Choice Hotels International Inc (CHH) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Choice Hotels International fourth-quarter and year-end 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 provision 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 similar words or phrases. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied.

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

You can find a reconciliation of our non-GAAP financial measures referred to in our remarks as part of our fourth-quarter and year-end 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 Steve Joyce, Chief Executive Officer of Choice Hotels International, Inc. Please go ahead, sir.

Thank you. Good morning. Thanks for joining us today. I'm also joined by Scott Oaksmith, our Chief Accounting Officer. We are excited to share with you Choice Hotels' fourth-quarter 2016 and year-end earnings update. Choice continues to have strong performance. There are many factors that are contributing to this, highlighted by our strong leadership team who drive the right business objectives, excellence in our organization, and results for our shareholders.

Today I'm going to focus on three specific key initiatives: the strategic efforts to help increase franchisee profitability, resulting in Choice outperforming the industry in RevPAR; our accelerated growth and performance in the upscale category; and the strong development momentum in the United States and internationally.

Let's start with our efforts to help our franchisees increase profitability, which has resulted in strong RevPAR results that are outperforming the industry. The initiatives include the SmartRates proprietary pricing optimization system, and our customer acquisition strategies with our relaunched loyalty program, Choice Privileges. These tools have made a very positive impact on RevPAR.

Domestic systemwide RevPAR increased 3.9% and exceeded total industry results by 70 basis points. We also exceeded growth reported for each of our respective competitive segments. Choice upscale, upper midscale, midscale, and economy brands grew RevPAR at higher rates than their respective segments, with Smith Travel Research reports ranging from 2.1% to 3.1%. This marks the ninth consecutive month, and eight of the nine last quarters, that Choice's RevPAR performance growth has outperformed the industry.

How are SmartRates and Choice Privileges attributing to this growth? SmartRates is the most advanced RevPAR technology in the industry and a powerful tool for our franchisees. It is being used by more than 90% of our domestic franchisees to help them better analyze market conditions and set their hotel rates. Thanks to this tool, hotels are seeing enhanced RevPAR index growth in their local markets.

Another important initiative is our Choice Privileges loyalty program. At the beginning of 2016 we announced our Company's most significant redesign of Choice Privileges, and it is paying off in spades. The program surpassed 30 million Choice Privilege members and signed up 4.6 million in 2016, more than any other year in our history.

In addition to the immediate perks Choice Privileges delivers to our guests, we launched exclusive member rates in 2016, enabling visitors to choicehotels.com and our mobile apps to access discounted member rates that can't be found anywhere else on the Internet.

In addition to the positive impact this has to fill rooms, it has also increased the contributions generated by our proprietary reservation systems, up 240 basis points from last year, to over 50%. More importantly, while this had a positive impact in 2016, we are not going to stop here. This year, you will continue to see us leverage Choice Privileges to deliver value to our guests and franchisees. These initiatives, among others, are delivering great results for Choice and our franchisees, and helping us drive RevPAR performance over our competition.

Our next drive is our accelerated growth and performance in the upscale category; specifically, expanding our Cambria and Ascend brands. Choice recognized the growth opportunity to expand into the upscale segment with a focus on major urban markets. We had made a significant amount of investment behind the Cambria brand to spur developer interest, and this move is paying off. Cambria hotels & suites' pipeline at the end of 2016 had a more than 50% increase from 2015.

We have entered major markets with groundbreakings and grand openings in Philadelphia, two projects in Chicago, Nashville, and New York's Times Square; and have executed contracts in other major markets including two projects in Los Angeles, Boston, Seattle, and Dallas.

In addition to strong development numbers, the brand is also generating very strong business performance. For hotels that have been opened within the last two years, RevPAR was at $128 for 2016. And the entire portfolio ended the year at over $100. RevPAR index increased for Cambria by a remarkable 730 basis points for the year.

Cambria is also delivering on guest expectations, with an average guest satisfaction rating of nine out of 10 in our internal feedback, and is increasing even more with the introduction of great new properties. Third-party reviews continue to show Cambria performs exceptionally, and is at the top of the list compared to its upscale competitors.

Our other upscale brand, Ascend, is also on a roll. Choice pioneered the soft brand concept before any of the other major hotel companies. And while our competitors have been trying to build a presence through a soft brand, Choice already has one. Today, Ascend has 173 open properties globally, with more hotels than its top three competitors combined. The Ascend hotel collection enables independent hoteliers to plug into our industry-leading technology, robust distribution channels, and rapidly expanding loyalty program. It's a win-win for them and for Choice.

As you can see, there's a lot of momentum in upscale, but this is only part of our strong development growth in the United States and internationally. Overall, 2016 ended with new franchise agreements in nearly 650 hotels, representing approximately 50,000 guest rooms, a continued increase from our impressive 2015 sales numbers. Our current domestic pipeline hotels that are awaiting conversion are under construction or approved for development as of December 31, 2016, increased 19% compared to the same time last year.

It's also important to note that about one-third of our new franchise agreements are for new construction hotels, which were up 16% in 2016 compared to the prior year. This growth is highlighted by driving the right strategies for our Comfort Inn, Comfort Suites, and Sleep Inn brands, as well as a dual concept property with Sleep Inn and MainStay Suites.

The focus in investments that we've made resulted in our current success that will continue this year. With Comfort, our transformation strategy has resulted in renewed development and guest satisfaction. There were more than 120 Comfort executed agreements in 2016, two-thirds of which are new construction hotels.

Comfort is also experiencing sustained all-time high guest satisfaction scores and is beating the upper-middle segment on RevPAR growth; and stealing share, recording 27 consecutive months of RevPAR index gains compared to its competitors.

Sleep Inn is also having great upward trajectory and interest from developers. The brand is outperforming the segment on RevPAR growth by more than a 2 to 1 ratio. And developers are taking notice. In addition to its performance, the brand unveiled a successful prototype in 2016. And it has been well received by developers for its simply stylish aesthetic, as well as its cost-effectiveness to build and operate. This has resulted in a strong pipeline of new hotels.

We also launched an innovative Sleep Inn Mainstay Suites dual brand concept that allows hoteliers to efficiently address multiple customer segments all under one roof.

There is also international development growth and momentum in key markets. Choice secured agreements in seven new international markets in 2016, specifically, the United Arab Emirates, Saudi Arabia, Austria, Belgium, Finland, Greece, and Hungary. This is through both master franchise agreements and direct franchising. This growth will continue in 2017 as we put additional focus on our European international division.

As you can see, Choice is positioned for continued growth and success from its well-established areas of business to new and emerging opportunities. We are very optimistic, both this year and beyond.

Thank you. Now I'll turn things over to Scott Oaksmith who is going to share specifics on our results.

Thanks Steve. Good morning, everyone. 2016 was another great year for Choice Hotels as we again posted record revenue, operating income, and net income. Let's start by reviewing our fourth-quarter performance. We increased our diluted earnings per share by 10% over the prior year, and exceeded our guidance of at least $0.51 per share by $0.05. Our full-year adjusted diluted EPS was $2.49 which represents a 12% increase over the prior year and exceeded our guidance of $2.43 to $2.46 per share.

Our full-year 2016 adjusted hotel franchising EBITDA increased 7% to $273 million and was in line with our previous outlook for that metric of $272 million to $274 million.

Steve spoke about a few of our key initiatives that drive growth. I'm going to provide further details on three of our performance metrics that were key to our strong-fourth quarter results which closed out this record-setting year. These include our domestic royalty revenues, continued improvement in our franchise development results, and prudent cost management.

First, our domestic royalty revenues. The improvement in our hotel franchising revenues for the quarter were primarily driven by our domestic royalties which increased 8% over the prior year to $68.4 million. The critical areas that drive our domestic royalty growth continue to improve in the fourth quarter, highlighted by our domestic systemwide RevPAR, which increased 5% in the fourth quarter and 3.9% for the full-year; a 1.6% increase in our domestic hotel system size; and a 13 basis point increase in our fourth-quarter effective royalty rate.

Our fourth-quarter RevPAR growth of 5% achieved the top end of our guidance and was driven by a 150 basis point increase in occupancy and a 2.3% increase in average daily rates. As Steve mentioned, we were particularly pleased that our RevPAR results for the quarter exceeded the performance of the overall industry, as reported by Smith Travel Research, by 180 basis points. Our outperformance of the industry's RevPAR results was driven primarily by occupancy growth rates which exceeded the industry by 120 basis points.

Furthermore, excluding the impact of the energy markets, our fourth-quarter RevPAR results would have increased by an additional 120 basis points over our reported increase. We'd expect the impact of the energy markets on our RevPAR results to stabilize in 2017, and only negatively impact our results by approximately 50 basis points.

Current RevPAR and US macroeconomic trends point to continued RevPAR growth in 2017, and we expect our full-year 2017 RevPAR to increase between 3% and 4%. We believe that our domestic RevPAR results will continue to outperform the industry in 2017, driven by continued expansion of the membership in our number-one rated Choice Privileges program, adoption of our SmartRates technology, and other innovative strategies designed to continually improve the RevPAR performance of our franchisees.

In 2016, we also improved the pricing of our franchise agreements, and we expect that to carry forward into 2017. Our domestic effective royalty rates expanded by 13 basis points in the fourth quarter to 4.49%, and increased 11 basis points for the full year. The pace of year-over-year growth in our domestic effective royalty rates is expected to accelerate. And as a result, we are projecting our full-year rates to increase 12 to 14 basis points next year.

Our ongoing focus on improving business delivery to our franchisees should allow us to continue to improve the pricing of our contracts over time.

Moving on to the supply front, and our continued improvement in our franchise development results. We were able to grow the number of hotels operating in our domestic franchise system by approximately 2% compared to December 31, 2015. Excluding the impact of our Comfort brand rejuvenation strategy, we grew the number of net units online in our domestic system by 133 units which represented a 3.7% increase.

Our domestic unit growth was highlighted by our upscale brands, Cambria and Ascend, which grew by 12% in the aggregate; our Quality brand, which increased approximately 5%; and our Rodeway brand, which increased 10%.

In addition to the strong unit growth, the Quality brand reported the highest full-year RevPAR growth rates across our portfolio, increasing over 5%. We are also pleased with our expansion into the upscale segment and our focus on major urban markets. The number of rooms under our Cambria and Ascend brands grew by 13% and 11%, respectively, since the end of 2015. And the royalty generated from these brands increased 32% and 8%, respectively.

We executed 28 new franchise agreements for Cambria during 2016; 12 of those in the fourth quarter, resulting in a 50% increase in our pipeline. As a result, we expect to see an increase in the number of Cambria hotels opening over the next several years. In fact, we've already opened two new Cambrias in January and expect to open 8 to 10 more in 2017 in key travel markets.

As Steve mentioned, the Cambria hotels opening over the last two years generated RevPAR of $128 for 2016. And the entire portfolio reported RevPAR of over $100 for the full year. The higher RevPAR commanded by this brand, as well as the higher average room counts compared to the Company's other brands, should provide a positive catalyst for overall [royalty] growth over the next several years.

On the development front, the fundamentals that drive new hotel development and conversion opportunities remain strong, and the growth strategy we have implemented is generating positive results. During the fourth quarter of 2016 we executed 267 new domestic franchise contracts compared to 263 in 2015. For full-year 2016, we executed 645 domestic franchise agreements representing over 50,000 rooms, including over 7,000 rooms in the upscale segment. This represents a 19% increase over the prior year.

We are particularly pleased with the increase in the number of new franchise agreements for our Sleep Inn brand which increased 50% from 34 agreements in 2015 to 51 in the current year. The Sleep brand has posted 31 consecutive months of RevPAR index gains compared to its competition, and developers have taken notice. We are optimistic that this momentum will continue into 2017.

We believe the industry fundamentals are still favorable for continued supply growth, and expect the growth in the volume of our new construction franchise agreements to accelerate next year. More importantly, our overall 2017 franchising sales activity levels are also expected to exceed this year's results.

As a result of the growth in our domestic pipeline and the continued industrywide supply growth, we expect the pace of growth for our domestic franchise system size to accelerate in 2017, and are forecasting our domestic system size to increase between 2% and 3%. As a result of these items driving our top-line franchising revenue growth, as well as prudent cost management, our adjusted hotel franchising EBITDA for the fourth quarter improved 8%. And we expanded our adjusted franchising margins by 110 basis points to 64.4%.

I'm also pleased to report that we expanded our adjusted hotel franchising margins for the full year to 68.2%, which represents an all-time high for the Company.

Now on to my final point, our cash flows. During 2016, we generated operating cash flows of over $150 million, and utilized these cash flows to return value to shareholders through a combination of share repurchases, dividends, and investments in our business to drive future growth. The Company paid dividends during full-year 2016 of approximately $46 million; and, in the fourth quarter, announced that our Board of Directors authorized a 5% increase in our annual dividend rate from $0.82 per share to $0.86 per share, beginning with our dividend paid in January of this year.

During the year, in addition to our quarterly dividend, we also completed the opportunistic and accretive repurchase of 600,000 shares of common stock under our share repurchase program, at a total cost of $30 million. In December our Board of Directors increased our current authorization by 3 million shares, and we now have authorization to repurchase up to 4 million shares of our common stock.

In addition, we continue to use our balance sheet to prudently support the growth of our Cambria brand, and it is working. Our support, which has included joint venture investments, forgivable key money loans, senior mezzanine lending, and site acquisitions, has been a catalyst to incent new hotel development and construction.

During 2016, we advanced approximately $104 million in support of Cambria's expansion, and recycled approximately $28 million of previous investments, for a net capital outlay of $76 million. As of December 31, 2016, we had approximately $200 million reflected in our consolidated balance sheet, and we expect to continue to use our balance sheet to expand Cambria's footprint.

Now I will turn to our 2017 outlook.

As always, our outlook assumes no additional share repurchases under the Company's share repurchase program. Our outlook also assumes our recurring effective tax rate of 33.5% for the first quarter and full-year 2017. Our hotel franchising activity guidance assumes that our RevPAR will increase approximately 3.5% to 4.5% for the first quarter, and range between 3% and 4% for the full-year 2017. Our guidance also assumes that our effective royalty rate growth will accelerate, and increase between 12 and 14 basis points for the full-year. And, finally, our net domestic unit growth will increase between 2% and 3%.

Excluding the impact of our Comfort rejuvenation strategy, we expect our domestic portfolio net unit growth of our other brands to increase by approximately 4.5% in the aggregate.

Based on these assumptions, our guidance for the full-year 2017 adjusted EBITDA from hotel franchising activity is a range between $297 million and $302 million, which represents approximately a 9% increase at the midpoint. With regards to our non-hotel franchising activities, including SkyTouch and vacation rental activities, we are projecting reductions in adjusted EBITDA for full-year 2017 to range between $4 million and $6 million. As we have discussed on our previous calls, our 2017 adjusted EBITDA guidance for SkyTouch division reflects a substantial reduction in the net expense as compared to prior years.

Our 2017 guidance reflects both an increase in revenue generated from the division as well as a significant reduction in the expenses. It is now expected to break approximately even. We are optimistic that the investments in the SkyTouch division over the last several years, to bring the product to market and expand its feature functionality, will position it to accelerate the acquisition of new customers and improve the experience of our existing customers.

In addition, we will continue to invest prudently in the SkyTouch product in an effort to expand our current customer base and improve the product for our SkyTouch customers as well as our franchisees. We will also continue to opportunistically evaluate potential strategic alternatives with respect to SkyTouch. However, no transaction is imminent, and there can be no assurance that future evaluation of strategic alternatives, if any, would result in a transaction.

We expect our first-quarter 2017 diluted EPS to be at least $0.49 per share, and our full-year 2017 diluted EPS to range between $2.78 and $2.84. Our consolidated adjusted full-year 2017 EBITDA is expected to range between $292 million and $297 million, representing an increase of approximately 15% at the midpoint.

These EPS and consolidated EBITDA estimates assume that we incur net reductions in EBITDA related to non-hotel franchising activities at the midpoint of the range for those investments.

To sum it up, we are pleased with our fourth-quarter financial performance, and are well-positioned to continue to expand on our 2016 financial performance.

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

Thanks, Scott. Before we move to questions, I just want to reinforce that we had a great year and are very optimistic that we will continue to drive excellent results for our Company and shareholders. With our strong leadership team who are driving the right business objectives and results, we are excited about our future success and growth, which, in 2016, was highlighted by three key initiatives: the strategic efforts to help increase franchisee profitability, resulting in Choice outperforming the industry in RevPAR; our accelerated growth and performance in the upscale category; and the strong development momentum in the United States and internationally.

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

(Operator Instructions). Felicia Hendrix, Barclays.

It's actually Anthony Powell here for Felicia. Just a question on the royalty rate increase in the guidance. If you could explain more about the mechanics of what's going on there. Are you signing more deals with higher franchise -- royalty fees, rather? What are your published royalty rates right now? If you can give some more detail on that, that would be great.

Sure. I can take that one. The growth in our royalty rates can be attributed to a multitude of factors. As you know we've been improving the quality of our systems, and as a result, our brands are performing better than ever. This provides pricing power when we are negotiating new franchise agreements. We've also increased the rack royalty rates for six of our brands, which we did in April of 2016, and increased those between 25 and 50 basis points over the six brands.

And also we've also historically utilized royalty rate discounts a customer acquisition tactic, as these discounts burn off over the first few years of the contract it provides a lift to our royalty rate. So as we've implemented these higher rates we have the opportunity, as we sign new contracts, to sign them at these new higher rates. As well as when hotels relicense in our system, which I think we had close to 450 hotels relicense this year, that gives us an opportunity to sign new franchise agreements at these new higher rates. So those are the real drivers behind that royalty rate increase.

Got it. And can we expect these types of 10, 12, 14 bps improvements in rates annually for the next few years? Or what do you think the cadence of that will be?

We believe that we should be able to have this pace of increase for the next several years, yes.

All right. And my final one, just on SkyTouch, if you can give a bit more detail on the driver of the cost reductions that are just basically reducing expenses there. And what do you think the value generated from your investment activities over the past several years have been?

I think the way to think about it is, we built the product that we think is the right product for the marketplace. That investment is done. We will continue to update it for the independent hotels and other brands, as well as our own. But we think the bulk of the investment that we needed to make has been made. So now we are simply in the selling-the-product mode, which is why we were able to bring the expenses down to basically breakeven. So, as we look at that, we think there's an opportunity going forward.

We do believe we've created a lot of value. We thought it had value when we first started this project. Based on the discussions we've had with potential other transactions, that has borne out to us that we have created significant value, over and above what we invested. And we are going to continue to look for the opportunity to maximize that for the shareholders.

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

Shaun Kelley, Bank of America.

So maybe just to build on the last question on SkyTouch, because it seems like it's a big portion of the year-on-year growth in EBITDA. Steve, if I recall correctly, last quarter you kind of said that there could be an update within 30 to 60 days on that business, which is kind of an explicit time frame. We never heard that update. Instead, we kind of fast forwarded to this quarter.

So did something change in sort of the trajectory for that business? And was rightsizing the business on the expense base the plan a quarter ago, or is this sort of just where you arrived at?

Yes, so I think if you think about where we were, we said two things. We said that either within -- by the end of the year that we were going to have some announcement that we thought optimized the value for the shareholders, or we were going to bring it to essentially where we brought it, which was a breakeven level. We were -- have been through a multiple of conversations with other folks interested in it. We did not find a situation that we liked. We continue in some of those conversations. But as Scott said, there's nothing imminent.

And so we are going to continue to evaluate what our options are to maximize the value of that product, including future looks adding to that technology program. So when we think about it going forward, we want to pick the right time with the right partners, if that's the way we go, to optimize that structure and to optimize the value to the shareholders. And we're going to continue to work against that.

But as we said, and we committed throughout 2016, we would bring that to a basis where it was not costing the Company money, which is what we've done. And we think we are in good shape to continue to grow it, but also to look for other opportunities to maximize the value of that, plus our other technology platforms.

Got it. That's pretty clear. And then my second question would just be on -- I guess to focus in on the net unit growth. So, clearly the story there is also beginning to accelerate as you begin to move past some of the Comfort system exits. So we are sitting here today; I think you guys said 2% to 3% for net guidance now, but you'd be closer to 4.5% -- if I caught that number correctly -- closer to 4.5% net unit growth, excluding some of the Comfort piece. So where can we be as we move into 2018 based on your -- maybe it's just directional at this point. But where can we be on net unit growth in 2018 as you continue to wind down what's going on with Comfort?

I think the way to think about it is historically we've been 4% to 5.5% supply growth for our brands. That's sort of where we think we'll probably end up. Now when you look at -- it's not all the same, though -- because if you look at what a Cambria adds, that's a significant increase over what one of our other brands adds, by a multiple of 3 to 5. And so the net benefit of Cambria's is significantly above some of the others, so that's a factor to consider.

And then as you think about going forward, there is several questions that we are waiting to be answered. We're pretty optimistic that the lending environment is going to at least stay the same, and could improve, based on what we are hearing from the administration. And so, if that occurs, then I think you are going to see a pretty positive development cycle for the next several years.

The RevPAR environment, we like where we ended the year, and we like where we started off. And if you believe that anything that's going on from a government stimulus standpoint helps drive GDP, that's going to add fuel to the fire. And on top of that, the employment growth where you are finally seeing potentially an uptick in the level of employment as a percentage of the workforce, is a very positive segment for us because those people going back to work are part of our customer base. And we believe we are in a position to gain from that, probably more than anyone else.

So, net-net, on the development side, if we get a strong financing environment that either -- it is working today, obviously based on the deals we are getting done. But if it even improves, our sense is that this cycle may elongate for several more years. And if we get a strong incentive within the economy that's going to spur GDP growth, that just adds more benefit to the overall performance of our hotels.

I think the only thing I'll add to that is if you -- historically we've grown our system size 4% to 5% before the Comfort rejuvenation strategy. And even throughout the rejuvenation strategy, our other brands have grown right around there. 2017 should be the final year where we've got declines in the Comfort Inn system, as we've worked through that process. So we've filled the pipeline with quite a few new construction projects for Comfort Inn. So we would expect to see those starting to open in 2018. So I think what you'll see is kind of continued growth of our core brands, and then Comfort Inn declines or -- stopping and starting to grow again in 2018 and beyond.

And maybe just to be clear, the 4% to 5% is gross or net?

That's net.

That's net? Okay. Great. That's it for me. Thank you very much, guys.

Thomas Allen, Morgan Stanley.

Two questions on RevPAR. First, can you just talk about how long you think this RevPAR index outperformance can continue, understanding it's coming from SmartRates and some other initiatives? Like how long can that continue? And then second, can you just parse out performance, if you can, between leisure and corporate trends? It would be helpful. Thank you.

We just rolled out the SmartRates tool this year, so we've got it in over 4,000 of our hotels. And we think we have a lot of runway there as more people get familiar with the tool ?- accept the rate. So we think that for the next several years could be an outperformance for us.

In addition, all the other initiatives we've talked about with our improving loyalty program; and we are really seeing great adoption of that by guests, which are driving more stays at our hotels. We are really pleased that our occupancy rates have outperformed the industry. So we've maintained with the ADRs and still improved occupancy.

So I think we feel very bullish about continuing to outperform the industry in 2017. As far as the amount of leisure versus our initiatives, we believe it's about a third leisure; two-thirds of our initiatives that are driving our outperformance.

Sorry, just can you elaborate on that last point on a third -- can you just explain that more?

So if you think about our outperformance against the industry, we think about a third of that is because we are more predominantly a leisure travel business, which has held up longer. And the other two-thirds are based on the initiatives that we've implemented in our hotels.

Okay. That makes total sense.

Let me -- if I could, just to add to that. We've spent a lot of time and money reinvesting in our brands. And so, those numbers -- we are seeing benefits currently, as we share with you. But we expect that to be at least a midterm benefit, based on the investment we made and where the brands are today. So, Sleep obviously being the dominant brand in the midscale segment; and we think Comfort will assume a relatively similar position in the upper-midscale. And we are pretty confident that that's a going forward at least through the midterm.

And then based on the other activities that we've got, including our program where we are providing Choice Privileges special rates, we think that's going to not only continue to grow our share but we also think it's going to improve the profitability of our franchisees. Because they are going to -- we're going to acquire those customers at a much lesser cost.

Makes sense. And then just on your balance sheet and your cash flow, your guidance suggests that EBITDA is going to grow 15% next year. Respecting the fact that you are going to be investing in Cambria, you increased your regular dividend a little bit. I assume you will continue to do buybacks. It still seems like your leverage is coming down quite significantly. Could you potentially do another special dividend, or be more aggressive on buybacks? How do you think about capital returns? Thank you.

As we've always said, we look to maximize shareholder value, and we review all the options on the table. But at this point in time, we think that our cash flows will mainly be used to support our Cambria investment, to continue to get that brand growing. But we certainly evaluate all options. And if something makes sense, we would consider doing that.

And then our general philosophy is obviously return to shareholders is our priority, always. But at the same time, we are also -- we generate a lot of cash. And as a result, we know that we want to keep our leverage levels up. And so, the way to think about it is, if we have opportunity to do inorganic growth or opportunities to return it to shareholders, it's going to be based on the value of those to the Company and to the shareholders.

It is our first priority to return capital to shareholders, always. But we're also looking for opportunities to grow, which is why you see the investment in Cambria. And the nice thing about our position is, we want to maintain the leverage levels that we are at. So we are going to look for opportunities to do that.

Helpful, thank you.

Jeff Donnelly, Wells Fargo.

Back on just the market share questions: I'm curious, are you seeing any acceleration, or, conversely, erosion in that pace of index gain that you've seen in the past -- I think it was 27 quarters? Or has that gain been pretty steady?

I think we view it as pretty steady. It's significant. And we are obviously assuming it's going to carry through into 2017, but we're not seeing it change. We are seeing relatively the same level of pace over, in terms of the increment over the competition. So our view is, barring something else that we are not anticipating, we are going to at least maintain those levels. And we've got a lot of other things that we are working on that we believe could build on it.

You might have answered my next question. I was curious, how much of that 3% to 4% RevPAR growth outlook you have for 2017 -- how much of that do you think is driven by the continuation of that index gain versus maybe you just have a more optimistic sort of baseline view of travel demand, say, versus your competition this year?

Actually, the way we do it is the way almost everyone else does it; we take the blue-chip forecasts and then we add our premium to it. That's how we got to the number.

That's good. And then just one last question on SkyTouch. I was just trying to think about different outcomes there. And maybe in more of a bearish outcome, if you ultimately find that SkyTouch does not get traction outside of the Choice system, do you think it could continue to operate on a breakeven, or even profitable basis?

The answer to that is yes.

Okay, thanks guys.

Robin Farley, UBS.

Two questions. One is on the unit growth for the year came in, the up 1.6%. And you had kind of been guiding to up about 2%. And technically it does round to 2%. But I'm wondering if it's kind of on the low end of maybe what range that would've suggested. Was it just some openings that kind of slipped into Q1? Or were there more removals in Q4 that kind of made the net number go a little bit lower? And then I have another question as well.

Yes, predominantly the unit growth was around timing of conversion openings. So if you look at our pipeline, our actual conversion pipeline is up 10%. And some of that is not only due to the increased sales, but some of those hotels that we thought would open late December pushed into January.

Part of that is also driven by our strategy of we are now requiring a higher level of improvement to the property before we convert, and that has moved the conversion timetable back somewhat. And so it is an outcome of our demanding better hotels for our customers. That is not -- obviously we've got an increasing opportunity from the pipeline, but the time to conversion has increased a little bit.

If we think about if maybe 50 basis points of your unit growth ended up shifting into 2017 from 2016, just with that sort of longer investment period, would that actually suggest that your growth rate is actually pretty similar? I'm just thinking about -- you were talking about sort of reasons that it might accelerate. But it looks like if it weren't for maybe that sort of some of those openings slipping into 2017, you would be sort of close to 2% in both years. Is that a fair --?

If you think about our conversion pipeline, it moves through the system pretty quickly. So, a lot of times, we sell contracts that don't even show up in our pipeline because conversions can open as quickly as three months for some brands, and maybe as long as six months. So a lot of it is our unit growth is more predicated on what we think we are going to sell in our franchise development in 2017. And so we do believe that that will be at a higher level than our 2016 results. So, I don't -- I wouldn't characterize the fact that a few of our units moved into opening in 2017 as a -- that we are lower in unit growth than we originally thought for 2017.

And if you look at the numbers, you would say, okay, excluding the Comfort impact, we are at 4.5%. So even if you took your 50 bps, we'd be at 4%, which is a lot higher than last year. So we are accelerating.

Great, that's helpful, thanks. Then the other question is just how to think about Easter impact. Just since you have so much leisure business, is Easter shifting into Q2 helping or hurting Q1 for you? It's obviously a lot more clear for business travel that Easter -- what that means. But I'm just trying to think about for leisure travel, whether that's hurting or helping your Q1.

It definitely helps Q1, and we are expecting a strong Q1. We had a strong start. It is continuing. And then that technical reason will even boost those results further.

Okay, great. And so that's -- part of my question was that's probably a lot of what -- why Q1 is higher than the full-year guide. I just want to clarify that there was sort of additional (multiple speakers)

That's correct.

Okay, great. Thank you.

(Operator Instructions). David Katz, Telsey Group.

So on -- and the questions and answers so far have been really fulsome. But on the subject of capital allocation -- and this may seem out of left field -- but is there any prospect that you would launch any sort of additional strap-on businesses like SkyTouch? Are there any others that are in the planning or analysis stage to sort of broaden your business in any way? Is that a potential allocation of capital in the future?

Never say never. But right now, what we're focused on is launching the vacation rental business, which is where our investment is going. And so, we are very focused on that. We want to make sure that has a robust pipeline and growth to it. And so far, the results look pretty good. And then we are also obviously -- in the marketplace, there's a lot of activity and we are looking at every opportunity that's coming up. So we are spending some money from that perspective.

We are always going to look for other opportunities to do what we view as adjacent businesses that take our skill sets, and we can apply those and our technologies in the businesses. So, for example, we are going to deliver sometime this year the first state-of-the-art reservation system that's been built in the last 30 to 40 years. The capability of that obviously opens up lots of new potential opportunities. Probably several years down the road, though, because we want to get that stabilized and working in the right -- in exactly the way we want it. We want it to allow us to expand our capabilities technologically, which will help our upscale brands, as well.

And so we are doing a lot of things that are going to create opportunities, but right now we are focused on vacation rental. We are focused on inorganic growth opportunities as they come up. We are happy what SkyTouch is; we're going to continue to examine alternatives for that. And we're going to continue -- by the way, we didn't mention -- to pursue Tier 1 brands. We just have not landed one yet, obviously.

So as we think about it, over time we'll probably look at other business opportunities, but I would say that's probably out at least into the midterm.

And if I can follow that up just a bit, if you could just talk about just in generally speaking, the notion of buying an additional business versus launching one. Which we observe -- and one of the factors in that is just the length of ramp time that it can take toward profitability and then true productivity. How do you think about, or how have you thought about that sort of launch versus buy option, given the financials that you have? You have the money.

Having done both, I can tell you that obviously the length of time it takes to develop a new brand is significantly above what it takes to take an existing platform and put our skills to it and grow it. So the issue for us, though, is we are in a very strong position. We are a very disciplined potential buyer. And so the returns of buying that platform need to be along the lines of the way our shareholders expect.

And so, we don't believe that we need to do anything to have a very strong growth story. So we are a very aggressive, disciplined reviewer of opportunities. We've seen some that we like, but they didn't come to fruition. And we're going to continue to do that. But we are going to do it in a way that provides real value to our shareholders in the near-term. And so, you will continue to see us examine that.

We are an active looker at opportunities that are out there. If you look at the market, you'll know that there's a number of things that are potentials. So while we don't have anything at all to report, we believe that adding to our platform, because of our infrastructure is built to absorb a significant number of hotels without having to add to the cost -- which is why our margins are what they are -- that we continue to look for opportunities to add to that platform. And if we buy them at the right price, we like the idea of starting with an existing platform to grow from versus starting another brand.

And so, we will continue to invest in Cambria, obviously. And when we feel that Cambria has gotten to the point where it longer requires the kind of investment that we are putting in now, which is probably midterm from this standpoint, we'll look at potentially launching another brand. But we will continue to also look for opportunities of existing platforms that we think fit well with our inventory and that we can grow significantly.

Understood. Thanks very much.

Thank you. And I'm showing no further questions at this time.

I would like to turn the conference back over to Mr. Steve Joyce for closing remarks.

Okay. Well, thanks again for joining us. As always, we appreciate your interest in Choice Hotels. And that concludes our call for today.

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