that most travelers still prefer a traditional hotel stay, we also know that some customers have a desire for a different type of experience that is better met through vacation rentals. These are accommodations that cater to a longer stay, are adequate for larger groups, and include key home like amenities. Given that the vacation rental industry is a $23 billion market in the US alone, it represents and significant opportunity.

So after considering the positive results from our pilot program last year, and success over the past several years with our strategic alliance with Blue Green Vacations, we recently announced the official launch of vacation rentals by Choice Hotels, which we see as an exciting growth opportunity for the Company. We recognize the change in dynamics in the hospitality industry and the types of travel consumers now desire.

Its that progression that lead us to launch this new product, which includes both a fee for service technology platform, and a fee-base franchising arrangement. We are leveraging our expertise in distribution and technology by working with vacation rental management companies, or VRM's for short, in major destinations that appeal to our customers. These VRMs get access to our distribution channels that are visited by tens of thousands of customers searching our website for longer stays on any given day.

Our goal with Vacation Rentals by Choice Hotels is to bring a new level of quality and service to this emerging segment of the lodging industry. We believe guests will appreciate the reliability of a major national brand, 24 hour guest support, the benefits of the Choice Privileges guest loyalty program, and being able to earn and redeem points for their stays at our vacation rentals.

We are launching the new service in eight US locations including Orlando; Aspen; [Destin], Florida; Panama City Beach, Florida; Williamsburg, Virginia; Shenandoah, Virginia; Phoenix, Arizona; and Big Bear Lake, California. The initial vacation rentals by Choice Hotels members, including leading management companies such as Bluegreen Resorts, Magical Memories and Sterling Resorts.

Given strong industry interest, Choice expects to rapidly add locations and management company members in 2016. This program provides unique but complementary lodging products to Choice's traditional hotel brands. Thanks to Vacation Rental by Choice Hotels, guests will find options to satisfy a broader range of trips, while continuing to benefit from staying within the Choice portfolio.

We are excited about this new opportunity and have great optimism about its potential, while we are currently investing in this endeavor, we expect it to turn positive in the next 12 to 18 months.

Now moving on to our results. There are a number of positive financial and non financial highlights for the quarter that I want to emphasize. With respect to the financial highlights, total revenues increased 18% for the quarter with franchising revenues in domestic royalties increasing 4% and 5% respectively.

Importantly, all three of the levers which drive domestic royalty revenue, system size, RevPAR, and effective royalty rate, all moved in a positive direction during the quarter again. Domestic and international units increased 1.1% and 2.3% respectively for the quarter. Domestic system-wide RevPAR increased 1.2%, driven by average daily rate growth of 2.5%.

Our domestic RevPAR performance was in line with the industry results for the primary scale segments where we compete, and in the mid-scale segment where the majority of our room supply resides. Our brands achieved RevPAR index gains estimated at 170 basis points against their primary competition. We achieved growth of 7 basis points to 4.38% in our average domestic effective royalty rate.

On the brand front, we have some great news to share about our momentum in the upscale segment where our Ascend and Cambria brands have grown globally to 182 hotels and more than 17,000 rooms open and operating in the aggregate. In addition, the comfort refresh continues to be an enormous success.

The Cambria brand continues to grow in key markets across the country. In the first quarter, we celebrated the grand opening of a terrific new Cambria in Manhattan with the Cambria Times Square. And just last week we announced and celebrated a double hotel groundbreaking in Chicago for conversion of an existing hotel and an adaptive reuse of a commercial office complex, which are under development.

This follows previous groundbreakings in top destinations like New Orleans, Nashville and Los Angeles. We also signed new agreements this quarter to bring another Cambria to the greater Charleston, South Carolina, market and a new motel for the CBD of Fort Lauderdale.

Now on to Comfort. We have been tell you about the Comfort refresh and it keeps getting better. The Comfort brands have enjoyed 20 consecutive months of RevPAR index growth. In the first quarter, RevPAR index growth was up 170 basis points compared to the same time last year.

So improvements we implemented for our Comfort Inn and Comfort Suites brands have not only been stunning physical transformations, but the revenue performance numbers and ROIs resonate greatly with hotel owners and developers. Comfort brand guests are also noticing the transformation.

The likelihood to recommend scores from Comfort guests continue to be the highest they have ever been. Customers have seen firsthand the impact of these changes we have made at the hotels.

As part of the strategy, we did take a hard line to improve or be removed policy with sub par properties. As of the end of 2015, approximately 600 hotels have exited the system since 2010. As for the remaining system, we are seeing a much higher [cure rate], the highest ever LPR scores as mentioned before, and simply higher standards across the board.

In aggregate, the hotels that took advantage of the property improvement incentives that we offered are also enjoying significantly higher RevPAR gains. We are extremely pleased but we're not surprised. We were deliberate in creating and executing a strategy designed to coincide with this very favorable period in the lodging cycle. And it is paying off.

The Comfort family development pipeline has increased 24% in the past 12 months to more than 200 executed, but not yet open contracts. With 2016 expected to be the last year of the normal brands pruning, we are well-positioned for the next phase of the flagship Comfort brand lifecycle.

Now, shifting to our distribution results for the quarter, the proprietary revenue generated by our central reservation system and property direct royalty program contribution continues to grow. The revenue contribution of these channels increased to 53% in the first quarter, up 260 basis points compared to the same period last year.

We have 17 days with CRS revenue over $15 million in the first quarter, compared to none last year. We never surpassed the $15 million mark for CRS revenue in a single day in previous quarters until the first quarter 2016. In fact, we had our first Q1 $15 million, $16 million, and $17 million days in 2016.

ChoiceHotels.com continues to grow significantly and generates the largest share of our revenue on our distribution channels. Our direct online channels, choicehotels.com com and mobile, have 39 days with over $5 million in bookings in Q1 2016, compared to 27 last year.

Bookings via mobile applications continue to grow at a fast pace and have yielded an increase of 17% in revenue for the first quarter compared to last year. In the first quarter, we announced a series of enhancements to the Choice Privileges program and those changes are already driving considerable lift in enrollments by new members, which are up 63% versus Q1 2015. And activity among existing members is up 17% versus last year. In the first quarter, we registered a 400 basis point increase in loyalty program revenue contribution.

Our distribution strategy is delivering great results. We are staying ahead of the guest booking needs and we are leveraging our distribution channels to deliver an increasing number of customers to our franchisee's hotels.

Obviously, we are pleased with the momentum we are now seeing in RevPAR development and CRS contribution, and are particularly optimistic about the launch of our new vacation rentals business and the positive impact our enhanced Choice Privileges program is having on customer loyalty.

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

Thanks, Steve.

In this morning's press release, we reported franchising revenue and EBITDA increases of 4% and 3% respectively. In addition we reported diluted earnings per share of $0.35 per share for the first quarter 2016.

Our diluted earnings per share results for the first quarter were below our previous guidance of $0.38 per share, primarily due to the impact of certain discrete and unanticipated items. Our EBITDA from franchising activities for the current period were impacted compared to our expectations by approximately $2 million in the aggregate, or $0.02 per share net of tax, as a result of lower than expected increases in domestic RevPAR and higher than anticipated corporate development and litigation settlement costs.

In addition, below the operating income line, certain discrete tax rate items and higher equity method losses related to certain joint venture investments and recently opened or under renovation Cambria properties in major urban markets negatively impacted our first-quarter results by approximately $0.02 per share compared to our expectations. We anticipate the earnings per share impact of these last two items will be off-set or reversed during the balance of the year.

As I mentioned, franchising EBITDA for the first quarter increased 3% over the same period to prior year and our franchising margins expanded by 10 basis points to 61.6%. Our franchising revenues for the quarter increased 4% over the prior year, driven primarily by growth in our domestic royalties and procurement services revenues.

Our domestic royalty revenues for the first quarter increased 5% over the prior year to $60.5 million driven by growth of all three critical drivers of royalties; RevPAR, system size and effective royalty rate. Our domestic royalty revenues were impacted by leap year, which resulted in an extra day in the quarter. The extra day in the quarter did not impact our RevPAR statistics but we estimated it added about 1% to domestic royalty revenues compared to the first quarter of 2015.

We achieved a 1.2% increase in domestic RevPAR, which was driven by a 2.5% increase in average daily rates, partially offset by 70 basis point decline in occupancy. Our first quarter RevPAR growth was less than our previous guidance of 2%; however, our absolute RevPAR performance from the first quarter was in line with the total industry results for the primary [chain field] segments in which we operate.

Our more recent RevPAR trends have improved compared to the first quarter, as our April RevPAR results increased approximately 6%. As Steve mentioned, we are also pleased that our Comfort family of brands performed well against their focused competitive sets, achieving RevPAR index gains estimated at 170 basis points compared to last year's first quarter. And, in addition, our mid scale an economy brands as group also gained 160 basis points in RevPAR index compared to their focus competitor sets.

Our first quarter RevPAR results were impacted by both the timing of the Easter holiday, which within the first quarter this year, as well as the negative RevPAR performance in energy producing markets. We estimated that the impact of the Easter holiday shift on our domestic RevPAR performance was approximately 50 basis points.

Excluding the impact of the energy markets, our first-quarter RevPAR results would have increased by approximately 200 basis points over our reported results. We expect this spread to decrease over the year as the oil markets stabilize and comparables become easier. Based on our first-quarter results and current RevPAR trends, we have narrowed the range of our projected domestic RevPAR increases for full year 2016, from a range of 3.75% to 4.75%, to a revised range of 3.75% to 4.5%.

On the supply front, we were able to grow the number of hotels operating in our domestic franchise system by approximately 1%, compared to March 31 of 2015, which is in line with our expectations. Our domestic supply growth numbers continue to be impacted by our rejuvenation strategy to the Comfort Brand family, which we have discussed in past calls. Excluding the impact of this strategy, our domestic system increased by more than 150 net units online, or approximately 4.5%, which compares favorably to industry-wide supply growth rates.

Our domestic pipeline of hotels awaiting conversion, under construction or approved for development, stands of 582 hotels as of the end of March 2016, which is an increase 12% over the prior year. Our domestic pipeline for the Comfort Family brand has increased 24% over the prior year, driven primarily by a 29% increase in new construction projects for the brand. Our domestic effective royalty rates expanded by 7 basis points in the first quarter to 4.37%. And we continue to expect our effective royalty rate to expand between 6 and 8 basis points for the full year of 2016.

With respect to franchise development, we believe that the industry fundamentals that drive new hotel development and conversion opportunities remains strong. Our first quarter re-licensing and renewal activities continue to reflect the strong hotel transaction environment and improved 7% over the first quarter of last year.

We attribute the decline in the number of new domestic franchise agreements, which fell from 99 in the first quarter of 2015 to 70 in the current quarter, to timing is we had a strong hotel development results in the fourth quarter of 2015 and we saw stronger than planned franchise development results in April.

Furthermore, we expect the number of executed domestic franchise agreements for the full year of 2016 to exceed our strong full-year 2015 results with a significant increasing Cambria and Comfort new construction.

Our business continues to drive significant cash flows and strive to allocate these cash flows to those items that will ultimately return the highest value to our shareholders over time. During the first quarter, we continued to utilize these cash flows to return value to our shareholders for a combination of share repurchases, dividends and investments in our business to drive future growth.

The Company paid dividends during the first quarter at a quarterly rate of $0.205 per share, or approximately $12 million, which represented a 5% increase over the 2015 levels. In addition to our quarterly dividend, we also completed the opportunistic and accretive repurchase of 100,000 shares of common stock under our share repurchase program, at a total cost of approximately $4 million.

Finally, we continued to utilize our balance sheet to prudently support the growth of our Cambria brand. During the first quarter, our net advances in support of the expansion of the Cambria brand, totalled approximately $40 million. These advances were primarily in the form of joint venture investments, [forgiveable key money] loans, senior and mezzanine lending and sight acquisitions. We expect these advances will accelerate the pace of the Cambria brand's growth over the next several years.

Now I will turn to our outlook for the remainder of 2016. As always, our outlook assumes no additional share repurchases under the Company's share repurchase program. Our outlook also assumes the effective tax rate to be 32% for the second quarter and 33.5% for full year 2016.

With respect to the tax rate, our guidance assumes the adoption of a new accounting standard in the second quarter, which requires the excess tax benefits related to stock compensation be recognized as income tax expense or benefit through the income statement.

Our hotel franchising activity guidance assumes that our RevPAR will increase between 3% of 4% for the second quarter and range between 3.75% and 4.5% for full year 2016. Our guidance also assumes that our effective royalty rate growth will increase between 6 and 8 basis points for the full year and that our net domestic unit growth will increase between 2% and 3%.

Excluding the impact of our Comfort rejuvenation strategy, we expect our domestic portfolio of net unit growth of our other brands to increase by approximately 5% in the aggregate. Based on these assumptions our guidance for full year 2016 EBITDA from franchising activities is in the range between $270 million and $274 million.

With regards to our non-hotel franchising activities, including Sky Touch and vacation rental activities, we are projecting reductions in EBITDA for full year 2016 to range between $16 million and $19 million. We expect our second-quarter 2016 diluted earnings per share to be at least $0.66, and our full-year 2016 diluted earnings per share to range between $2.30 and $2.35.

Our consolidated EBITDA for full year 2016 is expected to range between $252 million and $256 million. These EPS and consolidated EBITDA estimates assume that we incurred net reductions in EBITDA related to non-franchising activities at the midpoint of the range for those investments.

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

Thanks Dave.

To sum it up, overall, during the quarter, we continue to execute on our strategies to drive value for our hotel owners and our guests.

Our core hotel franchising business continued to perform well, with positive growth in key revenue drivers, RevPAR index and with cost discipline reflected in our franchising margin expansion. We are excited, obviously, about the launch of our vacation rental business, and believe it's going to be a growth opportunity for our shareholders that can add to our already strong franchising business model.

And to top it off, the enhancements of our Choice Privileges program are driving customer engagement at unprecedented levels. We are very optimistic about our continued long-term growth prospects and our ability to drive excellent results for our company and shareholders.

So with that, let's open it up to any questions.

Thank you.

(Operator Instructions)

Jeff Donnelly, Wells Fargo.

Your line is open.

Good morning.

I don't mean to disregard the operating performance, but I wanted to ask a question because I saw the Carlson platform recently transacted. I was curious if you'd seen that as a potential fit for choice?

We don't comment on individual transactions. But as we've said in the past, we look at everything that comes available. And we are always looking for opportunities to add to our portfolio. But we do not comment on individual items.

Understood. Maybe just to build on that though, how do you think about opportunities that might come down the path that could potentially bring you outside of being a pure franchise player?

Do you see it as part of Choice's evolution if it wants get into, say, the full-service side of the business, that it eventually might have to enter the management aspect of the hotel business?

Well, we have obviously have expressed a desire to be in the full-service segment; and your right. That typically means providing management for some of the hotels. It would also depend on which kind of brand we went into on the full service side.

I have done a lot of management business over my career and we're not afraid of doing it. We obviously like the franchising business. And we like the fact that when we are in the franchising business, we're not competing at all with our franchisees and our owners. And so having said that, if the right opportunity comes along for a full-service brand that includes management, we would embrace that.

And additionally to that, as we expand our international platform, that may too lead to some management opportunities, which then we'll embrace.

And maybe just one last question.

And maybe a little bit bigger picture, just on the competitive landscape out there because we've heard from some of your competitors out there or segments of some of the global brands.

When you look at mid-scale today, you have Hilton launching through. And, obviously, you guys have done a pretty aggressive refresh, if you will and sort of culling, if you will, of your portfolio over the last few years. And some of your competitors maybe appear to be losing there. I know you mentioned Carlson as a new owner.

How do you see the landscape shaking out in the next two to three years? It feels like there's a lot of moving pieces going on. And I'm curious how you think of what's going to drive success or failure for companies competing in mid-scale right now?

I think what it boils down to is scale. Obviously, the scale that we have gives us a considerable advantage. When you look at the fact that, we drive over half of the business in the hotels. As your seeing out in the landscape, some of the sole brands are struggling to survive and thrive in this environment, as scale becomes more and more important.

And look, $400 million a year making sure that our distribution platform is the best out there. And so far, were doing really well with that. So I think the issue you're going to see, and I think that you're going to see further consolidation. And that is because it is extraordinarily difficult in this environment for an individual brand to survive or an individual independent hotel to survive.

And that is why you have seen the dramatic growth that we have had in Ascend. So I think you are going to see continued consolidation. Whether or not that's at the bigger players' level, sort of the top four or five companies. Most of us are buyers, not sellers. So, obviously, all of us are looking at the transactions that have occurred with great interest to see how they play out for those folks. And we're going to continue to look for opportunities for us.

One of the things that you've seen with us is we're not going to limit ourselves to just hotel brands. We like the idea of taking our skill set and applying it to adjacent businesses. And we think we are going to grow some pretty significant profit lines for ourselves in these other businesses over time, which is why you see us investing the money in them.

But, yes, on the other front, both globally and domestically, we are constantly looking at what's available. And actually, quite frankly, we also talk to people that aren't available, just to see whether or not there's opportunity to provide value for both sides.

The nice thing about this Company, though, is if you look at our long-term growth and profitability, we actually don't have to do anything to that's inorganic. If we did something that was inorganic, were going to make sure it adds to the value. We're not in a we've-got-to-buy-something-and-we're-in-a-tough-position. We are actually view our position as very strong.

And so we are a very disciplined financial buyer. We will buy when the numbers are right and they add to our overall story. But the nice thing about being in our position is, we can do this organically on our own and have very happy shareholders as a result.

That's helpful. Thank you.

Steven Kent, Goldman Sachs.

Your line is open.

Good morning. Just a couple of questions.

Can you talk about your investments in Cambria and the expected return. And how we should be feathering out that $40 million or so investment over the next few quarters?

And then I know you always struggle with this, of giving longer dated forecasts given the shorter bookings. But what gives you some confidence that you will accelerate through 2016? I'm assuming it's some macro stuff, but I would just like to hear your views.

Let's start with Cambria first.

We are underwriting Cambria, and we are doing it in a variety of ways to incent growth. It is actually really getting fun because were getting some amazing projects that are just going to thrill our customers. And we also think we'll bring in a lot of new customers with Choice portfolio.

So as we look at those investments, they are temporary. Were already seeing some significant recycling of capital. And so you will hear probably in the next quarter about some major recycling occurring. So our view is that we will continue to put money into projects.

But as they open and stabilize -- and they are stabilizing on the rapidly increasing timeline because of the success of the brand and our efforts around ramping these hotels up rapidly. The fact that we're putting them in urban markets, where we already had millions and millions of customers calling us for rooms and we don't have them. So the New York hotels are ramping extraordinarily rapidly. Because we've got seven or eight million people that contact us looking for a room in Manhattan, and we have 1,500 rooms.

So you can say what you want about Manhattan. Were going to fill the hotel. The question is at what rate; and if the market softens, obviously, we are affected by that rate. But we're very confident about where we're doing these urban markets that those hotels are going to not only survive but thrive.

And the investment, we like this idea. We've got a pool of capital that we are putting into these. Bit the nice thing is that pool of capital will recycle probably on an average of a three- to five-year basis. And so the number of the projects that you have seen us open in the last two or three years there will be events were refinancing or the restructuring of the overall deal will result in the capital that we laid out coming back to us.

And quite frankly, we have made some investments that have been really attractive. And so we're not going to be the long-term holders of those hotels. But because they have done so well, there are profits to be had in the coming years, which is great for the Company and great for our developers.

On the front where we are looking at the acceleration of RevPAR, obviously April is encouraging. But what we have seen, based on our bookings and our view into the summer, is it going to be very strong.

And if you look at the macro trends that affect Choice and the moderate tier -- and we represent 99%. So aside from the elections, which I'm not going to comment on, the outlook for all of the indicators we look at are good. GDP growth is decent. Employment, which is the key factor we look at, has really improved. And It looks like it's going to continue to improve.

Housing starts look good And there is optimism in those markets. And consumer confidence is there. We've got several experts that we've talked to regularly about where the consumer is and how they are spending. And all of those indicators for us are green lights.

And so while the RevPAR growth is not going to be as strong as last year, and the first quarter started a little slower than we thought, the net result though is -- as Dave mentioned -- the oil markets have stabilized. I don't know that they're going to improve, but they are stabilized. And we took a lot of that hit last year. And so the comps are going to get easier as we go forward, both from the standpoint of the impact of the oil market -- which is not a huge amount -- it's probably 9% or 10% of our inventory.

And in addition to that, you are going to see total comparables get easier as the RevPAR growth eased the backend of last year. So net/net, our RevPAR guidance -- our view is the same as it was in January, maybe adjusted slightly. As a result of a couple of these costs, we adjusted our EBITDA up slightly. But our outlook is exactly what it was when we had our last earnings call. And so while there is supply addition, it is still not at levels that look like the end of the cycle.

And so if the financing markets stay in place, we think not only our development business -- which we think were going to have a bigger year this year than the huge year we had last year. Our development business is going to be strong, we think, through at least 2018. And after 2018, we're not sure. And we think RevPAR growth is going to be solid through 2018, based on what we're seeing in the fundamentals that drive our business.

And so if you are sensing optimism on our side, we are -- because barring something unforeseen, we don't see any reason why we don't have a very strong year this year and seeing that carry into 2017 and 2018. And then the other exciting thing about 2017 and 2018 is you're going to start seeing some of the other things were doing -- some of the Cambria investments, some of the alternative growth investments -- start to add to our portfolio and our EBITDA. And that's why we're pretty bullish on the next several years for this Company.

Okay. Thank you.

Thank you.

Shaun Kelly, Bank of America.

Good morning.

You talked in the prepared remarks a lot about distribution and how successful you've been on the Central Reservations platform. I am curious. I know you break out your distribution by channel, I think, in your investor presentation.

But just as you look at the change in patterns over time, are you seeing an actual shift from the OTA channel to your direct booking channels? Or is the share coming from some of the more traditional channels? Where are you picking up the share gains from?

The share gains are coming from the more traditional channels. The OTAs continue to grow as a part of our business. And as a result, while we're certainly welcoming the other OTAs as a channel to utilize, we are not happy with the price points that they want.

And so you're going to continue to see us try to drive business to our channels, simply because they are dramatically more profitable than an OTA trying to suck 15 to 20% out of the deal. And so we're not anti OTA, but we're not at all happy with some of their practices. And we have never been happy with their pricing. We think it's overrated for what they provide.

And so as we look at this going forward, one of our sole missions is to try to limit the amount of activity going from the OTAs and coming from into our primary channels. And if you look around the industry, everybody else is doing the same thing. And so we openly welcome them as a channel.

We just want it to be price appropriately and with a business relationship that makes sense for us. But we are going to continue to drive our business and our proprietary channels. Because that creates the strongest loyalty loop with the customer and because it's the most profitable for us.

I think that's very clear, and I appreciate the color.

So then I guess as we think about some of those initiatives you mentioned that some of the other brands are up to. Some people have taken a pretty hard stand on the brand side of launching direct booking campaigns. Where does Choice sit in that?

Clearly, you've embarked on a number of initiatives to drive the growth that your seeing. But have you gone out and started a direct booking campaign yet? Or is that something that could be available in the future to really try and emphasize the value that you can provide to the channel?

We think that the industry is providing leadership and going the right direction. We have been doing activities around that for the last five years. We are looking at all of our options; including most of the activities you are seeing from others.

Now, there have been some significant advertising campaigns out there. And also some ways of bringing back around rationality of the market because the buying public still thinks they are going to get lower rates on the OTAs because they say they do. Which is not true. And so as a result, you're going to see us talking a lot more with our customers about, you want the lowest rate? Come to Choice hotels.com.

Be a member of Choice Privileges, and you're going to get a discount to those other channels. And we've got to get that word out. We are very encouraged by what the other brand companies are doing in terms of the marketing activities and everything else they're doing to drive customers back to proprietary sites. Because that's good for the industry; it's good for our owners, our franchisees, and all the hotel companies.

So you will see us very much (inaudible). Obviously, we do things our way; so you will see us take a different turn on our own things. But we are very much supportive of that movement, and we will be a major player as part of it.

Thanks.

And just one final one to switch gears. Could you give is a quick update on Sky Touch from two different areas. First of all, just where in the P&L should we be seeing the contribution on the revenue from maybe both SkyTouch and the new Vacation Rental Management Platform? Where should we be seeing the growth?

And then, obviously, there's some significant operating losses that have been attached to this. Do you think you're still on track? I believe the target was pretty close to break even, on at least SkyTouch, by next year. Is that still a viable goal?

I will let Dave answer questions about the financials.

But it is absolutely the goal that 2017, we will break even and not withdrawing and looking at a bright future. The growth of the pipeline and the signings of companies that are working with us, both brands and independent hotels, continues to accelerate in a significant way.

We are in long-term discussions with several major players as well. We will see how that plays out over the next six months. Those are longer term investments.

But you said, operating losses. That is not what we are doing. We are investing in a business that we think is going to generate EBITDA.

And the only reason we talk about this so much is if I was putting $50 million on the balance sheet because I could capitalize it, like it used to be in the old days, we wouldn't even have this dialogue. The difference is it's running through EBITDA, which we get. But it's an investment, not an operating loss.

So we are investing in perfecting that product. We are investing in talking to customers and bringing them on board. We are investing in other functionality that we think will help sell and what else we can add to that platform.

That's where that money is going. And so the operating loss makes it sound like that money is gone. We're building an asset that is going to generate significant EBITDA over the next, we hope, 10 years. And we're going to continue to add to it. And we believe we're on the right track. And we will keep you up-to-date in terms of there ire several different ways we achieve our goal in 2017. And we are currently evaluating and having discussions around that.

And as a result, I don't think in the next quarter, but in the next several quarters, you will know what we're doing and why it will change from an investment into eventually profitability.

And, John, to answer your question on geography. In the press release, there is an Exhibit 8, which shows non-franchising activities broken out at the revenue line, which is where the revenues from those different opportunities reside.

If you looked at the GAAP P&L, also Exhibit 1, it shows up in other revenues. And I think there is a little more detail in our 10-Qs and 10-Ks in the Segment Disclosure section that you can pick off those figures from.

Great. Thank you very much, both.

Felicia Hendrix of Barclays.

Your line is open.

Hello. Good morning. Thank you.

Back to Cambria -- first, a bit of a housekeeping question on Cambria. You removed Cambria from your RevPAR growth data table. So just wondering if you could lets us know how the RevPAR growth trended for that brand. And you obviously are optimistic about it for the next few quarters. But if you can let us know how that was in the quarter?

We actually have not included Cambria in the RevPAR guidance. The answer is that RevPAR is up double digits. But we don't include it because when you only have the number of hotels we have, and you add in New York City, the numbers go up dramatically. So we are still in this phase where we will add it to the RevPAR charts when it hits,

It's kind of 25 has been our threshold. We've never reported the Cambria data in our earnings releases. And our approach has been that until a brand gets at least 25 units and you have year-over-year comps at that level, we don't report it.

So actually, we are at 25 units in Cambria this quarter. So next year, we would expect to start showing it -- I'm sorry, at the end of this year.

Probably Q4. The answer is it's double digits because we are adding urban product, and the numbers are off the charts. And not only are the new products performance extraordinarily well, the existing inventory, which was in much tougher markets, was not an urban then suburban strategy when they started the brand. It has shifted since I came over.

But even those hotels, the sum total of them, are reaching full parity with the competitive set. And a number of them are running premiums to the competitive set.

So that's a good segue to my next question. And in your remarks to another question,, you are so optimistic about Cambria brand. And you've had nice successes so far and also regarding the growth.

So given all of that, when do you foresee the investment in the brand, as far as the investment key money that you're giving that. When do you see pairing that back?

We have a major target, which we haven't disclosed, but think of it as a pretty developed system by 2018. When we hit that number in 2018, our sense is we will have to do a lot less incentives because the brand will be so strong and the developers are going to want that brand as a first choice.

And so we are obviously getting some pretty strong competition. But I will tell you that the Development Committee has turned 180 in terms of their level of interest, to the point where we have actually had some fist fights over projects we've had. Which while I was used to it in my old company, it's something new. And it's nice to see again in this brand.

And so our view is after 2018 -- and you're going to see significant recycling as well. So the amount of money going out the door now will stabilize. But then what will happen is we will just continue to reinvest it. But after 2018, our sense is we're going to have to do a lot less if we meet the goals we have established for ourselves.

And then to add to that, what Steve said, obviously the developers that were doing these loans or equity investments with operate traditionally with competitors at more of that upscale select service level and more institutional capital quality. So the nature of the partners that we're attracting to the brand using our balance sheet this way is certainly one of the things that is exciting. We've got, I'd say, multiple examples of success there at this point.

And then to step back from the capital, if you look at it, I think I put a number in my prepared remarks that we were around $165 million of capital that had been deployed at the end of March. If you look at how that breaks down, about one-third of that is loans. And a good portion of those loans, we were able to leverage the cash that we have on our balance sheet and generate a mid-to mid-ish single-digit percentage return on the capital, in addition to building the brand that drives a royalty stream.

And then on the equity method investments, while in a particular quarter the equity method with a gap approach so obviously you can have variability in the earnings. From an economic perspective, we are finding these projects that kind of unleveled basis. You can get the high-single-digit, low-double-digit, unlevered returns on these projects, where you are sharing the equity risk with high-quality developers. And over time, as that capital is recycled through capital transactions of the projects, we feel really good about the return on the capital.

But probably most importantly, as Steve said, in terms of our goal for growth from revenues with this system in 2018 is to be a significant contributor to the royalty stream. And to make that happen, us stepping up with some form of capital support in kind of a relatively modest and controlled way makes all the sense in the world from our perspective.

And I think as you see those returns, when we're underwriting for us, not only are we building a brand that's going to be a significant contributor over the next 20 years to this Company. We are underwriting, when you include everything, into a high teens/low 20s investment, which we are really happy with. So we will have to see if our track record continues. But we are very pleased with every investment we have made so far.

And as Dave said, in the loans where we are creating either primary or mezzanine situations, that cash is sitting earning nothing. And we are able to earn a significantly higher return, as a result of deploying it; and build a brand; and get other returns as well when you add in the royalties and everything else.

That's really helpful and makes a lot of sense. Thank you for that.

And then, Steve, you talked about your optimism for the core business through 2018. But I still want to ask you about the drivers behind your investment in the ancillary businesses, And you did say that you like the idea of taking your skill set and growing it into adjacent businesses, like SkyTouch and Vacation Rentals, which totally makes sense.

But I'm just wondering, as you look out to the horizon where we are in the cycle -- and again keeping in mind that you were optimistic for the core business in 2018. I am just wondering. Is some of this investment also to strategically offset the slow in growth in the lodging industry at this point?

No. It's to add to the variety of our growth and variety of our cash stream. So what I'm interested in doing is being in businesses that may track the lodging cycle in some fashion. But if you take vacation rental, that business is the most stable business you've ever seen. The only time in 40 years of working alongside that business that it ever declined was in the great recession. And so that was the amazing thing about vacation rentals.

People take their vacations regardless of where the economic climate is. The reason I like that is, one, the numbers for customers. In five years, we have gone from 5% to mid-30%s of American travelers willing to consider an alternative lodging arrangement. That is a mega trend in this business, and that's why we're jumping into it.

And it's also highly fragmented and has not been successfully branded. So we believe that's a real opportunity for us. But we also like the fact that it seems much less cyclical than the hotel business. I think there are couple people, but I think Mark Woodruff said it best. He said everybody agrees the lodging cycle has peaked, but nobody says it's going to rapidly declined.

And our view is as supply comes online, that obviously will have some impact on where RevPAR goes. But the supply, if you look at it, it is mostly in the upscale segment. And so where most of our hotels are, there is not much supply getting added. As a result, that's why you're hearing from us.

We know the party doesn't last forever. But we are pretty confident that at least through 2018, we're going to have very, very solid years. And then after 2018, we will see. It depends on what the economy does and where employment is and everything else.

But the reality is in the moderate tier, there's very little supply being added. So our situation, while we are competing in the upscale market -- but we like how we're competing -- in the primary core markets we are in, there is not supply being added.

Another helpful answer. Thank you.

And last one just quickly. The second quarter in a row we've seen conversion slowing. Just wondering if anything to read into that?

I was actually looking back at that. If you look back over the last five or six years actually, there's been a handful of quarters where you have seen franchise sales decline on an overall basis, and even during lodging up cycle. We don't tend to overreact to one quarter of data. And the other thing that's important, I kind of mentioned this in my remarks, is that what we've seen since quarter end in terms of franchise development activities has been very promising.

It gives us confidence that our view that we can exceed last year's overall franchise sales results, and that's what we're planning to do this year, as well. So if you look at the growth of the pipe and the number of applications in house and everything that were looking at. The first quarter, quite frankly, we were little surprise because some of the deals slipped from March to April. And so what we have signed -- we've made up a bunch of that difference already this month. And so our we're very optimistic.

And then the other thing about our pipeline, they've actually turned into open hotels. And so if you look at our pipe, we are running over three-quarters percent going to opening and actually having a hotel. And everybody always says well why isn't (inaudible). Let me just maybe redirect you to something that might be more helpful, and that's how many hotels get opened.

And so in our case, we're looking at, ignoring Comfort, we're looking at 5% growth this year. That's about as good as it gets. When you're sitting on 6,400 hotels and you're growing at 5%, that's a pretty good clip.

Yes, I was just speaking specifically about the other conversions. So there's nothing to -- we should see conversion rates picking up over the next quarters?

Yes, the only thing that I will tell you about what affects conversions. Obviously, we get more than our share of the independents that want to upgrade and brand. So we get a lot of business from that.

We also get a lot of business from the other brands shedding their hotels. And you have seen pretty remarkable growth in quality, which has a lot of those -- including Comforts.

So we're in a period in the cycle where it appears that some of the hotel brands may, as they put in these programs to do their refresh of their brand, may be moving and terminating some hotels. Which is a major opportunity for us. So as we look at the landscape, we are at peak levels for conversions; and then we think this year we'll be better than last year.

And then the exciting thing is we mentioned is the new constructs are up significantly. So that combination has us pretty excited about this year. Our folks have a major goal, but they are actually pretty confident that they are on track to meet it.

Okay. Great. Thanks so much.

Thank you.

Robin Farley, UBS.

Great. Just a couple of quick questions.

The higher corporate development cost. Is that mostly related to the vacation rentals business and something that we would probably see the at these levels going forward?

And then I wanted to ask about your Q1 unit growth. The rate of unit growth is below the full-year guide and up 1 in the quarter, up 2 to 3. And I know you talked about the new hotel contracts and how that can slip. That can be just a matter of timing. Is a similar thing happening with the properties opening in Q1 -- just sort of chunky timing there?

And then my last question is I was just looking at where the increases are in new hotel contracts. And it really looks like it's basically just the Clarion and the Econo Lodge brands and not some of the other brands that you been highlighting, where there was growth in new contracts. Is that again just sort of a quarter that is atypical, or is there something else going on there?

A few things there. On the unit growth, I will take that one first, that's just timing. We feel confident about our full year net unit growth range, which is between 2 and 3%. And so that will play out over the next several quarters.

On the corporate development costs, I guess what I would say there is we highlighted corporate development and a few other items just because of some of the noise of the EBITDA line for the quarter. That is one of a number of things that impacted the franchising margins for the quarter that I would consider to be kind of infrequent that that would happen. I wouldn't tie it to vacation rental necessarily.

And then the other question on the Clarion and the Econo Lodge brands -- back to Felicia's earlier comments. We tend to not look at our quarterly franchise sales results in a vacuum. You get some things where the comps are tough kind of on a year-over-year basis because you did a particular brand deal in the prior year that's impacting this comparison.

So I don't think there's anything to read into the Clarion and Econo Lodge contract results verses our other brands this quarter. We continue to believe that with what we've got going, what we've seen in April, and what we expect for the balance of the year that we will see good traction with our moderate care and upscale brands, as the year progresses.

Okay, that's great, thanks.

Anything you would highlight driving the higher corporate development costs in the quarter, if it's not related to the vacation rentals?

No, I don't think there's anything else to highlight. Again, it was one of the highlights out of a number of factors that impacted our results that we wanted to make sure we explained versus our previous outlook and what had happened.

Okay. Great. Thank you.

Thank you.

Joseph Kraft, JPMorgan.

Good morning.

Hopefully, I'm not asking questions that you already answered.

But, Dave, you mentioned your confidence in growing 2% to 3% for this year. That's on a property basis. What does that translate into on a room basis? Is there a difference?

The past several years, the net unit growth rate has slightly exceeded the net room growth rate. And that's one thing to consider. But I think the other thing to consider that you've got to really think through when you're doing your work, is where some of the unit growth is coming from is more in the upper moderate tier, as well as upscale space.

So while the room counts may be lower, the absolute RevPAR is a lot higher. So the per-unit economics are a little bit different. I don't think you can oversimplify it by necessarily looking at just units or just rooms. You got to think about brand mix and whatnot over time.

but I guess to answer your question, at the end of the day, traditionally our net unit growth rate has been a little bit higher than the net room growth rate, just given the average size of the properties involved.

Thank you.

And then on top of the hotel development and financing, the press release and you talked earlier about the $40 million investing in spending in filling out the Cambria brand. What is your expectation for the full year this year and next year? I know you talked about you plan to do some recycling in of some of these loans and investments over a longer timeframe. How much are you baking in getting this year or next year?

We don't traditionally provide a free cash flow forecast, per se. What I would tell you is we talked for quite a while, a number of years, about putting out between $20 million and $40 million per year on average. Some years will be higher; obviously, I think this year will turn out a little bit higher.

What's a little tough to handicap is that meaningful component of what you see on our cash listing for the quarter is about $25 million of real estate acquisitions. A good portion of that was land, where we acquired multiple sites, more pieces of real estate, to be essentially flipped over to a hotel franchise developer.

And we're having great conversations on all of those sites. And we feel pretty optimistic about our opportunity to recycle those pretty quickly. So if that happens within the year, then it's going to obviously be a shorter recycling window than the three- to five-year time horizon that Steve talked about.

The balance of the year, in terms of loans and direct investments and other Cambria investments, probably think about it in the neighborhood of $80 million to $100 million on an annual basis for this year potentially. But there are going to be a lot of things that have to go right in terms of putting together the right deals and getting the right terms. So some variability, depending upon the particular deals that we see.

Thank you.

Thank you. Thomas Allen, Morgan Stanley.

Good morning.

On your RevPAR guidance, you talked about RevPAR growth of 6% if all your guidance is for 3% to 4% for the second quarter, understanding Easter would obviously help April. But it does imply a big deceleration. Can you just explain that in more detail?

I think the answer is as you get into for the second quarter, April is obviously a strong month, both because business has picked up but also because it has an extra day in it. So there is a technical reason why it slows down, but it slows down to the pace that we are expecting for the year. We're not suggesting that all of a sudden we're going to jump to 6% RevPAR for the remainder of year.

What we're sensing is a very strong summer and then strong end of the year. But when we say strong, we mean in terms of the relative range that we've given you of where we will end up. And so what you should expect from us because of the way our products are differentiated is we will have a stronger summer. And then a fall and close of the year that looks more like the guidance we're giving.

Yes, and just to add to that little more granularly, when you look at our quarterly RevPAR outlooks, certainly the way that the months fall and the calendars fall in these different months has a pretty meaningful impact in terms the linearity, so to speak, of these RevPAR rates.

So we did talk about 6% in April. We are expecting May to be a good amount softer than that -- still positive, but softer largely on account of the calendar shift in terms of the number of Fridays and weekend days in the month compared to the prior year before things rebound in June. And we feel good about the summer.

And we really saw that in the first quarter too. March ended up being the strongest month from a RevPAR performance perspective, despite having Easter in it. So you get month-to-month swings, and you see it obviously in doing your work in the STR data. We see it as well. A lot of times, that's tied to the calendar shifts in terms of the number of weekend days and holidays and how they fall in the year versus the prior year.

Helpful.

My second question -- someone about this up earlier -- but you redesigned your Loyalty program in February. It didn't seem like you went down the path of greatly promoting discounting or discounts on your own website versus OTAs. But now you're suggesting -- I took your comments to suggest maybe you would go down that path.

I guess my question is why didn't you do that originally? And why you feel comfortable doing it now?

The program changes were designed to make it compelling for a population that had not joined yet. And that is why you have seen the growth rate of that program literally go from 2-plus million to we think 4-plus million this year. And that is to attract millennials. When you sign up for our program, you get something immediately. So that is absolutely having the same effect.

But you should expect to see us also move in this direction of the best pricing is going to be available to our choice privileges members on our sites. And we are doing that already, by the way. We're doing it in a way you see when your booking with us but not necessarily in our advertising.

And so we're considering lots of different approaches to doing this. But we are already doing it. And you should expect us to accrete that effort, as we want to correct the misunderstanding that there are better rates someplace else.

Helpful. Thank you.

Thank you.

Our final question comes from, David Katz, of Telsey Group.

Good morning.

If I could just go back to one of the earlier topics around SkyTouch. If I was listening carefully, Steve, the target of turning to a positive outcome on it. Is there a range of possibilities beyond just operating that business to flip to profitability in growing that profit? Is there potential partnership (inaudible) sale or range of outcomes we could be thinking about as well?

Yes, and that is exactly what we're doing. There are three or four different ways that we have identified that we can get there. And we are in discussions evaluating each one, and what is the best outcome for our shareholders and also for the customer base.

So we're looking at both because it is not only getting to the goal by 2017, but it's doing something that makes the offer more compelling to the entire industry. And so it is a combination of those two. So the things you mention are exactly what we are looking at.

Thank you very much

Thank you.

I would now like to turn the conference over to management for any further remarks.

Thank' s for joining us. We appreciate your interest is always. That concludes our call for today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone have a wonderful day.