Choice Hotels International Inc (CHH) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotels International second-quarter 2016 earnings conference call.

(Operator Instructions)

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 provisions 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, foresees, forecasts, estimates or other words or phrases or 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 of the -- 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 we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity and performance or achievements. We caution you, do not place undue reliance on forward-looking statements which reflect our analysis only and speak only as of today's date. We undertake no obligation to publicly update our forward-looking statements to reflect subsequent events or circumstances.

You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our second quarter 2016 earnings press release which is posted on our website at www.ChoiceHotels.com under the investor information section.

With that being said I would now like to introduce Steve Joyce, Chief Executive Officer of Choice Hotels International, Incorporated. Please go ahead, sir.

Thank you. Good morning. Welcome to Choice Hotels' second-quarter earnings conference call. Joining me today is Scott Oaksmith, our Chief Accounting Officer.

This morning we'll update you on our performance for the second quarter of 2016. We will also share some news about initiatives designed to increase the number of reservations delivered to our franchisees directly from our proprietary distribution channels. Importantly, again this quarter, all three levers that drive domestic royalty revenue all increased: system size, RevPAR and effective royalty rate.

We are also seeing international growth in key markets, and, while still a small part of our overall business, we have some notable accomplishments. So let's start with our distribution strategy.

This quarter, we continued to drive more reservations through Choice's proprietary channels, helping to increase the number of customers to our franchisees' hotels at lower costs. This is a result of a number of new initiatives.

Just a few weeks ago, we announced that visitors to ChoiceHotels.com and on our mobile apps will now be able to access to discounted rates that can't be found anywhere else on the Internet. Both existing and new members of Choice Privileges can access these exclusive room rates that are up to a 7% discount off the best available rate. This is in addition to our commitment to stand behind our pricing.

If a guest finds a lower price elsewhere online, we will match the price and give the guest a $50 Visa gift card. The Choice Privileges member rate is the latest in a series of enhancements for our loyalty program. At the beginning of the year, we announced the biggest redesign of the Choice Privileges program in our Company's history. The changes were so well-received that we already expanded the popular Your Extras program where guests can earn special rewards for midweek stays with new partners like Uber.

The changes are designed to bring greater value to members and in return drive business to Choice's distribution channels and increase the number of loyalty members, and it is all working. In fact, the numbers speak for themselves. We just surpassed 27 million Choice Privileges members. We are on pace to sign up more members this year than in any year in our history.

In fact, already this year, we have signed up more members than we did in any year prior. All of these new members are contributing to the increase in revenue generated by our central reservation system and property direct loyalty program. The revenue contribution of these channels year-to-date increased to 57%, up 330 basis points compared to the same period last year.

This quarter, we had our highest CRS revenue day ever on June 20, surpassing $20 million. Prior to second quarter in 2016 we had never surpassed the $18 million mark for CRS revenue any day in our second quarter. The amount of revenue delivered through our CRS continues to set new milestones and reach new all-time highs on a weekly basis.

ChoiceHotels.com also continued to grow significantly and generate the largest share of revenue of our distribution channels. Our direct online channels, ChoiceHotels.com and mobile, had 15 days with over $7 million in bookings in Q2 2016 compared to only 5 last year.

We hit our first ever $8 million day for ChoiceHotels.com and mobile in June 2016. Bookings via our mobile applications continue to grow at a fast pace and have yielded an increase of 22% in the revenue for the second quarter compared to the same time last year.

Our distribution strategy is delivering great results. We are aggressive in coming up with new ways to drive guests to our proprietary channels, and it's increasing the number of customers to our franchisees' hotels at lower costs.

Now moving on to the rest of our results. There are a number of positive financial highlights for the quarter. The Company delivered a 15% increase in adjusted earnings per share.

Total revenues increased 4% for the quarter with franchising revenues and domestic royalty fees each increasing 7%. As I mentioned earlier, once again this quarter, all three levers that drive domestic royalty revenue performance increased: system size, RevPAR and effective royalty rates.

Domestic system-wide RevPAR increased 4.3% in the quarter and exceeded total industry results as well as the results for the primary chain scale segments in which the Company competes as reported by Smith Travel Research. Our Comfort family of brands continues to outperform its focused competitive set and has now experienced 21 straight months of RevPAR gains.

Moving on to some more good news in the development in brand [farm]. In the second quarter we saw executed franchise agreements increase by 6%, driven significantly by our new construction results. New construction was up 40%, fueled in large part by the growth of our Cambria brand.

The domestic development environment continues to remain strong, and our franchise agreement applications in-house at the end of the second quarter were up 8%, including a 9% increase in conversion applications. We continue to expect the number of executed domestic franchise agreements for full year 2016 to exceed our very strong results for last year. Our momentum in the upscale space continues with our Cambria brand continuing to grow in key markets across the country. The domestic pipeline for Cambria increased by 112% compared to the same time last year.

In the second quarter, we celebrated the groundbreaking of a 222-room 14-story Cambria in the heart of downtown Philadelphia just off Rittenhouse Square. We also signed nine new franchise agreements to bring Cambria to key markets including three in Southern California. One adjacent to LA live in downtown which is 180 rooms; two, our largest Cambria to date 350 rooms in Anaheim near Disneyland where the new Star Wars Park is opening; and three, another 225-room project near LAX.

We also signed new projects in Boston, Seattle, Indianapolis, and Oklahoma City. These signings are consistent with our strategy of growing the Cambria brand in high-profile locations within the top travel markets across the country further enhancing the long-term brand visibility with the target upscale customer Choice is actually recruiting to the previously discussed changes to our loyalty program. These recent signings follow the grand opening of our terrific new Cambria in Manhattan, the Cambria Times Square, earlier this year and the announcement last quarter about two hotels coming to downtown Chicago with the conversion of an existing hotel and an adaptive reuse of a commercial office complex which are both now under development.

Moving to our international growth we are seeing momentum in key international markets as a result of several deals that are adding new hotels to our system. We recently announced a new master franchise agreement to expand into the UAE and Saudi Arabia where we believe our mid scale brands such as Comfort and Clarion will perform very well. As part of our European expansion in the first half of 2016 the Company signed agreements to add 19 properties in Germany, Austria and Hungary under the Comfort and Quality brands and another deal to establish multiple hotels in Belgium.

Choice is further growing its presence in Germany with two new Comfort brand hotels in Frankfurt and Dusseldorf and recently launched its upscale Ascend hotel collection in the UK and France. Choice continues to see tremendous opportunity in Europe, and we are uniquely positioned to aggressively grow and compete. We are pleased with the momentum we are now seeing and strong RevPAR gains domestic and international growth and new initiatives on the distribution front that are successfully driving more business to our proprietary distribution channels.

Now, let me turn it over to Scott Oaksmith to share more detail about our financial results.

Thanks, Steve. In this morning's press release we reported adjusted diluted earnings per share of $0.71 a 15% increase over the prior year. Adjusted diluted earnings per share excludes executive termination benefits totaling approximately $2.2 million which represented approximately $0.03 per share for the quarter.

Our adjusted diluted EPS exceeded our previous outlook of $0.66 per for the quarter by $0.05 per share. Approximately $0.03 of this out performance is attributable to better-than-expected operating results. The remaining $0.02 was the result of a lower effective tax rate than we had previously expected.

Our operating income results exceeded expectations due to a combination of better than projected hotel franchising revenue performance as well as lower than anticipated SG&A expenses. Our SG&A expenses for the quarter were less than we had anticipated as a result of the delay in the timing of certain expenses that we now expect will occur in the back half of the year. Our adjusted hotel franchising EBITDA for the second quarter increased 7% over the same period of the prior year, and our hotel franchising margins expanded by 60 basis points to 69.2%.

Our franchising revenues for the quarter increased 7% over the prior year driven primarily by growth in our domestic royalties and procurement services revenues. Domestic royalty revenues for the second quarter increased 7% over the prior year to $81.1 million driven by growth in all three of our key levers. We achieved a 4.3% increase in domestic RevPAR in the second quarter which exceeded our previously published outlook of a 3% to 4% increase.

Our RevPAR increases were driven by a 3% increase in average daily rates and an 80 basis point increase in occupancy. We were particularly pleased that our RevPAR results exceeded the performance of the overall industry, as reported by Smith Travel Research, by 80 basis points. Furthermore, excluding the impact of the energy markets, our second quarter RevPAR results would've increased by an additional 150 basis points over our reported increase. We expect this spread to decrease over the remainder of the year as oil markets stabilize and comparables become easier.

We attribute our second quarter RevPAR out performance against the overall industry and the primary chain scales in which we complete primarily due to the continued strength of leisure travel, the rejuvenation of our Comfort brand, as well as new revenue and rate management tools the we have recently provided to our franchisees.

As you may know, although we continue to increase our share of business travel, our business remains predominantly leisure travel focused. And as a result we expect to see continued strong RevPAR results in the third quarter as the summer travel season continues. As a result, we expect our third quarter RevPAR results to increase between 3.5% and 4%. On the supply front, we grew the number of hotels operating in our domestic franchise system by approximately 1% compared to June 30 of the prior year. This growth was in line with our expectations.

Our domestic supply growth numbers continue to be impacted by our Comfort brand rejuvenation strategy which we have discussed in past calls. Excluding the impact of this strategy we grew the number of net units online in our domestic system by more than 130 units, which represented a 4% increase. This increase compares favorably to the industrywide supply growth rates.

Furthermore, our Quality brand has continued its strong growth and is approaching 1400 units. This represents nearly a 6.5% increase over the prior year. In addition to the strong unit growth, the Quality brand has also reported one of the highest RevPAR growth rates across our portfolio increasing over 6% in the second quarter.

Our domestic effective royalty rates have also continued to expand and reached 4.4% in the second quarter, a 12 basis point expansion. Furthermore, our year-to-date effective royalty rates have increased 10 basis points compared to the prior year. As a result, we have revised our outlook and now expect our effective royalty rate to expand 7 to 9 basis points for the full year.

With respect to franchise development, we executed 147 new domestic hotel franchise agreements during the second quarter, a 6% increase over the prior year. New domestic hotel franchise agreements for new construction projects increased 40% over the prior year quarter, highlighted by our Cambria Hotel and Suites brands which executed nine new agreements in key markets that we believe will continue to drive the success of this brand. Our domestic pipeline for our Cambria brand continues to expand and has more than doubled over the prior year and now stands at 53 units.

Our total domestic pipeline at June 30 has grown to 591 hotels which is an increase of 14% over the prior year. Our license and renewal activities continue to reflect the strong hotel transaction environment and improved 26% over the second quarter of the prior year and are up 16% year-to-date. Our business continues to drive significant cash flows, and we strive to allocate these cash flows to those items that will ultimately return the highest value to our shareholders over time.

During the second quarter, we continued to utilize these cash flows to return value to our shareholders through a combination of share repurchases, dividends, and investments in our business to drive future growth. During the second quarter, we completed the opportunistic and accretive repurchase of 400,000 shares of common stock under our share repurchase program at a total cost of approximately $19.4 million.

In addition to these share repurchases, we also paid dividends during the second quarter at a quarterly rate of $0.205 per share or approximately $11 million. This represented a 5% increase over prior-year levels.

Finally, we continue to utilize our balance sheet to currently support our growth of our Cambria brand. During the first six months of the year, we have advanced approximately $67 million in support of Cambria's expansion. These advances were primarily in a form of joint venture investments, forgivable key money loans, senior and mezzanine lending and site acquisitions.

Importantly, we also recycled approximately $18 million of these investments previously utilized to support the expansion of this brand, and these funds are now available to incent new Cambria projects. We expect these advances will accelerate the pace of the Cambria brand's growth over the next several years.

Now I will turn to the 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 our effective tax rate to be 32.5% for the third quarter and 31% for full year 2016. As mentioned in our earnings release this morning, our full year effective income tax rate reflects the early adoption of accounting standards update 2016-09 which requires excess income tax benefits related to stock compensation to be recognized in the Company's income statement.

The adoption of this standard reduced our previously reported income tax as for the first quarter of 2016 by approximately $1.6 million. Our hotel franchising activity guidance assumes that our RevPAR will increase approximately 3.5% to 4% for the third quarter and range between 3.5% and 4% for full year 2016. Based on our year-to-date results and current RevPAR trends, we have updated the range of our projected domestic RevPAR increases for full year 2016 from a range of 3.75% to 4.5% to a revised range of 3.5% to 4%.

As I previously mentioned, we have increased our projections for the growth in our effective royalty rates. As a result, our guidance now assumes that our effective royalty rate growth will increase from 7 and 9 basis points for the full year. And our net domestic unit growth will increase between 2% and 3%. And excluding the impact of our Comfort rejuvenation strategy, we expect our domestic portfolio net unit growth of our other brands to increase by approximately 5% in the aggregate.

We are maintaining our full year guidance for 2016 adjusted EBITDA from franchising activities as a range between $270 million and $274 million. With regards to our non-hotel franchising activities, including SkyTouch and vacation rental activities, we are projecting reductions in adjusted EBITDA for full year 2016 to range between $16 million and $19 million.

We expect our third quarter 2016 diluted EPS to be at least $0.78 per share and our full-year 2016 adjusted diluted EPS to range between $2.38 and $2.43 per share. Our consolidated adjusted EBITDA for full year 2016 is expected to range between $252 million and $256 million.

We have increased our full year adjusted diluted EPS range by $0.08 per share primarily due to the impact of a lower than previously projected effective tax rate and accretive share repurchases. These adjusted EPS and consolidated EBITDA estimates assume that we incur net reductions in adjusted EBITDA related to non-franchising activities at the midpoint of the range for those investments.

Now, let me turn the call back over to Steve.

Thanks, Scott. So to sum it up, again this quarter all three of the levers that drive domestic royalty revenues -- system size, RevPAR and effective loyalty rate -- have increased. Our international growth while still a small part of our overall business is notable, and we are seeing momentum particularly in Europe and other key markets. We are investing in programs designed to drive more reservations through our central channels, improve guest loyalty and enhance the value of our brand in an effort to drive incremental business to our franchisees.

As you can tell, we're optimistic about our continued long-term growth prospects and our ability to drive excellent results for our Company and in particular for our shareholders.

Now I'm going to open up the call to see if you have any questions.

(Operator Instructions)

Thomas Allen, Morgan Stanley. Your line is open.

Hey, good morning. I guess my first question would just be around, so RevPAR beat in the second quarter but you're lowering full-year guidance. Is it June and July trends that are making you more conservative or anything else? Thanks.

Well actually we're having a good summer and it's kind of holding at the levels. But we are also seeing, like everyone else has discussed, our business results midweek are less robust than sort of the leisure side; leisure side is holding up strongly. And then as we get in the back end we have still got the impact of oil on our results although the impact is lessening. It's about a little over a point now. Last year it was several points.

So the continued effect of that -- so if we get more recovery the nice thing is it feels like it will -- definitely bottomed out and it's on its way back up. The question is how quickly do those markets recover. But all in all we're seeing a very healthy environment. But what we're trying to do is to look at we think we're going to be between those results, and we think actually fourth quarter will probably be a good quarter for us as well.

Summer is good because of the leisure side, but we are seeing a trend where we think where we're sort of operating is in that 3.5% to 4% range, and it's pretty steady so we feel pretty good about it.

That's helpful. And then you gave some interesting stats on your distribution and your direct booking push. Some of your peers have talked about how they felt like it had negatively impacted RevPAR growth, but I think Marriott highlighted about 40 basis points of a drag. Do you feel like it's impacting your RevPAR growth at all, or have you been able to quantify that? Thanks.

No, we obviously -- when you start giving discounts to your customers, there's a question about what the incrementality of that business is. And so, but we are also benefiting from a significant number of new members joining Choice Privileges, the results being that those are probably -- a lot of those are incremental.

And so we think that net-net it is going be a real positive for us. And in the long run when you think about what it costs you to have a room booked through an OTA versus through our channel, we can afford to give our customers a discount. And through the incremental customers we get that aren't booking with channels that are dramatically more expensive, we are going to benefit net-net.

So just to follow up on that quickly, long term, you think that this is going to be a benefit. Short term, it does sound like you feel like you're getting a bit of a RevPAR drag just given you are giving your members a discount.

No we haven't seen a RevPAR drag yet. We think it's at least being offset.

Okay. That's clear. Thank you.

Thank you. Shaun Kelley, Bank of America. Your line is open.

Hi good morning. Thanks for taking my question. In the prepared remarks I think you guys mentioned that you were seeing a fairly healthy transaction environment. And that was maybe helping to drive some activity be it on the conversion side or whatnot.

Could you elaborate a little bit there? I think that's a little different than we've heard from some of the large franchisers this quarter where some of them actually called out that their fees have been a little light because transaction activity slowed. So is that something you could just talk a little bit more about?

Yes. Well, our transaction activity is up both conversions and new builds. We're finding a lot of demand for our product. Lending is holding up, so while CMBS market was a little less active. But what we're seeing in terms of the long-term trends is there's some slight adjustments on the levels of leverage being offered, but our franchisees tend to put a lot of equity in their deals anyway. They don't highly lever their deals.

And I think what you're seeing on margin is the developers that were used to a very high leverage level to make their deals happen is what's falling off. That's not usually our franchise system. And so as a result, even with a lessening of leverage levels -- so think of it, a lot of times our folks were running in the 70 percentage points, now it's probably drifting more towards 65. In their view a lot of them aren't levering past 65 anyway. And so I think if you're seeing falloff in development it's from those higher yield, higher leverage leveled deals, and that's not our bread-and-butter.

And we actually saw an acceleration of the pace that we like to see in our second quarter which increased to 26%. And so on a rolling 12-month basis we've seen over 8% of our systems side with the size we like just over the last year.

Okay great. That's very helpful stats. And then the second thing would just be a little bit on Cambria as we start to see some new brand launches out there and some new positioning from other people, just curious on how competitive is it right now to get the new deals signed? And obviously you're offering some incentive there but that's sort of par for the course when you're trying to launch an accelerate a new brand. So if you could just talk about the incentive environment, how aggressive it is out there at the moment.

Yes. So, it is -- there is a lot of competition. We are aggressively incenting our development which is working. In addition to that the development -- developer interest in our product is up significantly as they see how these new urban products perform. We're getting some very quick ramp rates and running some impressive RevPAR index premiums. White Plains opened at 130%. The New York hotels are going to be in premiums within the first nine months, 12 months of their opening.

The hotel out of our headquarters, while from a location standpoint is at somewhat of a disadvantage is running RevPARs regularly, indexes regularly in the 130%s. So people are taking notice of the performance. And the one advantage that we have that some of the others don't have is because of the vast size of our system, we have enormous number of customers looking for urban locations.

So the poster child is New York City where 9 million people contact us looking for a room, 9 million a year. We have 1,500 rooms. We're not worried about filling our hotels. We're not immune to a market that is softening. We're going to fill it. The question is at what rate. And so but even in New York we are very happy with the results we're achieving.

And I should probably know this -- this is my last question. But what's the price point for developer at the moment for one of the new Cambria properties sort of on a per-room basis? Like all in or maybe ex land is probably the right way to think about it since that can vary dramatically.

Yes, the way you ought to think about it is, in a greenfield prototype suburban environment, which we're not doing any of, it would be about $120 to $125 a key. And land depending on where you are could add $5,000 to $10,000 a key to that. What we're doing though are urban products which are all custom and a lot of them are high rise and mid rise. So the average cost of the urban product is probably running in the $220 to $250 range per key.

Manhattan's probably was a little higher than that, but on average if you look at where we've been, it's in the mid -- low to mid $200s.

Great. Very helpful. Thanks guys.

Thank you. Joseph Greff, JPMorgan. Your line is open.

Steve, could you just revisit with us your expectations for SkyTouch turning profitable or not an EBITDA drag? Thank you.

Yes, so we're obviously -- we put that out there. We are holding to that. It is going to happen. We are in the process right now of evaluating two or three options as to how to get there. We're hoping that you hear something from us relatively soon. But we believe we are well on our way to proving that commitment out.

And so as we look at the options that we've got, we're finding some very attractive alternatives, and the question is which one do we end up landing on and making a deal. So our view is that commitment you can still count on, and we're actually hoping to do a little better than that.

Thank you.

Thank you. Anthony Powell, Barclays. Your line is open.

Hi, good morning everyone. On the unit growth for this year I think you're tracking a bit below the 2% to 3% guidance range. Do you expect the pick-up to come from new construction hotels or conversions in the back half of the year?

Actually both. So we normally -- and it's the way people do it. We have an enormous acceleration of deals towards the fourth quarter. We have done 97 different things to try to spread it out more evenly in the year, but invariably our guys bring in twice as many deals in November, December as they bring in any other month. So it's just the historical cycle.

Yes, so we're feeling really good about the environment. Our in-house apps the developer interest; we had a very strong month for the month of July. Ahead of budget, so picked up probably 20 deals, I think, on that lag. And so barring something unforeseen we're feeling like it's going to be a pretty record deal, and I don't think we put the number out but we're -- it's a significant increase over last year, which is our target. Think of it in terms of approaching almost 700 deals.

And you can think about our conversion openings is typically pretty strong openings in that November/December timeframe, as Steve said the cyclicality of the business.

Got it. Thanks. And on the direct bookings initiative, does that impact your P&L directly at all, or does this make your franchises more attractive to developers?

Makes us a lot more attractive to developers, because if they know they're going to get 57% of their business from us, that's going to lower their overall cost of customer acquisition a lot. And quite frankly we're tired of the fallacy that the lowest rates are on OTAs. It's not true. They spend $2 billion a year saying it, but it's simply not true, and we're trying to get the consumer to be aware that the lowest rates achieved are on brand.com sites, not in an OTA.

And so I think the entire industry is tired of hearing about the OTAs. We particularly don't want to be lectured by the OTAs about how we ought to approach the customers. And so I think you're going to see a much more aggressive stance not just from Choice but across the board.

All right. That's it for me. Thank you.

You're welcome.

Thank you. Jared Shojaian, Wolfe Research. Your line is open.

Hi, good morning, thanks for taking my question. So if you were to break out those three buckets of the RevPAR out performance -- the leisure, the Comfort refresh, the new rate tools -- is there one component that's having more of an impact right now than the others? And I'm specifically wondering in regards to the Comfort refresh if that's more responsible for what you're seeing right now.

I would say with most responsible is the leisure travel at this point in time. The consumer confidence and kind of unemployment rates being where they are today has really kind of made the leisure traveller much more resilient than the business traveler. So I think that's kind of the lion's share of the increases there. But we are seeing definitely RevPAR index improvements for the Comfort brand as well as some of these new tools that is still in the infancy of rolling them out on the rate and revenue management tools that we think going forward can have an impact on our RevPAR results.

So the other thing to think about too that we still believe there is upside for us, even at this point in the cycle, is if you look at where we've been with relatively lackluster GDP growth we've had some pretty remarkable results.

We've got a labor participation rate that is still below 63%. Those people that are participating are our customers. If they go back to work, that's continued upside for us. And so as we see it, if we get any decent support in terms of GDP growth and some real improvement in employment, then that will help drive our results further, which is why you hear us being relatively optimistic about not only for this year but also for 2017 and into 2018. Because, while we may not post 7% RevPAR results, we think we're going to post very steady, very attractive returns and yields for our shareholders and for our overall results.

Okay, that's helpful. Thanks. And then just as a follow-up question can you remind me what percentage of your hotels are in sort of these big urban markets right now? And how does that urban RevPAR growth compared to just your system RevPAR growth right now? I'm assuming it's weaker, but do you think that's more a function of just excess supply in those big markets, or do you think it could be Airbnb share shift?

Yes it's not Airbnb. So we are not seeing that as an impact. So full-service folks have seen that in markets where they were full, and the Airbnb expands you've seen the results. But we're not seeing any result, any impact on our side, well, which is in fact -- but we like the business which is why we launched vacation rentals. So we actually kind of think that was a pretty smart idea.

I think the only thing about those guys is they are going to have to pay taxes and worry about life safety and zoning over time. But we think that's an attractive business.

Getting back to your main point we're probably less than 10% in urban markets, and the performance is varying. But anywhere we have got Cambrias it's obviously a very up-RevPAR growth cycle, because they are relatively new. And they are increasing in every case every year. And then we are starting to see the results that we've been hoping for like Tuesday a week ago we sold out almost every Cambria in the system.

So we're starting to see the kind of results that we thought were available to us in an urban market because of the excess demand we got because our product is simply a newer and better product than anything else out there. Consumers react to it in a way that I've never seen with another brand. So we know we've got a winning formula. We just need to continue to accelerate the distribution of them.

We're looking to have a significant number of hotels open and operating by 2018, and once we have that in a firmly established stance then we think we're going to have a brand to be reckoned with.

Okay. Thank you very much.

Thank you. David Katz, Telsey Group. Your line is open.

Hi. Good morning, gentlemen. How are you?

Good morning. How are you?

Not bad. Congrats on a solid quarter. Sorry?

August. It's August. It's summer. (multiple speakers)

This is true, but here we are. I congratulate you on a good quarter, because I think the sort of core of your business is very straightforward, and its merits I think are relatively clear. So I'll apologize for asking about SkyTouch again, but among the range of options that it sounds like you're considering, would those include situations where you don't own it or all of it anymore?

I mean is that a fair question about whether this should be part of what is otherwise a very sort of clean and straightforward business, and this, while it's related is something a bit different? Do you think that's fair?

Yes it is different, but we actually like the opportunity a lot. And the answer to your question is absolutely that's one of the likely outcomes. We'll see. We've got several different alternatives we're evaluating with different approaches. But it's not lost on us that SkyTouch is better off not being seen as a Choice entity, because as they sell to industry and other brands, which we're in deep conversations on our own with a number of major brands, it is a factor they've got to consider.

There's no risk to their data or anything else and we can assure them in almost every way that they're going to benefit from having that system. But quite frankly, in the discussions it's a point that gets raised. We never intended to hold it long term. The idea was to build it up and then launch it into some vehicle where it would be on its own, and you should expect to see probably something like that from us.

And we're excited about what we're seeing from the customer base. We've seen a 25% increase in the pace of signings particularly in our tier 2 and tier 3 customer segments. And I think as Steve has said in the past calls we're in all the conversations we need to be with the bigger tier 1 customers.

So if I were to just ask sort of why the drag still exists, or what is it that the businesses would benefit from in a partnership, is it broader distribution? Is it a sales force? Is it more of a marketing strategy? What is it that it needs that will cause it to turn the corner?

Well okay let me give you a slightly different lens. From a tech company launch this is about as good as I've seen, where we're talking about profitability in year three. So -- .

Right.

So, my lens is a little different. I think this has been a really good adventure if you look at any basis from a tech start-up which literally is three years old, we're at $37 million, $38 million revenue run rate. And we've attracted significant new numbers of customers in tier 2 and tier 3. We're talking with several tier 1 opportunities.

And our view is based on that performance and based on what we're going to do that -- now granted this is my first tech company I've launched. But being profitable by year three from what I understand is a pretty good result. And so we think we can accelerate that through one of these other options.

So we actually feel really good about the investments we've made, because if you think about it our overall investment has been $50 million to $60 million. If we were putting on that balance sheet and that was the investment that we could capitalize, which we can't, you guys wouldn't even want to talk about it.

So we see it as that -- we know that that investment has created real value for us, real value. And so we'll see as we go to figure out the next stage in the lifecycle of that company, but we're feeling pretty good about it.

Understood. So not to repeat it, but I mean the notion is that you have this tech company that, okay mission accomplished, it's getting distribution, but it's losing money and combining it with this core business that does nothing but make money. And you sort of understand the confusion or the conflict that that creates, and that's how you're thinking about its options going forward.

Oh, see -- different lens. We're not losing money. We're making an investment in something that's going to pay off. So if you look at it from an investment standpoint, you would say, and by the way we're not going to lose money next year. So our view is very different. Our view is we have invested money in an asset that has significantly more value than we put into it. And so -- and we believe it's going to continue to return value to us, so we don't view it as money losing. We look at it as investing.

I understand. I appreciate it and thanks for your patience with it.

No worries.

Thanks.

I'm used to it.

Understand.

Thank you.

(Operator Instructions)

This concludes today's Q&A session. I would now like to turn the call back over to Stephen Joyce for closing remarks.

Thanks for joining us. As always we obviously appreciate your interest in Choice Hotels. We are very excited about where we're going and where our opportunities are, and that concludes our call for today. We will see you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.